Certificate in Accounting and Finance Stage Examination

Instructor: M. Bilal Qureshi, ACA, FCCA
Audit and Assurance – Final Mock Exam – Autumn 2022 Atempt
Suggested Solution
Ans. 1
(a)
1. Mandatory under ISA 520 and assist with forming an overall conclusion/corroborate audit conclusions/audit
opinion [0.5]
2. Identify previously unrecognized risks of material misstatement [0.5]
3. Financial statements consistent with auditor’s understanding [0.5]
4. Determine if further audit procedures are required/sufficient work performed [0.5]

(b)
The auditor shall include in the audit documentation:
Issues identified regarding compliance with Code of Ethics and how they were resolved. [0.5]
Conclusions on compliance with independence requirements that apply to the audit engagement and any
relevant discussions with the firm that support these conclusions. [0.5]
Conclusions regarding Acceptance & Continuance. [0.5]
The nature and scope of and conclusions resulting from, consultations undertaken during the course of the audit
engagement. [0.5]

The Engagement quality control reviewer (EQCR) shall document that:

The procedures required by the firm’s policies on EQCR have been performed; [0.5]
The EQCR has been completed on or before the date of the auditor’s report; [0.5] and
The EQC reviewer is not aware of any unresolved matters that would cause the reviewer to believe that the
significant judgments the ET made and the conclusions it reached were not appropriate. [0.5]

(c)
1. Auditor shall be entitled to attend any general meeting of the company. [0.5]
2. Auditor shall receive all notices and communications relating to any general meeting, to which a member of
the company is entitled. [0.5]
3. Auditor shall be heard at any general meeting which he attends on any part of the business which concerns
him as auditor. [1]
4. For listed companies, auditor/person authorized by him in writing shall be present in the general meeting
considering FS and auditor's report thereon. [1]
5. A retiring auditor who is not being reappointed is entitled to make a representation in writing to the company
at least 2 days before the AGM which shall be read out at the AGM (before taking up the agenda for auditor's
appointment) [1]
6. Retiring auditor / person authorized by such auditor in writing shall attend the AGM in person if the above
referred representation is made. [1]

Ans.2
(a)
Evaluation
1. A failure of the confirming parties to respond is a situation of non-response. [0.5]
2. Fewer responses to confirmation requests than expected keeping in view the historical response rate may
indicate a fraud risk. [0.5]
3. Significant overdue receivable balances are indicative of the risk of bad/doubtful debts/ impairment loss.
[0.5]

Auditor’s course of action

1. Non-response and fraud risk
a. Send follow up requests / reminders including asking the client to request the responding party to
send the response directly to the auditor. [0.5]
b. Alternative procedures to obtain sufficient appropriate audit evidence for e.g., examining
subsequent cash receipts, shipping documents, sales near period end). [1]

 
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c. If the auditor has determined that response to a positive confirmation request is necessary to obtain
sufficient appropriate audit evidence, alternative procedures will not provide the required audit
evidence. In such cases the auditor shall determine implications for the audit and the auditor’s
report such as due to fraud risk stemming from low confirmations response rate compared to the
past. [1]
d. If the auditor assess fraud risk, increased professional skepticism, and unpredictability in audit
procedures may be an appropriate response. [1]

2. Doubtful / bad debts

a. Inspect the aged receivables report to identify any slow moving balances, and discuss these with
the credit control manager whether write down needed. [1]
b. For any slow moving/aged balances, review customer, lawyer, collection agencies
correspondence to assess whether there are any invoices in dispute. [1]

Other valid procedures would also gain credit

(b)
Evaluation
1. The scenario reflects a significant related party transaction as it involves holding and subsidiary company
[0.5]
2. The transaction appears to be outside normal course of business (ONCOB) and therefore a significant risk
due to being a complex financing transaction with equity conversion option on debt financing at low / par
value. [0.5]
3. Conversion at low / par value or interest rates may not be arm’s length basis and so a disclosure in financial
statements that related party transactions are on arm’s length basis should not be made. [0.5]

Auditor’s course of action

1. Significant related party transaction ONCOB
a. Inspect the underlying contracts / agreements, if any and evaluate whether:
i. Business rationale (or lack thereof) of the transactions indicative of fraud (fraudulent financial
reporting / misappropriation of assets). [1]
ii. Terms of the transactions are consistent with management’s explanations. In case of
inconsistency, consider the requirements of ISA 500 for contradictory audit evidence such as
modifications to risk assessment and other audit procedures for resolving inconsistent /
contradictory evidence. [1]
iii. Transactions appropriately accounted for and disclosed per applicable financial reporting
framework. [1]

b. Obtain audit evidence that related party transactions have been appropriately authorized and approved.
[0.5]

