Mock (Solution) Page 624 Audit, Assurance & Related Services

Mock Paper (Solution)

Question No. 1
The Firm should use the wordings which provide factual and objective information of the
services provided, the firm’s resources (human and other, specifying qualifications and
experience of personnel where appropriate), existing clients (unless this breaches client
confidentiality) and of professional assignments undertaken. (02)
Review of the designed profile indicates that the firm is exaggerating in projecting the Firms
profile and, therefore, should avoid such types of workings. (02)

Question No. 2
a) Evaluation of misstatement, the related further audit procedures and the impact on the
audit report: a) The auditor will determine if the misstatement lies in the Directors’
report(0.25) or in the financial statements(0.25) and is material(0.5);
b) If the material misstatement lies in the Directors’ report(0.5):
i) auditor should peruse management to make correction in the Directors’ report(0.5)
and re-submit the corrected version with the shareholders(0.25) and the Securities
and Exchange Commission of Pakistan (SECP)(0.25);
ii) If the management agrees(0.25), the auditor will take necessary steps to ensure that
revised Directors’ report are submitted with SECP and the members(0.5);
iii) If the management doesn’t agree to issue the revised Directors’ report(0.5), the
auditor should communicate the matter to those charged with the governance(0.5)
and should solicit the appropriate legal advice for further course of action(0.5);
c) If the material misstatement, lies in the financial statements(0.5)
i) The auditor should discuss the matter with the management and the Board of
Directors(0.5);
ii) Determine whether the financial statements need amendment; and if so(0.5)
iii) Inquire how management intends to address the matter in the financial
statements(0.5)
iv) If management amend the financials(0.5), the auditor shall:
• Ensure that correct EPS is now appearing the financials (0.5);
• Review the steps to ensure that shareholders and SECP are now in receipt of the
corrected version of the financials (0.5)
• Provide new audit report(0.25) on the amended financial statements(0.25) by
including either the emphasis of matter para(0.25) referring to the note clearly
explaining the reason for issuance of the revised financials(0.5) or include other
matter para explaining the situration(0.5);
v) If management doesn’t amend the financials(0.5), the auditor shall
• Notify Management and the Board that the auditor shall take steps to prevent
future reliance on the audit report;(0.5)
• If even after this notification, management and the Board don’t take any
actions(0.5), the auditor shall notify to the shareholders and SECP(0.5) not to
rely on the audit report (0.5)
Mock (Solution) Page 625 Audit, Assurance & Related Services

Question No. 3
Objectivity assessment (05)
[Link] Criteria Evaluation
1 Organizational status should be such IAD is reportable to the CEO i.e. management
that it should be free from bias, and not directly to the Board of Directors or
conflict of interest or undue the Audit Committee.
influence of others to override
professional judgment
2 IAD should not be performing any IAD head is acting as a Company Secretary.
managerial task which is clearly Company Secretary is considered reportable
distinguishable from the IAD to the Board of Directors and thus mere
function performance of the Secretariat function
doesn’t mean that IAD is performing any sort
of managerial function.
3 Board should govern the IADs From the scenario it appears that appointment
activities including hiring and and remuneration matters of IAD is
remuneration determined by the CEO
4 IAD scope should not be restricted From the scenario it appears that IADs
activities have not been restricted apart from
the fact that IAD doesn’t have access to the
core functional operational software such as
sales, marketing etc
5 IAD members should be the From the scenario it appears that IAD head is a
members of the professional body professional Chartered Accountant and other
members also are the members of the
professional body
Competency assessment:(05)
[Link] Criteria Evaluation

1 IAD should be adequately and IAD comprises of around 12 personnel in

appropriately resourced every area of the operations

2 IAD should have established policies Scenario is silent, however it appears that
for hiring, training and assigning internal training arrangements are in place
internal auditors to internal audit and staff are systematically splitted
engagements between various functional domains

3 IAD personnel should have adequate IAD head is a professionally qualified

training on the company’s financial Chartered Accountants and other staff
reporting and the reporting framework members are also professional accountants.

4 CPD requirements IAD has not completed the CPD hours

Mock (Solution) Page 626 Audit, Assurance & Related Services

Question No. 4
The CFO
Rafiq Group of Industries
As the paid-up capital of all the companies is less than PKR 1 Mn(1.5), therefore, you are not
required to prepare consolidated financials(01). Hence the question of auditing the
consolidated financials does not arise (0.5).

