The Professional’s Academy of Commerce

30 August, 2024
1 Hour - 35 Marks

Class Test-02

Audit, Assurance & Related Services

Q.1 Daley Co is a family owned, unlisted company which imports motor cars. The company buys cars from a
variety of car manufacturers for sale to car dealerships and vehicle leasing companies within its own domestic
market. Daley Co has been a client of your firm for the last three years and you are the newly appointed audit
manager on the audit for the year ended 31 August 20X8. The audit for the current reporting period is nearing
completion and you are reviewing the working papers of the going concern section of the audit file.
Extracts from the draft financial statements and other relevant information are given below.
Statement of financial position
31 August 20X8 31 August 20X7
Draft Actual
$ million $ million
Assets
Non-current assets
Property, plant and equipment 13·5 14·6
13·5 14·6
Current assets
Inventory 5·8 3·7
Trade receivables 3·7 2·6
Cash at bank and in hand – 0·6
9·5 6·9
Total assets 23·0 21·5
Equity and liabilities
Equity
Share capital 1·0 1·0
Retained earnings 1·3 4·7
2·3 5·7
Non-current liabilities
Long-term borrowings 11·2 12·4
Provisions 3·5 0·5
14·7 12·9
Current liabilities
Trade payables 4·2 2·9
Bank overdraft 1·8 –
6·0 2·9
Total equity and liabilities 23·0 21·5
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Statement of profit or loss for the year

31 August 20X8 31 August 20X7
Draft Actual
$ million $ million
Revenue 11·3 8·8
Cost of sales (4·4) (2·9)
Gross profit 6·9 5·9
Other operating expenses (9·1) (1·3)
Operating profit (2·2) 4·6
Finance costs (1·5) (0·7)
Profit before taxation (3·7) 3·9
Taxation 0·3 (1·3)
Net (loss)/profit for year (3·4) 2·6
You have also ascertained the following information during your review:
1. Daley Co has undergone a period of rapid expansion in recent years and is intending to buy new warehousing
facilities in January 20X9 at a cost of $4·3 million.
2. In order to finance the new warehousing facilities, the company is in the process of negotiating new finance
from its bankers. The loan application is for an amount of $5 million and is to be repaid over a period of four
years.
3. The provision of $3·5 million in this year’s statement of financial position relates to legal actions from five
of Daley Co’s largest customers. The actions relate to the claim that the company has sold cars which did not
comply with domestic regulations.
4. A major new competitor has moved in to Daley Co’s market in October 20X8.
5. The going concern working papers include a cash flow forecast for the 12 months ending 31 August 20X9.
The cash flow forecast assumes that Daley Co’s revenue will increase by 25% next year and that following
the reorganization of its credit control facility, its customers will pay on average after 60 days. The forecast
also assumes that the bank will provide the new finance in January 20X9 and that the company will have a
positive cash balance of $1·7 million by 31 August 20X9.
6. The financial statements have been prepared on a going concern basis and make no reference to any
significant uncertainties in relation to going concern.
Using analytical review where appropriate, evaluate the matters which may cast doubt on Daley
Co.’s ability to continue as a going concern. (10)

Q.2 You are the Audit Manager in charge of the audit of Perveen Limited (“the Company”) for the year ended
September 30, 2016. The review of subsequent events disclosed the following items:
i. October 3 2016: The government approved a plan for the construction of a new railway line. The plan
will result in the compulsory purchase of a portion of the land owned by Perveen Limited. Construction
will begin in late 2017. No estimate of the compensation award is available at this point.
ii. October 4 2016: It emerged that the funds for PKR 100,000,000 loan to the Company made by the
company CEO, Dawood Rana, on April 15 2016, were obtained by him from a loan on his personal life
assurance policy. The loan was recorded in the account “loan from officers.” Mr. Rana’s source of the
funds was not disclosed in the company records. The corporation pays the premiums on the life assurance
policy, and Mrs. Rana, wife of the CEO, is the beneficiary.
iii. October 7 2016: The mineral content of a shipment of ore en route on September 30, 2016, was
determined to be 72 percent. The shipment was recorded at year-end at an estimated content of 50 percent
by a debit to raw material inventory and a credit to accounts payable to the amount of PKR 824,000,000.
The final liability to the vendor is based on the actual mineral content of the shipment.
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iv. October 29 2016: It emerged that an individual trade receivable account of a material amount is highly
likely to remain unpaid as a result of the unexpected bankruptcy of the proprietor who ran the business
as a sole trader. Apparently, the bankruptcy was declared after a series of internet-based spread-betting
transactions went disastrously wrong.
v. November 30 2016: As a result of reduced sales, production was curtailed in mid-October and some
workers were laid off. On November 5 2016, all the remaining workers went on strike. To date the
strike is unsettled.
Required:
For each item:
(i) Discuss whether the above events are adjusting or non-adjusting. For non-adjusting events, discuss the
disclosure that you would recommend for each of the items (i) to (v) above, listing all details that you
would suggest should be disclosed. Indicate those items or details, if any, that should not be disclosed.
(12)
(ii) State also the consequences, if any, for the audit report if any of the adjustments or disclosures you
recommend are omitted. (05)

Q.3 Ali Afzal & Co. chartered accountants are statutory auditors of Mega Limited. Mega limited in engaged in
the manufacturing of large scale heavy machinery. During the course of annual audit, the auditors identified
that there is a material amount of inventory lying at warehouse which is not recognized as slow moving as
the company uses FIFO basis of accounting. However, while issuing inventory to production units such
policy is not followed. The auditors identified that such matter is persuasive and has expressed an adverse
opinion in the audit report on the financial statements of ML for the year ended 30 June 2022. After the
issuance of the annual report, ML has approached the auditor for reporting on the trade debts of the company
as on 30 June 2022. This report is required for submission to the bank which has provided financing facilities
to ML. The audit working papers reveal that the trade debts have been reported correctly in the financial
statements.
Required:
Discuss what may be the auditor’s response in the above situation. (08)

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