Cfap6 Audit Past Papers and Answers

CERTIFICATE FINANCE & ACCOUNTING PROFESSIONAL 06
AUDIT, ASSURANCE
AND
RELATED SERVICES
COMPILED BY: SIR MUHAMMAD IBRAHIM, ACA

IQ SCHOOL OF FINANCE AUDIT BY IBRAHIM IQSF.PK
ABOUT THE AUTHOR
SIR IBRAHIM is a great poet and a sports loving person. He is a Qualified CHARTERED ACCOUNTANT. He
has been qualified in 2013. He is associated with Deloitte Since 2009 and is currently working as a
Director in Audit and Assurance Section of Yousuf Adil Chartered Accountants (ICF Deloitte).
With his 14 years of practical experience in audit firm, he engaged in the audit of clients from versatile
sectors such as:
• Oil and Gas Sector

• Banking Sector
• Financial Institution – AMC and Mutual Funds
• FMCG
• Manufacturing Sector
• Trading Sector
• Service Industry
• NPO
He is also associated with Deloitte London and Deloitte Qatar.
In addition to audit, He is also the learning manager of Deloitte where his primary responsibility is to
obtain training and implement the Deloitte Global methodologies and conduct the training for all
employees and students.
Sir Ibrahim is the International Certified Trainer as per Deloitte Global Criteria based on the training
conducted and obtained in Deloitte Spain, Barcelona.
He is also a certified Deloitte Global Practice Reviewer to carry out practice review of international
member firms.
One of the key reasons why he is teaching to CA students is to transfer his knowledge and skills to
students, assist them to better understanding of standard and help them not only to pass exams but to
show an exceptional performance at their work in an audit firm and thereafter.
This book is dedicated to all my Students who have always been so eager and passionate to understand
this audit subject with logical linking and drafting, that not only motivated me to come out with
different ideas and publishing various books and audit software, but that also helps me to learn and
research more.
A Special thanks to all my Special Students for their love, respect and support.
Question Description Page no

No.
Winter 2017
1 Audit Risk+ Audit Procedures) 1
2 Expert+Fraud+Modification 9
3 Audit Procedures- Goodwill + Change in Accounting policy 12
4 ISAE 3000 14
5 (Key Audit Matter) – Tax litigation + RP + IFRS 05 15
6 (Code of Ethics) – Fees reduction + long outstanding + BR with CFM of E 17
7 ISRS 4400 – Restriction on distribution 19
SUMMER 2018
1 Audit Risk + Audit Procedures 20
2 Due Diligence 28
3 Analyse Audit report 31
4 Audit Procedures – Share Based Payment 33
5 Code of Ethics – Financial Interest 35
6 Impairment of PPE + Covenant breach + Change in Deprecation method +Other 38
Information Reporting implication (6b)KAM
7 Internal Controls + Fraud 43
WINTER 2018
2 Laws and Regulations 51
3 Comparative Information + Non-disclosure 53
4 ISAE 3400 55
5 Code of Ethics – Valuation service – Becomes an Audit Client + Conflict of 56
interest
6 Service Organisation + Related Party Control 58
7 ISA 300 + 600 + 240 60
SUMMER 2019
2 ISRS 4410 + ISRE 2400 69
3 Accepting the audit Engagements 72
4 COCG +ICAP Code of Ethics Long association 73
5 ISA 810 + Subsequent Event + Fraud + Scope limitation Going Concern 74
6 IT 77
7 Key Audit Matter – Acquisition + Development and Maintenance 78
Question Description Page No.

No.
WINTER 2019
1 ISA 600 + Disposal Procedures 79
2 Control Activities - SBP 82
4 ISA 800 89
5 Related Party + Other information + 710 90
6 Code of Ethics – Accounting and Book keeping services becomes related entity 93
7 Laws and Regulations 94
8 ISAE 3400 95
WINTER 2020
2 Joint Audit 101
3 Laws and Regulations – Cyber Attack 103
4 Audit Procedures IFRIC 01 104
5 Code of ethics + ISA 220 + family and personal relation + breach of ethics 106
6 Analyse Key Audit Matter 108
7 Due Diligence + ISA 805 110
SUMMER 2021
1 Code of Ethics Fees size and Fees due 112
3 Planning + ISA 540 (convertible bonds 119
4 Audit Procedures Sales and lease back + Summary Financial Statements 121
5 ISAE 3400 123
6 ISA 600 + IFR09 and IFRS 15 123
WINTER 2021
1 ISA 710 127
3 Due Diligence 136
4 Laws and regulations 138
5 Code of Ethics – Preparation of accounting records +TSA + Recruiting services 140
6 Audit Procedures – Trade Receivable 142
Certified Finance and Accounting Professional Stage Examination
The Institute of 7 December 2017