Question No. 5
1. Auditor should ask the management to draw financials of Sadia (Pvt) Limited as of and
for the year ended 31 December 31, 2018 as the gap between financial year-end of
Ayesha Limited (“The Holding Company”) and Sadia (Pvt) Limited is more than 90 days.
Prevailing and currently applicable provisions of the Company law requires that the gap
between holding company year-end and the subsidiary year-end should not exceed 90
days. (also refer para 37 of ISA-600);(02)
2. Both Sadia (Pvt) Limited and Sameera (Private) Limited are considered as a significant
component of the Group as the same total assets and revenues constitutes more than
10% of the Group post-tax profit (Ref: Para A6 of ISA-600);(01)
3. The auditor should establish an overall group audit strategy and should develop and
review a group audit plan (Para 15 and 16 of ISA-600);(0.5)
4. The auditor should determine the Group Materiality In this case group’s overall Planning
Materiality is PKR 208 Mn (10% of the Group Post-tax profits) (01)
5. Auditor should also determine the component materiality as the subsidiaries are
considered as significant components (para 26 of ISA-600). In this case component
materiality for Sadia (Private) Limited is PKR 25 Mn and for Sameera (Pvt) Ltd is PKR 10
Mn (10% of the respective post-tax profits);(01)
6. Auditor should obtain an understanding of group-wide controls and the consolidation
process of the Group’s Management and shall extend the further audit procedures
towards identified risks of material misstatements at the consolidation level;(0.5)
7. Auditor should request the management of Sameera (Pvt) Ltd to re-draw financials, for
consolidation purposes, using the historical cost method of valuing the fixed assets (para
35 of ISA-600); (01)
8. Auditor should do the audit procedures towards subsequent period i.e. between date of
financials and the date of the audit report (para 38 of ISA-600) (0.5)
9. Auditor should apply specific further audit procedures to verify the management’s
understanding that long outstanding debts of PKR 10 Mn, receivable by Sadia (Private)
Limited are not-impaired. If the auditors are not satisfied and the management is
unwilling to make adjustments, then the auditor should issue qualified (“except for”)
opinion on the audit report of Sadia (Pvt) Ltd. If auditor is satisfied, then the auditor
should insert emphasis of matter para in the audit report of Sadia (Pvt) ltd drawing
attention towards this long outstanding debt;(01)
10. Long-outstanding matter, individually shall not have any impact on the group financial
statements as the same comprises merely 0.48% of the Group’s post-tax profits. The
auditor should, however, consider this misstatement along-with the other
Mock (Solution) Page 627 Audit, Assurance & Related Services

misstatements, and if, aggregate misstatements approach the group materiality level,
then the group audit report may be qualified by the auditors.(01)

Question No. 6
Self Interest Threat and Intimidation Threat arises in the current situation.(02) As the father
of the Partner is not an immediate family member(02), the Firm may continue with the
audit.(0.5) In order to minimize the self-interest threat and intimidation threat, the captioned
Partner should not be involved in any manner whatsoever in the audit work.(01)

Question No. 7
Self-review threat and advocacy threats do arise in this situation (01). The tax exposure
involved is highly material for the financial statements (02). The advocacy and self-review
threats are so significant that no safeguards may be applied and thus the Firm should not
provide this taxation services to the client.(02)

Question No. 8
Firstly, it is required that the auditor shall read the most recent financial statements for
information relevant to opening balances, including disclosures.(0.5)

Then the auditor shall obtain sufficient appropriate evidence about whether the opening
balances contain misstatements that materially affect the current year’s financial statements
(0.5). This evidence is obtained by firstly determining whether the prior period’s closing
balances have been correctly brought forward.(0.5) The auditor shall also determine whether
the opening balances reflect the application of appropriate accounting policies(01).