2. Related party transaction on arm’s length basis

a. If the captioned assertion is made in the FS, the auditor shall obtain SAAE about the same. Obtaining
sufficient appropriate audit evidence regarding terms and conditions being on arm’s length may be
difficult. [1]

b. Evaluating management’s support for this assertion may involve the following: [1]
i. Considering appropriateness of management’s process
ii. Reasonableness of significant assumptions
iii. Relevance, accuracy and completeness of the data (internal / external)
Ans. 3
(a) The statement is correct to the extent of obtaining direct assistance in relation to adequacy of the related
provision which involves significant judgement and keeping in view of the risk involved. [1] However,
checking the accuracy of aging analysis does not involve significant judgement / risk and thus direct
assistance may be obtained. [1]
(b) This statement is incorrect as the auditor shall consider whether external confirmation procedure is to be
used as a substantive procedure or not. [1] Performing external confirmation procedure in every audit is
not mandatory. [1]
 
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(c) The statement is incorrect as intimation regarding the appointment of auditor to the registrar along with
the auditor’s written consent and that too within 14 days of such appointment is the responsibility of the
company and not the auditor [1.5] and therefore company would be liable to the penalty in the event of
default [0.5]
(d) The statement is incorrect as the scenario indicates selection of specific items which is different from
statistical sampling [1] and misstatements can only be projected to the population in case of items selected
via statistical sampling approach. [1]
(e) The statement is incorrect as analytical procedures are a mandatory procedure as a risk assessment
procedure in the planning phase of any audit (whether new or recurring client) [1] for the purpose of
understanding the entity and its environment in order to identify and assess the risk of material
misstatement [1].
(f) The statement is partially correct. Disclaimer of opinion is mandatory in the following situations:
i. Unreliable written representations related to “Preparation of financial statement and
Information provided and Completeness of transactions” are not reliable; [1] or
ii. Management does not provide written representations related to “Preparation of financial
statements and Information provided and Completeness of transactions”. [1]

However, in other situations the auditor has to evaluate the materiality and pervasiveness of the matter(s)
regarding which representations are not provided and so a qualified or disclaimer of opinion may be
appropriate. [1]

(g) The statement is incorrect as financial statements are prepared on a going concern basis [0.5] with a
disclosure regarding material uncertainty related to going concern per IAS 1. [0.5]
(h) The statement is incorrect as auditor may express a qualified opinion if the misstatement is material but
not pervasive [1] or adverse opinion if misstatement is material and pervasive. [1]
(i) The definition is incomplete as the term pervasive also includes:
i. if confined, represent or could represent a substantial proportion of the financial statements [1]
ii. In relation to disclosures, are fundamental to users’ understanding of the financial statements. [1]

Ans. 4
Control 1 – This is inappropriate as authorization only confirms that the posted invoices are reviewed and
represent genuine expenses / valid invoices but does not confirm that all invoices are posted. [1]

Control 2 – This is appropriate as it involves comparison of manual count of invoices with the system count. By
confirming the expected value against the total that has been input, the control ensures that all invoices have been
input. [1]

Control 3 – This is inappropriate as it confirms accuracy of purchase invoices and not that all invoices have been
posted in the system. [1]

Control 4 – This is appropriate as it ensures that there are no breaks in the sequence and thus all invoices have
been posted. [1]

Ans. 5
Audit software technique is used for substantive procedures which include test of details and substantive analytical
procedures to detect material misstatement at assertion level. In view thereof 1 and 3 represent audit software
techniques as 1 involves recalculation to determine accuracy and 3 involves a substantive analytical procedure
involving year on year comparison. [2]

2 is incorrect as it represents use of test data for the purposes of test of controls to check appropriate processing of
invoices in the system. [1]

Ans. 6

Before the count [Any 3 procedures i.e. 1 mark per procedure]

–The locations at which inventory is held, including the materiality of the inventory and the risk at different
locations to select the locations for attendance including inventory held by third parties.
 
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– Whether adequate procedures are expected to be established and proper instructions issued for physical
inventory counting.
– The timing of physical inventory counting
– Whether the assistance of an auditor’s expert is needed

During the count [Any 3 procedures i.e. 1 mark per procedure but procedure related to inventory of third party must be
mentioned as specifically referred in the scenario]
-Observe the performance of management’s count procedures to see controls over the movement of inventory
before and during the count, to assess that management’s instructions and count procedures are adequately
designed and implemented.
-Inspecting condition by identifying, for example, obsolete, damaged or aging inventory.
-Tracing items selected from management’s count records to the physical inventory to test existence
-Tracing items selected from physical inventory to management’s count records to test completeness
-Confirm that inventory belonging to third parties, but on the client’s premises at the date of the count, is not
included on the inventory sheets and is placed separately in the premises. [This procedure should be mentioned for full
marks]