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes
Audit, Assurance and Related Services

Q.1 You are the audit manager of Mehmood Auto Limited (MAL), a listed company, for the year ending
31 December 2017. MAL assembles and manufactures a wide range of motor vehicles. All motor
vehicles sold by MAL are under warranty up to a mileage of 50,000 km and are also eligible for
free service every quarter for two years.
The extracts from the draft financial statements prepared by the management are as follows:
2017 2016
Revenue from sales of motor vehicles 54,000 70,000

Revenue from sales of spare parts 1,500 1,000
Cost of sales (49,950) (63,190)
Gross profit
2017 2016
Property, plant and equipment 6,600 4,510

Deferred tax 233 194
Instalment sales receivables 1,200 700
Stock in trade 16,000 13,000
Other assets 13,817 15,476
During the course of the audit, you came to know that there have been 37 instances of serious
accidents involving newly manufactured cars where MAL had to pay compensation aggregating
Rs.145 million plus cost of repairs amounting to Rs.14 million.
An investigation into the matter has revealed that 15 such accidents were because of failure of the
brakes. The management has assured you that the fault has been identified and appropriate
corrective measures have been taken in this regard. However, you have noted that the entire
compensation amount is being shown as receivable from a supplier who has provided the brake
system.
Required:
Identify the audit risks in the above situation and specify the key audit steps which you will perform in
respect thereof. (20)
Page 1
Winter 2017 – Suggested Answer – Mehmood Auto Limited

Risk Risk factor Link to What is the risk on Procedures
heading assertion of assertion level
A/c balance or
class of
transaction
Revenue MAL Therefore there Because there are more than -Understand and evaluate the impact of
Recognitio assembles is a risk of 1 performance obligation, significant accounting policies for revenue
n and misstatement each of which may have and compliance with the applicable
Accounting manufactures (occurrence different revenue recognition financial reporting framework IFRS 15
policy a wide range and accuracy) criteria, and management
of motor of revenue may not have recorded the -Inspect the agreement with customers to
vehicles. All revenue in accordance with identify various performance obligation and
motor IFRS 15 OR transaction price
vehicles sold
by MAL are Allocation of transaction price -Obtain management working to allocate
under into performance obligation transaction price to various performance
warranty up required significant estimates obligation and check that whether
to a mileage and judgements and those assumption used by the management are
of 50,000 km estimates and judgements reasonable
and are also may not be reasonable
eligible for - Ensure that accounting policy used for
free service each performance obligation is appropriate
every quarter
for two years.
Provision All motor Therefore there Because provision for -Obtain an understanding of management
for vehicles sold is a risk of warranty may not be recorded process to record provision for warranty
Warranty by MAL are understatement as per IAS 37 and ensure that it is consistent with the
under of provision for OR requirement AFRF i.e. IAS 37.
warranty up warranty Provision for warranty
to a mileage required significant estimates, -Check that assumption used by the
of 50,000 Km assumption and judgement management such as number of claims,
and those estimates, nature of claims and cost against such
assumption and judgement claims are reasonable.
may not be reasonable
-Check actual warranty claims during the
year to perform the retrospective review
of estimates used to calculate warranty
provision
-perform subsequent event procedures

