The Professionals’ Academy of Commerce

Pakistan’s Leading Accountancy Institute

Certificatein Accountingand Finance Stage Examinations

Referral Test
Test no: 2 30marks – 1 hour

Audit & Assurance

Q. 1

Described below are situations that have arisen at four unrelated companies to which your firm
provides services.

Khaki Ltd. (KL)

Your firm is the external auditor of KL, a high street retailer, for the year ended 30 June 2020. KL has
experienced declining sales and is loss-making due to its inability to compete with online retailers.
Your firm has concluded that a material uncertainty related to going concern exists.

KL’s directors have refused to disclose the uncertainty in the financial statements as they believe it
will undermine the company’s ongoing negotiations for additional finance with its lenders. KL’s
finance director told the engagement partner, “We must present our financial statements in the best
way possible to secure future funding. I hope that your firm appreciates that its future position as
external auditor is dependent on your firm supporting the directors in this matter.”

OasisLtd. (OL)

Your firm is the external auditor of OL. OL was listed on the Pakistan Stock Exchange in June 2020
and has a year end of 30 September. In recent years, your firm has earned the following fees from
OL. These are expected to remain at the same level for the year ending 30 September 2020:

Rs. In Million

External audit 55

Annual taxation services 45

Your firm’s total annual fee income is, and is expected to remain at, Rs. 580 million.

Required:

For each of the four situations above:

a. State, with reasons, the implications for your firm’s audit report. In respect of OL, you should
consider the implications of the company’s listing on the Pakistan Stock Exchange. (6 marks)
 b. Identify and explain ethical issues arising for your firm. State any actions that should be
taken by your firm or its employees. (6 marks)

Q. 2

You are the auditor of Indiana Motor Limited (IML), a listed companies, for the year ended June 30,
2020. The management of IML has provided you following information about its assessment of
impact of COVID-19 on various areas of financial statements.

On March 23, 2020, the Government has announced a temporary lock down as a measure to reduce
the spread of the COVID-19. Complying with the lockdown, the Company temporarily suspended its
operations from March 24, 2020. In the IML case, the lockdown was subsequently relaxed from May
18, 2020. After implementing all the necessary Standard Operating Procedures (SOPs) to ensure
safety of employees, the Company henceforth resumed its operations and has taken all necessary
steps to ensure smooth and adequate continuation of its business in order to maintain business
performance despite slowed down economic activity. The lockdown has caused disruptions in supply
chain including supply of cars to the customers resulting in a decline in sales. It is also expected that
the outbreak may result in lower demand for the Company’s cars in future. Due to this, management
has assessed the accounting implications of these developments on the financial statements,
including but not limited to the following areas:

▪ the impairment of tangible and intangible assets under IAS 36, ‘Impairment of non-financial
assets’
▪ the net realisable value of inventory under IAS 2 ‘Inventories’
▪ deferred tax assets in accordance with IAS 12, ‘Income taxes’
▪ provisions and contingent liabilities under IAS 37, including onerous contracts; and
▪ going concern assumption used for the preparation of these financial statements.

According to management’s assessment, there is no significant accounting impact of the effects of

COVID-19 in these financial statements.

Required:

Draft how the above matter would be reported in the key audit matter section of the audit report.
(You may assume necessary details) (10 Marks)

Q. 3
You are the audit manager of Nadeem and Company Chartered Accountants (NC) and are
reviewing the key issues identified in the files of two audit clients.
Channel Limited (CL)
CL’s year end was 31 March 2019 and the draft financial statements show revenue of
Rs.28·2 million, receivables of Rs.5·6 million and profit before tax of Rs.4·8 million. The
fieldwork stage for this audit has been completed. A customer of CL owed an amount of
Rs.350,000 at the year end. Subsequent testing of receivables in April highlighted that
no amounts had been paid to CL from this customer as they were disputing the quality
of certain goods received from CL. The finance director is confident the issue will be
resolved and no allowance for receivables was made with regards to this balance. (4
Marks)
Jasmine Limited (JL)
 JL is a new client of NC, its year end was 31 January 2019 and the firm was only
appointed as an auditor in February 2019, as the previous auditors were suddenly
unable to undertake the audit. The fieldwork stage for this audit is currently ongoing.
The inventory count at JL’s warehouse was undertaken on 31 January 2019 and was
overseen by the company’s internal audit department. Neither NC nor the previous
auditors attended the count. Detailed inventory records were maintained but it was not
possible to undertake another full inventory count subsequent to the year end. The draft
financial statements show a profit before tax of Rs.2·4 million, revenue of Rs.10·1
million and inventory of Rs.510,000. (4 Marks)
Required:
Discuss the issue, including an assessment of whether it is material and describe the impact on
the audit report if the issue remains unresolved.