Depending on the nature of the opening balances, specific audit procedures are performed to
gain specific evidence on those opening balances(01). Additional procedures would be
required if it appears that the opening balances contain misstatements that could materially
affect the current period’s financial statements(01). Finally, the auditor shall obtain sufficient
appropriate evidence about whether the accounting policies reflected in the opening
balances have been consistently applied in the current period’s financial statements(0.5), and
that any changes in accounting policies have been accounted for and disclosed in accordance
with IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors.(0.5)

In relation to the opening balance of inventory, the following procedures are recommended:
- Inspection of records of any inventory counts held at the prior period year end, 31 July
2010, to confirm the quantity of items held in inventory agrees to accounting
records.(0.5)
- Observation of an inventory count at the current period year end, 31 July 2011, and
reconciliation of closing inventory quantities back to opening inventory quantities.(0.5)
- Analytical procedures on gross profit margins, comparing the opening and closing gross
profit margins year on year for the various types of items held in inventory.(0.5)
Mock (Solution) Page 628 Audit, Assurance & Related Services

- Verifying the sales value in the current financial year of items held in inventory at 31 July
2010, and comparing the sales value with cost. This should provide evidence that
inventory is correctly valued at the lower of cost and net realisable value.(0.5)
- Inspection of management accounts for evidence of any inventory items written off in the
current financial period(0.5)
- this is important for inventory of calendars and diaries which are likely to be
obsolete.(0.5) - Discussion with management regarding any slow moving items of
inventory which were included in opening inventory.(0.5)
- Analytical procedures such as inventory turnover calculations to highlight slow moving
inventory from the opening balance.(0.5)

Question No. 9
(a) Conditions indicate that significant uncertainty do exist.(01)
• Auditor to require the management to share with the auditors their plans to improve
the situation (01).
Such plan should include the appropriate assumptions(0.5). Assumptions should be
backed by the reasonable basis(0.5) for such assumptions;
• If management provides such sustainability plans along-with assumptions and basis
for assumptions, then auditor should also seek appropriate written representation
from the CEO and CFO(01)
• On the basis of availability of the evidence, the auditor to conclude whether going
concern basis of accounting is appropriate in the circumstances(0.5). If not then ask
the management to prepare the accounts on liquidation basis(0.5) and draw users
attention by inserting Emphasis of Matter(0.5). If management disagrees then issue
adverse opinion(0.5);
• In case where going concern basis is ok, auditor should ask management to insert
appropriate note in the financials and draw users attention towards that note in
Material Uncertainty section of auditors report(01).
where management disagrees then the auditor should qualify the audit opinion(0.5)
by inserting suitable basis for qualified opinion para(0.5); (A-27 of ISA-570)
(b)
• These acts of CFO of providing base-less representation and non-keeping of licensed
software raise concerns over integrity and ethical value of the management;(01)
• The auditor should revise their risk assessment procedures in case of other
representations(01) also and perform the additional audit procedures accordingly;(0.5)
• If the integrity of the management is highly doubtful(01) the auditor should consult the
legal advisor(0.5) and should consider the possibility of withdrawing from the
engagement;(0.5)
• The auditor should also consider its responsibilities to report the matter to those charged
with governance(0.5) and to the appropriate external authorities for which the auditor
should solicit the expert advice(0.5);
• If the auditor assesses that the amount of penalty and other financial exposure involved
is material(01),
Mock (Solution) Page 629 Audit, Assurance & Related Services

then the auditor may insist the management to provide the relevant contingent liability
note in the financial statements (0.5).. The auditor then draws users attention by
inserting emphasis of matter para(0.5). in case of management’s refusal, the auditor may
modify the report(0.5) by inserting suitable qualification in basis for qualified opinion
para(0.5).

Question No. 10
Enagement Partner should take the following steps:
a) Ask the management to revise management representation indicating that the
inforamtion destroyed in the fire was not provided;
b) Should consider the the effects of the pervasiveness of the information destroyed in the
fire; and c) Effect thereof on the opinion in the auditor’s report in accordance with ISA
705

Question No. 11
Auditors would ask the client to revise the last year’s financials or would request that the
corresponding figures in the current year’s financials be corrected with an explanatory note
to be given in the financials defining the subject rectification. The auditor would also request
the client to inform to the prior auditors accordingly. If the Management rectifies the
corresponding figures and also do the necessary amendments in the current year’s financials
the auditor would issue unqualified opinion and would insert an emphasis of matter para
drawing users attention towards the note in the financials explaining the rectification.
Auditor would also inform Board of Directors regarding the insertion of “emphasis of matter
para”.

