SOLUTION 1:

Subsequent Event Identified:

The matter identified after the issuance of financial statements is an adjusting event as per IAS-10
because the condition of making payment existed at year end. (giving guarantee to Standard Bank
Limited)

Procedures to be Performed:

The auditor shall discuss the matter with management and determine whether financial statements
needs amendment and inquires how management intends to address the matter in the financial
statements.

As the management is reluctant to resolve the issue, the auditor shall perform the following procedures.

1. Auditor shall notify management and TCWG that the auditor will seek actions to prevent users
from relying on audit report.
2. If despite such notification, management and TCWG do not take necessary steps, auditor shall
take appropriate action to communicate misstatement in financial statements to users
(considering legal advice).

Related Party Transaction:

Hub-Chowki limited has acquired 30% shareholding in Ormara limited which makes both companies
associated.

As this shareholding was not disclosed by management previously, the audit team shall perform the
following procedures.

1. Promptly communicate the relevant information to other members of engagement to assist

them in determining whether risk should be revised.
2. If AFRF prescribed related party requirements:
a. Inquire as to why entity’s process and controls failed to identify or disclose such related
party relationship/transaction.
b. Request management to identify all transactions with newly identified related party for
auditor’s further evaluation.
3. Perform appropriate substantive procedures on newly identified related party, and/or
significant related party transactions.
4. Reconsider risk of completeness of related party information because other unidentified
related-parties may also exist. Also perform additional audit procedures as necessary.
5. If non-disclosure appears intentional, reconsider risk of fraud. Also evaluate other implications
on the audit (e.g. re-evaluate integrity of management).

Furthermore, the transaction (giving guarantee to its associated company) is a transaction outside the
normal course of business, auditor shall consider it a Significant Risk, and shall perform following
procedures:

1. Auditor shall inquire management about business rationale of such transaction.

2. Inspect underlying contracts or agreements to evaluate:
 a. If there is indication of fraudulent financial reporting or misappropriation of assets.
b. Terms of transactions are consistent with management’s explanation.
c. Transaction has been appropriately accounted for and disclosed in accordance with
AFRF.

3. Obtain evidence of appropriate authorization of such transactions.

MARKING PLAN:
Identification of Subsequent Event 2 marks
Procedures of subsequent event 3 marks
Identification of related party 2 marks
Procedures of RP which were undisclosed by management 5 marks
Procedures of RP transaction Outside normal course of business 3 marks

SOLUTION 2

Revaluation must be done for entire class of assets. If management is not revaluing its entire class of
assets. Auditor should ask management to revalue its entire class of assets because selective revaluation
is not allowed.

Furthermore, audit team shall perform the following procedures on revaluation

1. Verify amounts in financial statements in valuer’s report.

2. Ensure that valuation is up to date.
3. Ensure that entire class of asset has been revalued.
4. Ensure that method used to measure fair value is consistent.
5. Recalculate Revaluation surplus or loss and depreciation expenses and ensure these have been
correctly accounted for in books.
6. Inspect the property physically to ensure their condition is same as described in valuation
report.

IMPACT ON AUDIT REPORT:

 If Management Amends Financial Statements.

If management amends financial statements, then there will be no misstatement. Auditor shall
express unmodified opinion on financial statements.

 If Management do not amend Financial Statements.

If management do not amend financial statements. This will be a misstatement. As the effect of
this misstatement is pervasive, auditor shall express adverse opinion on the financial
statements.

MARKING PLAN:
Identifying that selected revaluation is not allowed 2 marks
Procedures of Revaluation 3 marks
Implication on Audit Report 5 marks
SOLUTION 3
Key Audit Matter
1. Tax Contingency
Refer note x to the financial statements.
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.
2. Related Party Transactions
Refer note x to the financial statements
The company has significant purchases from related
parties. Further, significant amount of advertising
expenses is 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.
How the matter was addressed in our audit
 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.
 We assessed the management
controls over identification and
capturing and recording of related
party transactions
 We also assessed how frequently
the related party listing is updated
by the management.
 Reviewed contract with related
party for providing advertising and
other services.
 Reviewed minutes of meeting of
board of directors for the discussion
and authorization of related party
transaction.
 Reviewed accounting record for
large, unusual and nonrecurring
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
MARKING PLAN:
5 marks for each KAM and its procedures 10 marks

SOLUTION 4

Following audit procedures should be performed in the given circumstances.

