INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF PAKISTAN SPRING (SUMMER) 2007 EXAMINATION Monday, the 28th May, 2007 RISK MANAGEMENT AND AUDIT — (S-503) Stage — 5 Time Allowed — 2 Hours 45 Minutes Maximum Marks — 80 (i) Attempt ALL questions. (ii) Answers must be neat, relevant and brief. (ili) In marking the question paper, the examiners take into account, clarity of exposition, logic of arguments, effective presentation, language and use of clear diagram/chart where appropriate. (iv) Read the instructions printed on the top cover of answer script CAREFULLY before attempting the paper. (v) DO.NOT write your Name, Reg. No. or Roll No. anywhere inside the answer script. (vi) Question No. 1 — “Multiple Choice Question” printed separately, is an integral part of this paper. Marks Your client is engaged in developing software for sale and for own use 8 which will take substantial time for development. Enumerate some significant risks associated with above scenario and how the company may minimize the impact and likelihood of such risks. 2 a b) Give some examples how do the business risks relate to financial risks ? 7 3. a) Discuss essential matters to be considered in preparing all audit work 5 papers for substantive procedures. b) Explain duties of engagement partner in relation to quality control. 10 4 As at December 31, 2006, one of your clients, a company listed on stock exchanges, has an issued, subscribed and paid-up capital of Rs 500 million out of which Rs 350 million were contributed by sponsors and the general public in initial public offer while the remaining capital of Rs 150 million was issued against investment in shares of other associated/group companies. The original business plan and the financial/operational model did not work out due to which over the years the company has been consistently incurring heavy losses and a substantial portion of the paid-up PTO 43Marks capital has been eroded. The loss has been accumulated to an aggre- gate amount of Rs. 350 million, out of which Rs 100 million loss has been incurred during the year under report. The operating fixed assets costing Rs 100 million have almost been fully depreciated and they have almost completed their useful life. The operational performance of the associated/ group companies has also not been satisfactory and the company is expecting heavy impairment in the value of these investments, The company has trade receivables amounting to Rs 50 million which are outstanding for more than three years and appear to be doubtful as to their recovery, A long term loan from a commercial bank outstanding as on the balance sheet date aggregate to Rs 150 million. Next half yearly install- ment of Rs 50 million is becoming due in a month time and there appear no arrangements with the company to be able to make the repayment of the loan installment. The payable to suppliers aggregating to Rs 10 million is overdue by one year and the company has not been able to generate sufficient funds to clear off the obligations. Last year the company terminated the services of certain employees without compensating them adequately who had filed a case against the company in the labour court for the termination benefits aggregating to Rs 10 million based on long duration of service which has been decided in their favour a month ago. No provision has been made in the accounts for this liability. Required : (a) Define going concern assumption. Explain its significance in the 5 preparation of financial statements. State few examples of the events or conditions which can cast significant doubt about the going concern assumption. (b) In the light of the foregoing facts is it appropriate to use going concern 5 assumption in the preparation of the financial statements ? Give reasons to support your answer. {c) In the light of your above given answer, you are required to draft an appropriate para for your audit report in both of the following situations (i) If the management prepares the financial statements using the 5 going concern assumption (ii) If the management does not consider the going concern assump- 5 tion appropriate for the preparation of financial statements and also makes appropriate disclosure in the financial statements as per the requirements of the applicable financial reporting frame- work 213Marks a) Define the term ‘confidentiality’. Also discuss auditor's ethical obliga. 4 tions in respect of confidential information b) Under what circumstances the auditor is required or permitted to make 6 disclosure of confidential information ¢) Discuss matters to be examined during interim audit 5 a) When the audit of financial statements is required to be carried out 5 annually why there has to be a separate cost audit ? Discuss. b) While carrying out a cost audit how would you examine the cost relating to the following * Waste. 2 «Defective work. 2 * — Spoilage. 2 * Scrap 2 2 * Normal losses. THE END 3/3