Q Solution

Marks
no.
An unmodified audit opinion should be issued. (0.5 Mark)
There is no misstatement as appropriate disclosures have been made and no limitation on scope
as sufficient evidence is available. (0.5 Mark)
The use of the liquidation/NRV basis of accounts preparation is fundamental to the user’s
Maximum
understanding of the financial statements as there are a number of shareholders and many
1i Marks: 3
suppliers who are unaware that the directors have decided to liquidate the company. Therefore,
the auditor’s report should be modified to include an “emphasis of matter” paragraph after the
opinion section. It should draw users’ attention to the disclosures in the notes to the financial
statements and state that the opinion is not modified in respect of this matter. (2 Marks)

The appointment of the liquidator post year end is an adjusting subsequent event and the balance
on the receivables ledger in respect of KPL should be written-off. The balance represents 0.8% of
total assets and 3.6% of profit before tax and is therefore not material in isolation. It appears
unlikely that the work in progress balance is recoverable given its bespoke nature and therefore
this should also be written-off. The balance represents 0.9% of total assets and 3.9% of profit
before tax and is also not material in isolation. (2 Marks) Maximum
1ii However, the misstatements must be considered in aggregate. The total misstatement amounts to Marks: 4
Rs. 479,000 and represents 2% of total assets and 8% of profit before tax, it is therefore material
but not pervasive, as the misstatement can be isolated to receivables and work in progress. (1
Mark)
Therefore, there is a disagreement over accounting treatment and the audit report and audit
opinion should be qualified. The description of disagreement should be provided in basis for
qualified opinion section of auditor’s report. (1 Mark)

The firm was unable to undertake the planned audit procedures due to the new system and the
level of error in the financial statements cannot be accurately determined. This is a limitation on
scope which means the auditor is unable to obtain sufficient appropriate evidence and therefore
cannot reach an opinion on the financial statements as a whole. The matter is therefore pervasive. Maximum
1iii (2 Marks) Marks: 3
The audit report should be modified with a disclaimer of opinion expressed in the opinion
paragraph stating that the firm is do not express an opinion with an explanation of the limitation
on scope in basis for disclaimer of opinion section of auditor’s report. (1 Mark)

i. The sample selected does not test for completeness. (1 Mark for each point)
ii. To test for completeness, the sample should be selected from documentation outside of
the accounting system such as purchase orders, post year-end bank statements or a
supplier turnover report.
iii. The working paper should state the sample selection method, for example, random or
systematic sampling.
iv. The justification used for the reduction in sample size by 30 items is incorrect as the
control environment may have changed since the previous year.
v. The control environment must be tested in the current audit to confirm that there are no Maximum
2 changes if the external auditor wishes to rely on it to reduce the sample size. Marks: 7
vi. The error of Rs. 275,000 identified in testing suggests that the control environment is not
working effectively.
vii. The three items identified as immaterial must be investigated further.
viii. All items in a sample must be tested to allow a valid conclusion to be drawn from the
sample.
ix. The error of Rs. 275,000, identified as immaterial, must be followed up by additional
testing.
x. If relevant, the error should be extrapolated. The extrapolated amount is Rs. 1.2375m
which is material. All errors must be transferred to a summary of audit differences.

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 xi. All of the above indicates that it is not possible to form a conclusion because of insufficient
and inadequate work.

i. This matter must be included in representation letter. Written representations from

management must cover the commercial viability, technical feasibility and adequacy of
findings. (2 Marks for each point)
ii. The matter will be included in representation letter that that management has disclosed
all the facts and documents related to the above transaction.
iii. There is no need to include this matter in representation letter. The auditor should obtain Maximum
3 sufficient appropriate audit evidence with respect to sales and receivable. Marks: 10
iv. This matter would not be included in representation letter. The auditor will perform
necessary audit procedures to obtain sufficient appropriate audit evidence.
v. This matter will be included in representation letter as specific representation from
management regarding the existence, completeness and disclosure of contingencies in the
financial statements.

Parbat Limited (PL) (3 Marks)

As per Companies Act 2017, a person who is a partner of, or in the employment of, a director,
officer or employee of the company cannot be appointed as auditor. The Act states further that, a
person will not be qualified for appointment as auditor of a company if he is due to any mentioned
disqualifications has been disqualified for appointment as auditor of any other company which is
that company’s subsidiary or holding company or a subsidiary of that holding company. So, NJC
cannot accept appointment of PL.
Batura Limited (BL) (2 Marks)
NJC qualifies for the appointment of BL because the nominated directorship of Ms. Ammara in one Maximum
4 of the associated company has no significance with respect to qualification or disqualification of Marks: 8
his spouse.
Saltoro Limited (SL) (3 Marks)
NJC has already accepted his appointment as auditor of SL and as per Companies Act, If, after
appointment, an auditor becomes subject to any of the disqualifications due to any reason
mentioned, he will be deemed to have vacated his office as auditor with effect from the date of
disqualification. So, NJC will be deemed to have vacated his office on 20 th December-19. The
disclosure and disposal of shares is irrelevant in this case.

