The Professionals’ Academy of Commerce

Pakistan’s Leading Accountancy Institute

Certificatein Accountingand Finance Stage Examinations

Referral Test
Test no: 4 30marks – 1 hour

Audit & Assurance

Question: 1
You are the audit manager in Noor and Company Chartered Accountants. Your audit team
relating to one of the clients has shared following draft notes regarding their understanding and
proposed substantive procedures for trade payables;
i. Trade payables are material item of the financial statements and usually represent
following risk of misstatement;
a. Non-existent liabilities being included in the financial statements (Existence
Assertion). This is considered to be the main risk.
b. Not all liabilities of the reporting entity being included in the financial
statements (Completeness). This risk is rarer.
c. Liabilities are not being properly disclosed in the financial statements
(classification andpresentation assertion)
ii. Audit approach is similar to the approach used for the audit of trade receivables. Direct
confirmation of supplier balances is always used to confirm balances.
iii. Suppliers statements, sometimes available, are usually unreconciled with clients ledgers
and do not provide details of transactions but rather a summary of transactions. These
statements are not used as reliable evidence.
iv. Obtain or prepare a listing of balances on supplier accounts in the payables ledger
v. In selecting the sample of balances for testing, the auditor should consider the
followingpoints
a. Select large balances as main audit emphasis is on existence and overstatement.
b. Do not include number of accounts showing nil balances and debit balances
c. Include major suppliers based on the knowledge of auditor
d. Include static balance to see whether such balance is still payable
vi. Compare the balance from the payableslisting with the balance shown in the supplier’s
statement and if there is any difference, the auditor should reconcile it.

Required:
Critically evaluate all above draft notes only and write brief statement against each, whether
you agree or disagree. (10 Marks)

Question: 2
You the audit senior in Zeta & Co. Chartered Accounts and responsible for the audit of Kalash
Limited. The major portion of financial statements of the client consists of non-current assets.
During planning meeting, one of junior team member asked for principal risk of misstatements
in non-current assets pertaining to different assertions.

Required;
Describe principal risk of misstatements in non-current assets pertaining to relevant assets. (7
Marks)

Question: 3
Your firm is the external auditor of NajeebLimited (NL), a listed company which provides
construction and architectural design services. The engagement partner performed a detailed
review of the audit file for the year ended June 30th 2020. He is concerned about the quality of
the work performed on the confirmation of trade payables balances. An extract from the
working paper summarising the audit work in respect of the confirmation of trade payables
balances is shown below:
Trade payables
Objective of the audit test
To test trade payables for completeness.

Sample size
50 items. The sample size has been reduced from the firm’s standard sample size of 80 as we
believe the control environment at NL is strong as we have found no issues in previous years.

Source of sample
Balances selected from the trade payables ledger list of balances at June 30th 2020.

Other information
Materiality threshold – Rs. 1 million
Trade payables balance – Rs. 180 million
Sample selected for direct confirmation – Rs. 40 million.

Results of confirmations Number Rs. (m)

Balances confirmed directly with suppliers 30 31
For non-replies, alternative procedures were used as follows:
▪ Balances confirmed by after date payments made by
NL to suppliers 17 8.5
▪ No further work on balances that individually are not
Material 3 0.5

Total 50 40

Findings
One error of Rs. 275,000 identified - no further work as below materiality threshold.

Conclusion
Trade payables are not materially understated.
Required:
Identify and explain the deficiencies in the audit work of trade payable. (7 Marks)

Question: 4
You are audit manager of P Groupwich recently acquired S Company. While reviewing
consolidate financial statement, you observed purchased goodwill amounting to Rs. 50 million
recorded in consolidated statement of financial position. Enlist audit procedures which you will
perform to verify purchase goodwill. (6 Marks)