THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

Final Examinations Summer 2007

June 8, 2007

ADVANCED AUDITING (MARKS 100)

(3 hours)

Q.1 The Credit Manager of one of your audit clients has left without giving any notice. His
responsibilities included maintenance and distribution of management information
reports and participation as a member of credit committee.

The said client has requested your firm to allocate one of your staff members, for a
period of two months, to take up the responsibilities of Credit Manager. Your firm deals
in such kind of assignments for non-audit clients.

Mr. RMP, the Risk Management Partner, has been requested to advise the firm on the
above stated engagement.

Required:
Draft a memo on behalf of Mr. RMP clearly indicating whether and under what
conditions the firm can accept the above assignment under each of the following
situations:

(a) the client is an unlisted company;

(b) the client is a listed company. (10)

Q.2 The Management of Fine (Pvt) Limited sent a letter to the statutory auditor of the
company along with following statement and notes:

Statement of Receipts and Payments

For the year ended 31 December 2006

Rs. in million
Bank balance as 1 January 2006 50
Add: receipts from customers and shareholders 150
200

Less: - Payment against purchases 90

- Salaries paid 50
- Other expenses paid 20
160
Bank balance as 31 December 2006 40

Notes to the Statement of Receipts and Payments:

1. During the year company issued further shares of Rs. 100 million.
2. Payments against purchases and other expenses are made through cheques and
nothing was outstanding at the end of the year.
3. All goods purchased have been sold and all debts have been collected before the
year end.
 (2)

The audit firm has appointed you as job in-charge to audit the financial statements of the
company. Following information has also been made available to you:

(i) There are only five shareholders in the company having close family relationship
with each other and they are supervising the entire business activity themselves.
(ii) The company is engaged in sales and after sale services of a large number of
products.
(iii) Payments against purchases and other expenses are made through cheques except
the payments of some insignificant amounts.
(iv) The system of accounting and management information is reasonably
sophisticated. However, the management does not apply some of the important
internal controls due to its direct involvement in business operations.

The chief executive of the company has requested that since management lacks
accounting knowledge, the receipt and payment statement may be treated as the financial
statements or alternatively, a summary balance sheet and profit and loss account may be
prepared by the auditor. He has justified his request on the ground that user group is
extremely limited and is itself involved in the management of the company.

Required:
Discuss the following with appropriate explanations:

(a) What should be the response to the Chief Executive’s request;

(b) Essential matters to be dealt at engagement stage; and
(c) Internal controls of the company. (12)

Q.3 During the audit of financial statements of Shine Limited, a member of audit team has
developed the following differences of opinion with her job in-charge:

(i) She believes that an incorrect working of obsolete stock provided by the client,
which was superseded by a revised working given subsequently, should be kept in
the working paper file as there was material difference between the earlier and
final workings. Job in-charge wishes to discard the working since it was revised by
the client management themselves after discovering the error. An explanatory note
describing the error and how it was corrected has already been included in the file.

(ii) She performed risk assessment procedures related to sales and concluded that the
risk of material misstatement is high. While making such an assessment she tested
the risk of material misstatement due to error but did not consider material
misstatement due to fraud as she relied on the assessment and documentation made
by the job in-charge at financial statement level. Job in-charge does not agree with
her approach but he is not sure as to how she should have approached the issue.

(iii) She noted that a sales officer of the company had sold many products at exorbitant
prices to a customer and earned handsome commission thereon. She suspects
possibility of fraudulent collusion between sales officer of the company and
employees of the customer. However, the difference between normal and
abnormal prices is of below material amount. Job in-charge identifies it as a
significant risk of fraud and wants to communicate the same to those charged with
governance. She does not agree with the job in-charge.

Required:
(a) Resolve the above differences arising between the team member and job in-charge,
giving proper explanation in each case. (09)
(b) Draft a policy statement and narrate the guidelines relating to difference of opinion
within the engagement team. (05)
 (3)

Q.4 While going through the newspaper, Mr. Akram came to know that the Ministry of
Health had issued show-cause notices to those pharmaceutical companies which had not
yet started their own manufacturing within a period of two years from the issuance of
permission of toll manufacturing, as the said permission was subject to this condition.

