The Professionals’ Academy of Commerce

Pakistan’s Leading Accountancy Institute

Certificatein Accountingand Finance Stage Examinations

Referral Test
Test no: 3 30marks – 1 hour

Audit & Assurance

Question: 1
Almas Ltd. (AL) manufactures LED panelsand its year end was 30 June 2018. You are an audit
supervisorof Fast& Co. Chartered Accountants and the final audit is due to commence shortly.
Total assets are Rs. 43·2million and profit before tax isRs. 7·2million. The following matters
have been brought to your attention:
Trade receivables
AL trade receivables ledger is comprised of a large number of customers. In previous years, the
auditteam has undertaken a positive trade receivables circularisation to confirm year-end
balances. However, the customerresponse rate has historically been low and so alternative audit
procedures have been undertaken. A decision has beenmade that for the current year audit a
circularisation will not be performed. The year-end trade receivables balance isRs. 3·9 million
(2017 Rs. 2.8million) and the allowance for trade receivables is Rs. 410,000 (2017 Rs. 300,000).
Bank balances
The bank and cash figure included in AL draft financial statements is comprised of a number of
bank account balances, an overdraft of Rs. 5·1million which is the company’s main current
account and Rs. 200,000 relating to several savingsaccounts. The finance director has informed
the audit manager that all accounts have been reconciled as at the yearend.The overdraft of Rs.
5·1million has increased significantly since the prior year (2017: Rs. 1·2million). The directors
have informedyou that the overdraft facility, which the company requires in order to operate on
a daily basis, is due for renewal in October 2018 and that they are confident it will be renewed.
Required:
a. Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to AL’s trade receivables. (5 marks)
b. Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to AL’s bank balances. (5 marks)

Q. 2

(a)

You are working on the external audit of Snowball Ltd (Snowball) for the year ended31 August 2017.
You are responsible for performing the planned procedures in respect oftrade receivables. Your
analytical procedures identified that receivables days have increasedfrom 35 days at 31 August 2016
to 43 days at 31 August 2017. On enquiry, Snowball’sfinancial controller explained: “The increase is
due to a contract for the supply of goods to anew customer, Pets Ltd (Pets). The contract allows Pets
60 days’ credit rather than ourstandard 30 days’ credit. We despatched a large order to Pets 50 days
before the year end.”

Required:

Outline the additional audit procedures you would perform in respect of the financialcontroller’s
explanation. (4 marks)

(b)

The auditor should look at client’s procedures to evaluate whether inventory should be recorded at
cost or NRV. Describe, what substantive procedures the auditor will adopt for such purpose? (5
Marks)

Q. 3

Andromeda Industries Co (Andromeda) develops and manufactures a wide range of fast moving
consumer goods. Thecompany’s year end is 31 December 2015 and the forecast profit before tax is
Rs. 8·3 million. You are the auditmanager of Neptune & Co and the year-end audit is due to
commence in January. The following information has beengathered during the planning process:

Inventory count

Andromeda’s raw materials and finished goods inventory are stored in 12 warehouses across the
country. Each ofthese warehouses is expected to contain material levels of inventory at the year
end. It is expected that there will beno significant work in progress held at any of the sites. Each
count will be supervised by a member of Andromeda’sinternal audit department and the counts will
all take place on 31 December, when all movements of goods in andout of the warehouses will cease

Required:

Describe the before and during inventory count procedures you would perform during the audit of
Andromeda Industries. (11 Marks)