Audit Risks Audit Steps

(i)  Sales may be overstated as it has
suddenly increased during the last
month of the year. (1 Mark for each
point, Maximum one Mark)
5 Marks: 18
(ii)  Deferred tax asset can only be
recognized to the extent that the
company expects that it would
generate sufficient profits to
realize the benefit. There is a risk
that the company might be
recording deferred tax assets to
overstate profits. (1 Mark for each
point, Maximum one Mark)
 Send confirmations to debtors.
 Checking recoveries made subsequent
to the year end, analyzing and checking
subsequent sales return, comparing
them with last year and assessing their
reasonableness Checking cut-off. (1 Mark
for each point, maximum 2 Marks) Maximum
 The auditor would be required to
review the management’s future
projection reasonableness of the
assumptions used.
 Perform recalculation of deferred tax
asset as per IAS-12. (1 Mark for each point,
maximum 2 Marks)

2
 (iii)  Excessive pressure on
management to raise additional
debt indicates the risk of fraud in
the form of fraudulent financial
reporting through management
override of controls to obtain loan.
(1 Mark for each point, Maximum one
Mark)
(iv)  Increase in scrap sales may
indicate the following:
 Abnormal losses and defected
inventory
 Inventory valuation issues
 Scrap sales may be used to
transfer out funds from the
company illegally.
 Impairment in value of plant
and machinery. (1 Mark for each
point, Maximum one Mark)
(v)  Significant turnover in
management can also result in
significant risk. In case of high
rotation the responsibilities cannot
be fixed. There might be some
unethical practices/fraud going on
in the company. (1 Mark for each point,
Maximum one Mark)
(vi)  Frequently switching suppliers is
not itself a problem, but it does not
mean that a list of approved
suppliers cannot be maintained. If
totally new suppliers really are
being used so frequently, then
there might be issues with quality
rather than price. (1 Mark for each
point, Maximum one Mark)
Shigar Limited (SL) (2 Marks)
Suggestion of Mr. Hamza is not appropriate as client’s permission is required by both auditors
(current & proposed) to communicate with each other.
6a Nagar Limited (NL) (2 Marks)
NL denied permission to communicate with current auditors so Hispar & Co. should not accept
offer for the appointment.
 Test the appropriateness of journal
entries recorded in the general ledger
and other adjustments made in the
preparation of the financial statements
 Review accounting estimates for biases
and evaluate whether the
circumstances producing the bias, if
any, represent a risk of material
misstatements due to fraud
 Evaluate business rationale of
significant transactions outside of
normal course of business. . (1 Mark for
each point, maximum 2 Marks)
 The auditor would be required to
assess the reasons for increase in scrap
sale by performing the following:
 review the list of scrap sales to
establish its reasonableness.
 Ensure proper procedure such as
obtaining quotations/ auction has
been followed for scrap sales.
 check segregation of duties in the
processing of sales and dispatch
documents.
 Review the impairment testing done
by the client. . (1 Mark for each point,
maximum 2 Marks)
 The auditor would be required to:
 establish the reasons through
inquiry
 review of exit interview of ex-
employees and specially performing
procedures on the areas where there
have been significant turnover of
employees. . (1 Mark for each point,
maximum 2 Marks)
 Consider changing the audit strategy
for extensive substantive procedures on
areas such as:
 Inventory valuation
 Warranty issues
 Sales return subsequent to year
end. (1 Mark for each point, maximum 2
Marks)
Maximum
Marks: 8
3
 Rupal Limited (RL) (2 Marks)
Hispar & Co. should send reminder to RL for permission and if approval is further delayed, it
should not accept offer for the appointment.

Bagrot Limited (BL) (2 Marks)

Because Mr. Umari has approval of BL to communicate with us so Hispar & Co. should assess all
other available information and take decision about whether or not to accept the proposed audit.

A self-review threat would be created because the amount is material to the financial statements,
is highly subjective and is included in the financial statements of the period which the firm will
subsequently audit. (1 Mark)
In order to reduce the threat to an acceptable level the following safeguards should be applied:
 Not including personnel who provided the non-assurance service in the audit team. Maximum
6b  Having a chartered accountant to review the audit and the valuation as appropriate Marks: 4
 Engaging another firm to evaluate the results of the valuation engagement or having
another firm to re-perform the non-assurance service to the extent necessary to enable it
to take responsibility for the service. (3 Marks)

Key audit matter
Related Party Transactions
Refer note x to the financial statements
The company has significant
purchases from related parties.
Further, significant amount
advertising expenses are also paid to
related parties.
Due to the large number of
transactions with the related parties,
we consider it as an area of significant
risk, and hence this was identified as a
key audit matter. . (1 Mark for discussion of
significance)
7 advertising and other services.
How the matter was addressed in our audit
We assessed the management controls over
identification and capturing and recording of related
of party transactions.
We also assessed how frequently the related party
listing is updated by the management and whether
there are any time lags or not.
Reviewed filings with the regulatory authorities for
the names of related party in which officers and
directors occupy directorship or management
position.
Reviewed contract with related party for providing Maximum
Marks: 10
Reviewed minutes of meeting of board of directors for
the discussion and authorization of related party
transaction.
Reviewed accounting record for large, unusual and
non-recurring transactions.
We circulated confirmation request to the related
parties regarding the transactions carried out with
them and their balances as at year end.
We evaluated the adequacy of the related party
disclosures in the financial statements. (1 mark for each
response, Maximum 4 Marks)

