Certificate in Accounting and Finance Stage Examination

14 June, 2023
85 minutes – 47 marks
Additional reading time – 5 minutes

Audit and Assurance

Term Test # 1
Instructions to examinees:
(i) Answer all FIVE questions.
(ii) Answer in black ballpoint pen only.
(iii) Attempt each part of the question on a new page.

Q.1 As an auditor appointed under Companies Act, 2017 what would be your response in the
following situations?

(a) While appointing you as auditor against a casual vacancy, the board of directors states
that you will not be entitled to audit certain major payments stated to be commission
on sales.
(b) You have been appointed as auditor of A Ltd. at its annual general meeting held on
July 19, 2018. The company closes its accounts on March 31 every year. When your
assistant goes for a surprise check of cash on September 30, 2018, he is not allowed to
do so by the finance director who tells him that audit can be conducted only after the
accounts for the year are ready.
(c) The sales manager of A Ltd., of which you are the auditor, does no reply to a query
raised by you regarding a sales contract. He argues that he is in no way concerned
with preparation of accounts and, therefore, you should seek replies to all your
questions from the account manager.
(d) You wish to make a qualification in your report regarding material discrepancies
noticed between the book balance of inventory and physical balance. The management
advises you to make these observations orally at the annual general meeting instead of
qualifying the report, on the ground that the shareholders would better appreciate the
situation if it is explained to them orally at the meeting.
(e) Your father-in-law holds 30% shares and is also a director of F Ltd, of which you are
the auditor. You wish to disclose this fact in your audit report. The chief accountant of
the company argues that there is no need to do so since you are not directly interested
in the company.
(f) The board of directors of the company states that it will authenticate the accounts only
when the auditors have signed the same, as this will give them an assurance that the
accounts have been prepared properly by the accounts department. (10)

Q.2 You are a manager in the audit firm of Ali & Co; and this is your first time you have worked
on one of the firm’s established clients, Stark Co. The main activity of Stark Co is providing
investment advice to individuals regarding saving for retirement, purchase of shares and
securities and investing in tax efficient savings schemes. Stark is regulated by the relevant
financial services authority.

You have been asked to start the audit planning for Stark Co, by Mr Son, a partner in Ali &
Co. Mr Son has been the engagement partner for Stark Co, for the previous nine years and so
has excellent knowledge of the client. Mr Son has informed you that he would like his
daughter Zoe to be part of the audit team this year; Zoe is currently studying for her first set of
fundamentals papers for her ACCA qualification. Mr Son also informs you that Mr Far, the
audit senior, received investment advice from Stark Co during the year and intends to do the
same next year.
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In an initial meeting with the finance director of Stark Co, you learn that the audit team will
not be entertained on Stark Co’s yacht this year as this could appear to be an attempt to
influence the opinion of the audit. Instead, he has arranged a balloon flight costing less than
one-tenth of the expense of using the yacht and hopes this will be acceptable. The director also
states that the fee for taxation services this year should be based on a percentage of tax saved
and trusts that your firm will accept a fixed fee for representing Stark Co in a dispute regarding
the amount of sales tax payable to the taxation authorities.

Required:
(i) Explain the ethical threats which may affect the auditor of Stark Co. (05)
(ii) For each ethical threat, discuss how the effect of the threat can be mitigated. (05)

Q.3 Daud and Company, Chartered Accountants (DC), has received an offer for appointment as
auditor of Jamal Limited (JL). Wife of Daud is a Shareholder and Director in Royal Limited
(RL).

Required:
In accordance with the requirements of the Companies Act, 2017, state whether and under
what circumstances DC could accept the audit, under each of the following situations:
(a) JL holds 51% shareholding in RL. (03)
(b) JL is an associated company of RL. (03)
(c) One of the directors in JL also holds 10% shareholding in RL. (02)

Q.4 With reference to Companies Act, 2017, state whether following statements are Correct or
Incorrect. If Incorrect, also correct the error.
(a) The report must begin with "Chartered Accountant's Report"
(b) The report is addressed to shareholders.
(c) The report includes that management is responsible to prepare financial statements in
conformity with International Accounting Standards.
(d) The report indicates that auditor's responsibility is to conduct the audit in accordance
with International Standards on Auditing.
(e) The report indicates that auditor obtains material assurance about whether financial
statements are free of any misstatement.
(f) The report indicates that an audit includes assessing the accounting policies and
significant estimates made by management.
(g) The report includes opinion whether proper books of accounts have been kept as
required by International Accounting Standards.
(h) Complete set of financial statements consists of the balance sheet, profit and loss
account, and cash flow statement together with the notes forming part thereof
(i) If audit is conducted by a firm of chartered accountants, audit report contains either
the name of firm or the name of engagement partner. (09)
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Q.5 Asim & Co. an audit firm has a number of clients. Certain matters related to different clients
were brought into the notice of a partner of the firm for review and advise as to which type of
audit report are to be issued in each of the following cases:

(i) Milestone Technology Limited (MTL) is a renowned company for manufacturing

specialized machineries on order. One of the customers sued the company for the
worst quality of material used in machinery specially customized for him. The amount
that is being sued was not substantial but material in nature and the case could go
either way. The company did not mention this amount in the financial statements.

(ii) Rashid & Sons, one of the customers of Shalimar Corporation went bankrupt just after
the year end but the company did not provide for bad debts. The details are as follows:
Rupees
Amount of bad debts of Rashid & Sons 300,000
Total trade receivables 1,300,000
Profit for the year 3,000,000

(iii) Amir Brothers Limited is undergoing a major court case that would bankrupt the
company if lost. The directors assessed and disclosed the case as a contingent liability
in the financial statements. The auditors agreed with the treatment and the disclosure.

(iv) The auditor attended the inventory count of Kashan Limited but the company made a
very poor attempt to conduct their inventory count. However, there was insufficient
evidence that the inventory valuation at Rs. 3.5 million is correct. Sales revenue and
profit for the year were as follows:
Rs. in million
Sales revenue 40.0
Profit 17.5

(v) Mehreen Enterprises is a retailer, deals in Fast Moving Consumer Goods (FMCGs).
The company supplies its product on cash basis but there is no system to confirm the
accuracy of cash sales.

Required:
State what type of audit report should be issued in each of the above cases and also explain the
reason for selection of such type of report.

(10)

(THE END)