(i) Financial support from parent company

In support of parent company’s guarantee to provide continuing financial support to the
company, we should obtain

 A copy of legally binding agreement between the parties/board resolution, and

 Ensure that the parent company is financially capable of supporting the company. (e.g. historical
financial statements, forecasted information).

(ii) Rescheduling of borrowing facilities, we should obtain a

 Copy of written agreement or
 Communication in respect of debts rescheduled by the company with banks or financial
institutions. / confirmation from financial institutions.

(iii) Reduction of overheads and administrative expenses

 Assess whether it would be feasible to reduce overhead and administrative costs. For example,
such reduction may have serious negative impact on the company’s ability to provide quality
services to customers.
 Such plans might be evidenced by an approval of board of directors.

(iv) Increasing the Equity

 Evaluate management’s feasibility plan to inject further capital or issue of further capital.
 Examine related documentation and the steps taken so far (Board minutes, permission from
regulator).

MARKING PLAN

2.5 marks for each KAM and its procedures subject to maximum of 10 marks 10 marks

SOLUTION 5

Views expressed by the audit committee member were not correct due to following reasons:

The objective of an audit of financial statements carried out in accordance with ISA is to obtain
reasonable assurance that the financial statements taken as a whole are free from material
misstatements.
For this purpose, the auditor considers internal control relevant for the preparation and fair
presentation of the financial statements but is not required to express an opinion on the effectiveness
of the entity’s internal control system.

An audit opinion does not assure the future viability of the entity nor the efficiency or effectiveness with
which management has conducted the affairs of the entity.

The audit process is subject to certain limitations which are also recognized by ISA. Such limitations
include:

 Use of sampling
 Reliance on internal control which itself is subject to limitations (for example: possibility of
management override or collusion) and the
 Fact that most audit evidence is persuasive rather than conclusive.

Moreover, in the context of the specific instance referred by the audit committee member, it may
be possible that the subject branch may not have been selected for the purposes of audit due to its
relative insignificance in relation to the overall financial statements.

Moreover, the fact that credit was granted to close relative of branch manager without following
normal lending procedures, may not necessarily result in material misstatement in the financial
statements.

MARKING PLAN

Mentioning inherent limitations of audit 4 marks

Mentioning that auditor is not required to express opinion on internal 2 marks
control system
Linking the inherent limitations to the scenario 4 marks

SOLUTION 6

Change in Accounting Policy

Steps need to be taken by auditor

 Review change in accounting policy for biases and evaluate whether the circumstances
producing the bias, if any, represent a risk of material misstatement due to fraud.
 Whether the change in accounting policy will result in reliable and more relevant information
about entity’s financial position, its performance and cash flows.
 Whether the requirements of IAS 16 in relation to change in accounting policy has been
complied with.
 Evaluate competence, capability and objectivity of professional valuers.
 Obtain understanding of work of that valuer.
 Consider the need for appointment of an auditor’s expert.

MARKING PLAN

1 mark for each procedure subject to maximum of 5 marks 5 marks

SOLUTION 7

Interim balances:

Since the interim balances were used for sending confirmation, the auditor will need to check the
changes in the receivable balances between the confirmation date and the end of reporting period. This
check will consist mainly of checking entries in the receivable control account with the transactions
entered in the book of prime entry during the same period.
Assertions addressed:
Cut-off, rights and obligation assertion has been correctly identified the audit team.
However, the receivable balances are generally tested for overstatement, the completeness assertion is
therefore less relevant. Assertion related to existence is more relevant as this exercise confirms that the
receivables do in fact exist, and there is no overstatement of receivables in the financial statements.
Accuracy and valuation assertion is also verified during the confirmation exercise which has not been
addressed by the audit team.

Debtors’ wise assessment of work:

1. Alpha:
No further procedure required.

2. Beta:
The auditor should maintain control over the external confirmation requests, including the
process of sending the requests himself. The confirmation being sent directly was returned by
the courier on the grounds of invalid address and that resending by the client may indicate
doubts on the reliability of the response. The auditor should also consider performing alternate
audit procedures to verify the receivable balance such as subsequent clearance, review the
supporting documentation such as signed PO, delivery documentation and sales invoice

3. Gamma:
From the winding up event it appears that the amount receivable is irrecoverable. Therefore,
the auditor needs to ensure that the amount of irrecoverable receivables is written off or is duly
provided for
 Review any correspondence with the liquidator/debtor, relating to recovery of the amount due.
 Review the calculation of amount of provision/write off and basis thereof.