Ans. 7
1. The description and explanation provided for the adverse opinion is not sufficient, for a number of reasons.
Firstly, the matter is not quantified. The paragraph should clearly state the amount of Rs.10.5 million to
enable the users understand its impact. [1]

2. There is no description of the impact of this omission on the financial statements. Wording such as ‘if the
impairment loss had been recognized, property, plant and equipment, profit for the year and shareholder’s
equity would have reduced by Rs. 10.5 million (net of taxes, where applicable), and impairment loss
increased by Rs.10.5 million should be included. [1]

3. No reference is made to the relevant accounting standard IAS 36 Impairment of Assets. Reference should
be made in order to help users’ understanding of the breach of accounting standards that has been made. [1]

4. The use of the word ‘deliberate’ when describing non-recognition of impairment loss is not professional,
sounds accusatory and may not be correct. [1]

5. It is unlikely that this issue alone would be sufficient to give rise to an adverse opinion. An adverse opinion
should be given when misstatements are both material and pervasive to the financial statements. The amount
of the deficit, and therefore the liability that should be recognized, is Rs.10.5 million, which represents 6%
of total assets. The amount is definitely material, but would not be considered pervasive to the financial
statements. [1]

6. The titles and positioning of the first two sections included in the extract are not appropriate. In this case,
the titles are incorrect, and the sections should be switched round, so that the basis for modification is
provided after the opinion. [1]

7. The opinion section should be titled ‘Adverse Opinion’. [0.5]

8. The opinion section does not identify the applicable financial reporting framework i.e. IFRS and the
Companies Act, 2017 which has not been complied with. [0.5]

9. The opinion section does not contain the standard wording in the first paragraph of the opinion section such
as name of the company, financial year end, components of the financial statements, that the auditor has
audited the financial statements and whether all information and explanation obtained that was necessary
for audit purposes. [1]

10. When the auditor modifies the opinion, the ‘Basis for Adverse Opinion’, should describe the matter giving
rise to the modification. [0.5]

 
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11. Use of emphasis of matter (EOM) is not appropriate if a material uncertainty related to going concern
(MURGC) is adequately disclosed in the notes to the financial statements. Instead, the section should be
titled “Material uncertainty related to going concern.” [0.5]

12. No cross reference to the relevant note to the financial statements where the MURGC is disclosed. [0.5]

13. No mention that the opinion is not modified in respect of MURGC. [0.5]

[Discussions surrounding impairment loss being a pervasive misstatement based on % of net assets and appropriateness of
MURGC due to net assets figure being materially misstated would also be given due credit]

Ans. 8
(a) and (b)

Marking plan: [8 marks for risks (1 mark per risk) and 12 marks for procedures (0.5 mark per procedure)]
1. Going concern:
There is a risk of inadequate disclosure of material uncertainty related to going concern of ACL since:
it is the third consecutive year in which the company is making loss and the revenue has also fallen by
34% as compared to previous year.
current liabilities exceed the current assets and the current ratio has decreased from 0.98 to 0.87.

Audit procedures:
Obtain management assessment / future projections prepared justifying the use of going concern assumption
as appropriate in the financial statements of the company.
Analyze the assumptions used therein. The underlying assumptions used by the management needs to be
supported by the pertinent facts.
Ensure that proper disclosure is given in the financial statements of the material uncertainty and the
management’s assessment.
Read the minutes of the board meeting in which above issues were discussed.

2. Running finance facility

Since the company is planning to enhance the running finance facility and the results of the company have also
not been encouraging, management may overstate assets/income and understating liabilities / expenses to secure
finance leading to risk of material misstatement at financial statements level.

Audit procedures:
Understand and evaluate ACL’s financial reporting process and the controls over journal entries and other
adjustments.
Review accounting estimates for consistency/reasonableness/un-biasness.
Evaluate business rationale for significant transaction outside the normal course of business.
Overall response such as increased skepticism, more supervision and unpredictability in nature, timing, extent
of procedures.
Evaluate the change in policies especially those related to subjective measurements.
Perform analytical review of revenue and expenses.
Perform cut-off test to check that the transactions have been recorded in the correct period.
Perform extensive substantive testing in areas with low control reliance.

3. Warranty provision:
There is a risk that ACL has understated the warranty provision and related expense because the warranty
provision has decreased by almost the same percentage of the decrease in revenue, despite the fact that ACL is
offering extended warranties.

Audit procedures:
Obtain the working prepared by the management and consider the appropriateness of source data and the
assumptions used.
Review the contracts/orders for the terms of warranty.
Perform analytical procedures to compare the level of warranty provision year on year.
 
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Consider involving an expert to calculate the warranty provision to be included in the financial statements.
Obtain an understanding of the management process for recording of revenue of the extended warranty.
Ensure that the revenue for extended warranty is recognized over the warranty period.