Tax Contingency
Refer note x to the financial statements

4
 The company has significant tax
contingencies which can have a
significant impact if materialized. Due
to the high level of judgment required
to assess the outcome of tax litigations,
we consider it to be a key audit matter.
(1 Mark for discussion of significance)
We have obtained and assessed the management’s
contention against the demands made by the taxation
authorities.
We also had a discussion with the tax advisor of the
Company and his rationale and justifications against
the demands made by the taxation authorities.
We used our own tax specialist to consider the level of
provision required in light of the nature of the
company’s exposure, applicable regulation and the
company’s correspondence with the tax authorities.
We have considered any legal precedent or case law
by assessing relevant historical and recent judgments
passed by the courts and other authorities in similar
situation.
We evaluated the adequacy of the disclosure in the
financial statement. (1 mark for each response, Maximum 4
Marks)

Control deficiency (1 Mark for each point Control recommendation Test of control(1 Mark for
maximum marks 3) (1 Mark for each point maximum each point maximum marks
marks 3) 3)
Overtime worked is not authorised All overtime should be Review the overtime
prior to being paid. The information authorised by a report for evidence of
per employee is collated and responsible official prior authorisation and note
submitted to payroll by a production to the payment being the date this occurred
clerk, but not authorised. The processed by the payroll to ensure that this was
production director is only informed department. This undertaken prior to the
about overtime levels via quarterly authorisation should be payment of the
reports. evidenced in writing. overtime.
These reports are reviewed sometime The finance director, Obtain a sample of
after the payments have been made when authorising the payments lists and
which could result in unauthorised payments, should on a review for signature by Maximum
8 overtime or amounts being paid sample basis perform the finance director as Marks: 10
incorrectly and SL’s payroll cost checks from the human evidence that the
increasing. resource department’s control is operating
The finance director compares the staff records to payment correctly.
total of the list of bank transfers with list and vice versa to Verify signature of
the total to be paid per the payroll confirm that payments finance director on
records. are complete and only payment list.
There could be employees omitted or made to bona fide
fictitious employees added to the employees.
payment listing so that, although the The finance director
total payments list agrees to payroll should sign the payments
totals, there could be fraudulent or list as evidence that these
erroneous payments being made. checks have been
undertaken.
The practitioner shall agree the terms of the engagement with management or those charged with
governance that shall include: (1 Mark for each point)
Maximum
i. The intended use and distribution of the financial statements,
9a Marks: 4
ii. Identification of the applicable financial reporting framework;
iii. The objective and scope of the review engagement;
iv. The responsibilities of the practitioner;

5
 v. The responsibilities of management.
vi. A statement that the engagement is not an audit, and that the practitioner will not
express an audit opinion on the financial statements; and
vii. Reference to the expected form and content of the report to be issued by the
practitioner

Linear (1 Mark)
A linear flowchart displays the sequence of work steps that make up a process. This is invaluable
in identifying redundant or unnecessary steps within a process.
Deployment(2 Marks)
A deployment flowchart shows the actual process flow and identifies the people or groups
involved in each step. A deployment chart shows where the people or groups fit into the process
sequence and how they relate to one another throughout the process.
Horizontal lines are used to define the customer-supplier relationships. Maximum
9b Marks: 4
Opportunity(2 Marks)
An opportunity flowchart is a variation on the linear flowchart. The opportunity flowchart
differentiates between:
Process activities that add value – these are essential for producing the required product or
service. Without them the output cannot be produced.
Process activities that add cost only – these are not essential for producing the required product
or service, for example waiting for an approval or for some equipment to become available.

Algorithms can be either symmetric or asymmetric key ciphers:

Symmetric key ciphers – these use related (often identical) keys to both encrypt and decrypt
information. This is sometimes called „shared secret‟ between two or more parties. (1 Mark)
Asymmetric key ciphers – these use different keys to encrypt and decrypt information (one to
lock, the other to unlock). This is sometimes called „public/private‟ key. (1 Mark)
There are broadly two types of symmetric key cipher: Maximum
9c  Block ciphers – fixed length blocks are encrypted(1 Mark) Marks: 4
 Stream ciphers – data is encrypted one ‟data unit‟ (typically 1 byte) at a time in the same
order it was received. The simplest method is to use translation tables which offset the
input blocks across an array of the table. Enhanced encryption can be achieved by
combining two or more tables. (1 Mark)

 Computer operating staff should be suitably trained, and should follow standard operating
procedures for checking the version of the program they are using.
 Job scheduling: there should be formal job scheduling in large computer centres, and a job
schedule should specify the version of the program to be used. Maximum
9d Marks: 4
 Supervision. Supervisors should monitor the activities of operating staff.
 Reviews by management. Management should carry out periodic reviews, to make sure
that the correct versions of programs are being used. (1 Mark for each point)