such as subsequent claims and
subsequent cost to ensure that provision
for warranty is correctly recorded.
Provision There have Therefore there Because provision for Inquire management process to determine
for been 37 is a risk of compensation may not have provision for compensation to assess
Compensat instances of understatement been recorded as per IAS 37 whether it is appropriate in the
ion serious (valuation) of OR circumstances and in accordance with the
accidents provision for There may be more instances applicable financial reporting framework
involving compensation and no provision has been
newly made against those instances -Obtain the calculation of compensation
manufactured OR and ensure that assumptions used by the
cars where Provision required significant management are reasonable
MAL had to estimates, judgement and
pay assumption and those -Inspect the compensation claim file to
compensatio estimates, judgement and ensure that all customer who have filed for
n assumption may not be compensation is included in provision for
aggregating reasonable compensation working.
Rs. 145
million plus -Review the contract with customers and
cost of ascertain whether the terms support the
repairs basis of the compensation claim.
amounting to
Rs.14 million
Page 2
- Perform subsequent event procedures
such as subsequent claims and payment
for compensation to ensure that provision
recorded at year end is accurate.
Receivable The entire Therefore there Because receivable may have -Inquire why management has recorded
From compensatio is a risk of been impaired and no / receivable against all claims from supplier.
Supplier n amount is overstatement adequate impairment has
being shown (valuation) of been recorded by the - Inspect the contract with supplier and
as receivable receivable management as per IAS 39 / ascertain whether the terms support the
from supplier IFRS 09 OR basis of receivable
who has Supplier may not
provided the acknowledge / pay such - Inspect correspondence file with Supplier
brake system receivable balance therefore to ascertain the recoverability of balance.
such receivable may have
been impaired and no - Send confirmation to ascertain amount
impairment has been that is not acknowledge by the supplier.
recorded by the management
as per IAS 39 / IFRS 09 - Inspect subsequent receipt to ascertain
OR the recoverability of balance.
Provision for impairment
required significant estimates,
judgement and assumptions
and those estimates
judgement and assumptions
may not be reasonable
Installment Installment Therefore there Because certain installment -Understand and evaluate the
Receivable receivable is a risk of receivable may be long management process to identify long
has been overstatement outstanding and have been outstanding receivable and to estimate the
increased by (valuation) of impaired and no / adequate allowance for doubtful debt to determine
Rs 500 Installment impairment has been whether it is appropriate in the
million receivable recorded by the management circumstances and in accordance with the
however as per IAS 39 or IFRS 09 OR applicable financial reporting framework.
revenue has Provision required significant i.e. IFRS 09
been estimates, judgement and
decreased by assumptions and those -Obtain management working on
Rs 16 billion estimates, judgement and allowance for doubtful debt and check
assumptions may not be whether assumption such as model used,
reasonable PD and LGD used by the management is
reasonable
-Obtain debtors aging analysis and change

in debtor days to identify long outstanding
receivable
-Check subsequent receipts to obtain

evidence regarding the recoverability
Provision The inventory There is a risk Because Inventory may have
for has been of been impaired and no -Understand and evaluate the
Inventory increased by overstatement impairment has been management process to identify obsolete,
Rs.3 billion + (valuation) of recorded by the management impaired inventory and to estimate the
Due to the inventory as per IAS 02 provision to determine whether it is
serious OR appropriate in the circumstances and in
defects of the Impairment required accordance with the applicable financial
newly significant estimates and reporting framework
manufactured judgement and those Evaluate whether any defected vehicle
car + decline judgement may not be (failure of brake) has been appropriately
in sales reasonable consider for impairment.
- Obtain inventory ageing to identify old

obsolete inventory
-Inspect subsequent sales to identify

subsequent selling price to ensure that NRV
is reasonable.
Page 3
Impairment There has Therefore there Because PPE may have been Obtain an understanding of management
of PPE been a is a risk of impaired (value in use may process related to identifying, estimating
significant overstatement have been reduced) and no / and recording impairments for fixed assets
increase in (Valuation)of adequate impairment has to determine whether it is appropriate in
PPE by PPE been recorded by the the circumstances and in accordance with
Rs.2.1 billion management the applicable financial reporting
however OR framework i.e. IAS 36
revenue has Impairment of PPE required
been significant estimates, Check / inspect that assumptions used by
decrease assumption and judgement the management such as discount rate
significantly and those estimates, and future cash flows are reasonable
by Rs.16 assumption and judgement
billion. may not be reasonable Obtain management expert report or
Further there consider involving auditor’s expert
are some
serious Perform subsequent event procedures
defects in the such as subsequent interim FS to compare
newly the projected result with the actual result
manufactured
car
Risk Revenue 6.1.1 Identification of performance obligations – general

01 Recognition
Once an entity has established that it has a contract to which the five-step model can be
applied, the next step is to assess whether there are goods or services promised in the
contract that represent separate performance obligations. A separate performance
obligation can be either: [IFRS 15:22]
a. a good or service (or a bundle of goods or services) that is 'distinct' (see

6.3); or
b. a series of distinct goods or services that are substantially the same and that
have the same pattern of transfer to the customer.
8.1 Allocation of the transaction price to the performance obligations – general

When allocating the transaction price to each performance obligation, the objective is to
allocate amounts that depict the consideration to which the entity expects to be entitled in
exchange for transferring each of the performance obligations to the customer. [IFRS
15:73]
Page 4
Risk Provision for 6.3.4 Warranties
02 warranty 6.3.4.1 Warranties – general considerations
Entities often provide a warranty in connection with the sale of a product (whether a good
or service). The nature of that warranty can vary significantly across industries and
contracts. Some warranties provide the customer with assurance that the related product
will function as the parties intended because it complies with agreed-upon specifications
(an 'assurance-type' warranty). Other warranties provide the customer with a service in
addition to the assurance that the product complies with agreed-upon specifications (a
'service-type' warranty). [IFRS 15:B28]
When the customer can purchase a warranty separately (e.g. because the warranty is
priced or negotiated separately), the warranty is a distinct service because the entity has
promised to provide that service in addition to the product that has the functionality
described in the contract. In such circumstances, the promised warranty is accounted for
as a separate performance obligation. This will require a portion of the transaction price to
be allocated to the warranty service provided). [IFRS 15:B29]
Assessing whether a warranty is a separate performance obligation. As discussed by the