4. Onerous contracts:
There is a risk that due to the increased cost, the pending orders may result in an onerous contract and provisions
and related expense may be understated.

Audit procedures:
Obtain the correspondence with the school which has agreed to buy the new product.
Obtain and review the agreements with the other school and verify the termination clause including the amount
of penalty.
Obtain and verify the price at which the desktop along with the LCD screens could be purchased from some
other suppliers.
Ensure onerous contracts are appropriately recorded and disclosed in the financial statements.

5. Deferred tax
Deferred tax asset can only be recognized to the extent that ACL expects that it would generate sufficient profits
to realize the benefit. In the given scenario it seems difficult for the company to generate sufficient taxable profits
in the near future and so deferred tax assets may be overstated and deferred tax income overstated.

Audit procedures:
Review the management’s future projection of taxable profits.
Assess the reasonableness of the assumptions used.

6. Foreign exchange translation:

Since the company is exposed to foreign exchange risk due to significant imports, there is a risk that gains and
losses on translation of foreign currencies are wrongly credited/debited to purchases instead of charging to profit
and loss account.

Audit procedures:
Check, on a sample basis, that any gains/losses arising on the translation of foreign currency are correctly
recognized as per the requirements of IFRS.
Check that appropriate exchange rates are used in translation of foreign currency.

7. Inventory obsolescence
Inventory turnover rate has increased to 3 months as compared to 1.8 months in the previous years. There is a risk
of overstatement of inventory and understatement of cost of sales due to not being written down to the lower of
cost and net realizable value

Audit procedures
Obtain aging of inventory and identify obsolete inventory.
Review and test the procedures in place for comparing NRV with cost for each item of inventory and assess
whether appropriate changes have been made.
From the inventory list, identify inventory from discontinued operations which would have to be written down
to the net realizable value.

8. New accounting system

Post implementation testing has not been conducted. There is a risk of opening balances on the new system being
misstated and loss of ongoing data if they have not been transferred from the old system correctly. If the new
system is not operating effectively due to bugs for example, there is a risk of misstatement of the accounting
records.

Audit procedures
Undertake detailed testing to confirm that all balances have been completely and accurately transferred to the
new accounting system.
Perform walkthroughs to document the new system and test the controls in place.
 
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Discuss with management any issues which have occurred since the new system was implemented.

(c)
1. Declining profit margins and reduced demand of ACL’s products due to competition may pressurize the
management to engage in fraudulent financial reporting via overstatement of net income and net assets. [1.5]

2. ACL is in the process of negotiating financing facilities with banks and may be under pressure
to engage in fraudulent financial reporting via management override of controls such as biased estimates to make
financial position / performance look better than it actually is. [1.5]

3. Involvement of non-finance personnel such as CEO in developing accounting estimates for

warranty provision shows an attitude for fraudulent financial reporting via less prudent estimates. [1.5]

4. Various areas of complex estimates such as deferred tax assets, provisions (warranty & onerous
contracts) also provide an opportunity for fraudulent financial reporting as these require significant judgements
which provide a scope for window dressing. [1.5]

Ans. 9
Amendment to financial statements
1. The event mentioned occurred after the reporting period and is not an event which provides evidence of a
condition at the year end and hence this is a non-adjusting event. [0.5]

2. The total damaged assets of Rs.675,000 (650 + 25) would be material as they represent 8·5% of profit before
tax. [0.5]

3. As this is a material non-adjusting event, there should be a note to the financial statements detailing the fire
and the total value of assets which may be impacted due to the possibility of a lack of an insurance settlement.
[1]

Audit procedures [Any 3 valid procedures would get credit]

– Obtain a schedule showing the damaged property, plant and equipment and agree the net book value to the non-
current assets register to confirm the total value of affected assets. [1]
– Obtain a breakdown of the inventory stored at the distribution center on 15 February 2016 and compare to
earlier records or dispatch documents to ascertain the likely level of inventory at the time of the fire. [1]
– Review any correspondence from the insurance company confirming the amount of the claim, and the current
status of their investigation into the fire and any likely payments to assess the extent of any uninsured amounts.
[1]
– Discuss with the management / directors whether they will disclose the effect of the fire, as a non-adjusting
event, in the year-end financial statements. [1]

Ans.10
1. Include other matter paragraph that the prior period financial statements were audited by another firm of
Chartered Accountants, the type of opinion expressed by them and the date of their auditor’s report. [2]
2. Include other matter paragraph referring to the fact that another set of financial statements prepared has been
prepared by the same entity as per general purpose framework and the auditor issued an auditor’s report
thereon. [2]
3. Auditor’s report on special purpose financial statements shall include an emphasis of matter paragraph to alert
users that the financial statements have been prepared as per a special purpose framework and so may not be
suitable for another purpose and solely for intended users and not to be distributed / used by others. [2]
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