Akram is involved in the audit of Dine Pharma Limited (DPL) as engagement partner.
The audit is expected to be finalized within one month. DPL’s products are
manufactured under toll manufacturing arrangements and it has three to five years non-
cancelable agreements with five manufacturing units. Akram has approached you as the
firm’s Technical Director for consultation on the above matter.

Required:
Briefly advise Akram about impact of the above matter on the financial statements
disclosure as well as auditors’ report. (10)

Q.5 Mr. Dar is the Chief Financial Officer (CFO) of a medium sized limited company
engaged in sale of consumer goods through a number of distributors. These distributors
collect and deposit the sale proceeds in collection accounts opened in more than 100
branches of a commercial bank situated in urban and rural areas all over Pakistan. These
accounts are non-checking accounts (i.e. the company cannot issue cheque or transfer
the amount to any account other than the designated sales collection control account).
Under an agreement with the bank, the branches transfer the amounts collected on next
working day to the designated sales collection control account.

The auditor of the company intends to obtain direct confirmations from all branches and
intends to use positive as well as negative confirmations. Considering that such audit
procedures would take considerable time and may delay the finalization of accounts, the
Chief Executive Officer (CEO) is of the opinion that Mr. Dar should ask the auditor to
omit this procedure. CEO believes that according to International Standards on Auditing
management has a right to ask the auditor not to send direct confirmations.

Required:
Prepare an explanation for CEO on behalf of CFO explaining him the guidelines laid
down in International Standards on Auditing in respect of external confirmation in the
above case. (09)

Q.6 You are an Audit Manager in a large firm of chartered accountants which is also a
member of a global firm. You have recently completed the audit of one of your clients.
Your firm has already been appointed as auditors of the company for the following year.
Soon after the appointment, you came to know that the chief executive of the company
was involved in some illegal practices and he is about to face some investigation.

Required:
Discuss the various possibilities arising out of the above situation and what action would
you take in each case. (10)

Q.7 You are the statutory auditor of Critical Limited. The company has asked you to submit
a special purpose audit report for onward submission to a regulatory authority. The
report has to be submitted on a format prescribed by the regulatory authority, the
substance and wording of which does not conform to the requirements of International
Standards on Auditing.

Required:
(a) Describe the essential contents of a special purpose audit report as required by the
International Standards on Auditing.
(b) Explain how you would respond to the above situation. (08)
 (4)

Q.8 Mr. Ali has recently joined as Audit Partner of ABC & Co., Chartered Accountants. On
assuming the responsibility he discovered that the firm does not have comprehensive
guidelines for “Engagement Quality Control Review”. He wants to bring this issue to the
notice of Managing Partner.

Required:
Prepare discussion points for Mr. Ali explaining the following:

(a) The basis of selecting engagements for review;

(b) Nature and timing of review; and
(c) Criteria for eligibility of engagement quality control reviewer. (11)

Q.9 SK is the engagement senior on the audit of PK Limited. One of his team members has
been assigned the task of verifying the fair values of various assets in the financial
statements. He is perplexed by the fact that out of various valuation methods available
under the company’s financial reporting framework, the management has used a
particular method, except in one case where the management has changed the valuation
method in the current year. The team member is confused and has approached SK for
guidance.

Required:
Describe the procedures that should be performed in the above situation. (05)

Q.10 You are the job in-charge on the audit of Globe Industries Limited (GIL) which is the
holding company of a large group of companies engaged in production and marketing of
consumer items, food products and textiles. The net worth of the group is approximately
Rs. 89 billion whereas profit for the year ended December 31, 2006 is Rs. 6.4 billion
(2005 : Rs. 4.8 billion).

During the planning phase of the audit, you have gathered the following information:

(i) GIL holds 25% shares in Multan Industries Limited (MIL), at the beginning of the
year. GIL purchased further 30% shareholding in MIL on April, 2006. MIL is
audited by a large firm having international affiliation.

(ii) One of the group companies i.e. Karachi Industries Limited has incurred serious
losses during the year. Company had to discontinue two of its main products after
facing litigations on a copy right issue. The auditor of the company has expressed
serious doubts about the status of the company as a going concern and has issued
a disclaimer of opinion.

Required:
Describe the important aspects that you would consider at the planning stage. (11)

(THE END)