Extract of audit report:

Emphasis of matter para
We draw attention to note (xxxx) of the financial statements with respect to the necessary
rectification made by the Management with resepct to the deferred tax liability. Our opinion
is not modified in respect of this matter”. Key audit matter para
“In addition to the matter described in the emphasis of matter para relating to the
rectification of deferred tax liability, we have determined the matters described below”
If Management doesn’t agree either to rectify or to insert the requested note in the financials
the auditor shall issue adverse or qualified opinion, as the case may be, and shall also draw
attention of the Board of Directors in this connection.

Question No. 12
Auditors will insert other matter para as under:
“Report on other legal and regulatory requirements
In our opinion, the financial statements have been prepared in all material respects in
accordance with the relevant provisions of non-Banking Finance Companies (Establishment
and Regulation) Rules, 2003and Non-Banking Finance Companies and Notified Entities
Regulations, 2008”
Mock (Solution) Page 630 Audit, Assurance & Related Services

Question No. 13
To disclose the earnings per share is the requirement of the Company law. In the given
scenario, earnings per share has been omitted and thus there is as such no inconsistency does
exist between the financial statements and the other information provided in the financial
statements. Hence ISA-720 will not apply. In this scenario the Company has committed non-
compliance of the applicable law i.e. the Company law, however, the non-compliance has no
material impact on the financial statements. In such circumstances the external auditors are
required to report such non-compliance to the Board of Directors under para (22) of ISA-250.

Question No. 14
(a) Examination of Projections (Prospective Financial Statements) for the 5 years from xxxx
to xxxxx(03) (b) - Obtain Projections- Review assumptions(0.5)
(b)
- Inquire about, obtain and inspect the basis of assumptions (01)
- Review/inspect/inquire about the necessary supports/explanations to validate
those assumptions and basis(01)
- Inquire about the source of the data;(01)
- Try to engage with appropriate government personnel and inquire about the chances
of application of the Sales Tax(01)
- Engage tax specialist in Bangladesh to ensure tax computations are appropriate;(01)
- Engage appropriate legal expert and seek his opinion on the chances of getting the
land rights on timely basis(01)
(c) Assurance Report to the Board of Directors of Amreli Steels Limited on examination of
the Projections of Dhaka Operations of Amreli Steels Limited (“the Company”) for the
Period from __________to _____________ (01)

We have examined the attached Projections of the Company for the period from ______ to
_________ in accordance with __________ Management is responsible for the Projections
including the assumptions set out in Note xxxx on which these Projections are based.(01)

These Projections have been prepared for submission to the Land Authroties in the
Bangladesh.(01) As the entity is in in a pre-start phases the Projections have been
prepared using a set of assumptions that include hypothetical assumptions about future
events and management’s actions that are not necessarily expected to occur.
Consequently, readers are cautioned that these Projections may not be appropriate for
purposes other than that described above.

Basis of Qualified Conclusion and Opinion

Management has enhanced the projected sales by XXXXX (15%) for which no sufficient
appropriate basis and supports have been provided to us. Had the Management not done
the subject enhancement, projected Sales for the period would have been reduced by
xxxxxx and projected profit after tax would have been reduced by xxxxx;(02)
Mock (Solution) Page 631 Audit, Assurance & Related Services

Qualified Conclusion and Opinion

Based on our examination of the evidence supporting the assumption, except for the
matter as stated in basis for qualified conclusion and opinion paragraph above,(01)
nothing has come to our attention which causes us to believe that these assumptions do
not provide a reasonable basis for the projections. Further, in our opinion, except for the
matter as stated in basis of qualified conclusion and opinion paragraph above, the
Projections are properly prepared on the basis of the assumptions and is presented in
accordance with (01)

Even if the events anticipated under the hypothetical assumptions described above
occur, actual results are still likely to be
Chartered Accountants
Place:
Date

Question No. 15
Payroll:
• Develop expected salary; (01)
• Compare the expected salary with actual (0.5)
• Inquire about source and reliability of the data provided by the Management(0.5)
• Inquire about the reasons of deviations from the management(0.5)
• Assess the rationale behind the reasoning (0.5)
Going Concern:
• Obtain and review the management’s assessment of going concern;(01)
• If events of conditions are found then inquire from management its plans to cope with
such conditions or events;(0.5)
• Review the assumptions behind those plans as well as basis of such assumptions (01)
• Evaluate and conclude upon the evidences obtained. (0.5)