4. Small Distributors
Audit team’s decision to ignore small balance is not correct. The team may consider sending
negative balance confirmation. If the team ensure that there is low risk of material
misstatement, low exception rate is expected and there is no reason to disregard the
confirmation request.

MARKING PLAN

Discussion on the use of interim balances for balance confirmation 2 marks

Identification of correct and incorrect assertions 2 marks
Discussion on the appropriateness of the work performed by the audit team 4 marks
 0.5 mark for mentioning each additional procedure 2 marks

SOLUTION 8

Revision of Terms

 Any indication that the entity misunderstands the objective and scope of the audit
 Any revised or special terms of the audit engagement
 Significant change in ownership
 Recent change in management
 Significant change in nature or size of entity’s business
 Change in
o Legal or regulatory requirements
o The financial reporting framework
o Other reporting requirements
o The engagement partner or structure of audit firm.

MARKING PLAN

1 mark for each situation subject to maximum of 5 marks 5 marks

SOLUTION 9

(a) True and Fairview

The term true and Fairview has not been defined in companies act 2017 or in ISAs or in IFRS.
Therefore, it is the most important judgement auditor makes in reaching his opinion.

Generally, true means free from error and fair means free from undue bias in the financial
statements or the way in which they have been presented. True and fair means financial statements
have been prepared in accordance with AFRF. (e.g. IFRS, Companies Act, and other regulatory
requirements)

(b) Professional Judgement:

Professional judgement is the application of cumulative audit knowledge, experience and training
(within the context of accounting, auditing, and ethical standards), during an audit to reach
appropriate course of action or conclusion.

(c) Professional Skepticism

a. Professional skepticism is an attitude that includes;
i. A questioning mind
ii. Being alert to conditions which indicates possible misstatements (due to error
or fraud), and
 iii. Critical assessment of audit evidence.

b. It means that auditor should not believe in anything which management tells him.
Rather, he should obtain corroborative evidence and should investigate if there is a
conflict.

(d) EXPECTATION GAP

It is the responsibility of general public (i.e. stakeholders) to understand and eliminate expectation gap
so that scope of audit is not misunderstood.

Expectation gap means public perception of the role and responsibilities of the external auditor is
different (and usually higher) from his statutory role and responsibilities.

MARKING PLAN

2.5 marks for each term subject to maximum of 10 marks 10 marks

SOLUTION 10

Ratios

Ratios 2018 2019

Debtor Turnover days 128 78
149 227 149
Margin 43% 46%
Increase in revenue 1.36% -
Operating expenses as % of sales 22% 26%
Finance cost as % of borrowing 12% 26%

1. Stagnant Revenue despite launch of various new products

There has been only 1% increase in sales (1,190/1,174) despite launch of various new products this
year based on latest technologies. It indicates sales may be understated.

2. Overstatement of inventory:
Introduction of new products have not been successful or demand for existing products have
decreased, and indicates inventory may have become obsolete requiring write-down of inventory
from cost to NRV. Further, increase in inventory turnover days 227 days as compared to last year
149 indicates that Inventory may be overstated e.g. fake inventory may exist, or there may be
incorrect valuation of inventory or inventory may have become obsolete requiring write-down of
inventory from cost to NRV.

3. Overstatement of PPE:
Further, new plant purchased for new products may also have become impaired as its value in use
has decreased if new products are not successful.

4. Decrease in operating expenses (as %age of Sales)

 Decrease in operating expenses 22% as compared to last year 26% indicates understatement of
operating expenses (specially advertisement and sales related cost should increase when new
products are launched). It also indicates misclassification between operating expenses and cost of
sales.

5. Decrease in finance charge (as %age of borrowings)

Decrease in finance charge 12% as compared to last year 26% indicates understatement of finance
charges. Therefore, there is a risk of understatement of financial charges.

6. Increase in Debtors Turnover Days:

Increase in debtor’s turnover days 128 days as compared to last year 78 days indicates that debtors
may be overstated e.g. fake debtors may exist or doubtful debtors may exist from whom full
recovery is not expected. Therefore, there is a risk that appropriate provision against receivable
might not have been created.

7. Intangible assets recognized and purchased by company:

Intangible assets may not have met recognition criteria, or may be incorrectly valued because of
subjectivity and complexity in valuation (e.g. issue of useful life, issue of internal expenses).
Therefore, Valuation and Allocation assertion of Intangible Assets is at risk.

MARKING PLAN

3 marks for each term subject to maximum of 15 marks 15 marks