TRG in March 2015, if a customer does not have the option to purchase a warranty
separately, the warranty still includes a separate performance obligation if it provides the
customer with a service in addition to the entity’s assurance that the goods or services
transferred will function as intended or meet agreed-upon specifications (see
below).When the customer cannot purchase a warranty separately, it should be
accounted for in accordance with IAS 37) unless the promised warranty, or a part of the
promised warranty, is a service-type warranty. [IFRS 15:B30]
When considering whether a service-type warranty is being provided, an entity considers
factors such as: [IFRS 15:B31]
a. whether the warranty is required by law – if the entity is required by law to
provide a warranty, the existence of that law indicates that the promised
warranty is not a performance obligation because such requirements
typically exist to protect customers from the risk of purchasing defective
products;
b. the length of the warranty coverage period – the longer the coverage period,
the more likely it is that a service-type warranty exists because it is more
likely to provide a service in addition to the assurance that the product
complies with the agreed-upon specifications; and
c. the nature of the tasks that the entity promises to perform – if it is necessary
for an entity to perform specified tasks to provide an assurance-type
warranty (e.g. a return shipping service for a defective product), then those
tasks are likely not to give rise to a performance obligation.
If a warranty, or a part of a warranty, is a service-type warranty, it is accounted for as a

separate performance obligation and a portion of the transaction price is allocated to the
warranty. If an entity promises both an assurance-type warranty and a service-type
warranty but cannot reasonably account for them separately, both warranties should be
accounted for together as a single performance obligation. [IFRS 15:B32]
Risk More than 1 6.1.1 Identification of performance obligations – general

03 performance
obligation Once an entity has established that it has a contract to which the five-step model can be
Allocation of applied, the next step is to assess whether there are goods or services promised in the
TP contract that represent separate performance obligations. A separate performance
obligation can be either: [IFRS 15:22]
c. a good or service (or a bundle of goods or services) that is 'distinct' (see

6.3); or
d. a series of distinct goods or services that are substantially the same and that
have the same pattern of transfer to the customer.
8.1 Allocation of the transaction price to the performance obligations – general

When allocating the transaction price to each performance obligation, the objective is to
allocate amounts that depict the consideration to which the entity expects to be entitled in
exchange for transferring each of the performance obligations to the customer. [IFRS
15:73]
Page 5
Risk Provision 3.1 Provisions
04
IAS 37 defines a provision as a liability of uncertain timing or amount, i.e. a subset of
liabilities. A liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of resources
embodying economic benefits. [IAS 37:10]Note that the definition of a liability in IAS 37
was not revised following the revision of the definition of a liability in the Conceptual
Framework for Financial Reporting issued in 2018.A provision should be recognised when
and only when: [IAS 37:14]
• an entity has a present obligation (legal or constructive) as a result of a

past event;
• it is probable that an outflow of resources embodying economic benefits
will be required to settle the obligation; and
• a reliable estimate can be made of the amount of the obligation.
3.2 Contingent liabilities
A contingent liability is defined as: [IAS 37:10]
• a possible obligation that arises from past events and whose existence will
be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity; or
• a present obligation that arises from past events that is not recognised
because:
o it is not probable that an outflow of resources embodying

economic benefits will be required to settle the obligation;
or
o the amount of the obligation cannot be measured with
sufficient reliability.
Under IAS 37, a reporting entity should not recognise a contingent liability in its statement
of financial position. [IAS 37:27]
Therefore, a contingent liability, which is not recognised but is disclosed by way of note,
results when one or more of the three recognition criteria for a provision, as outlined at
3.1, is not met.
•
Recognition 3 Definition of a financial asset

Risk of financial
05 asset A financial asset is "any asset that is: [IAS 32:11]
a. cash;
b. an equity instrument of another entity;
c. a contractual right:
i. to receive cash or another financial asset from another

entity; or
ii. to exchange financial assets or financial liabilities with another
entity under conditions that are potentially favorable to the
entity; or
3.3 Contingent assets

A contingent asset is defined as a possible asset that arises from past events and whose
existence will be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity. [IAS 37:10]
Contingent assets are not recognised, but are disclosed by way of note when an inflow of
economic benefits is probable. When the realisation of income is virtually certain,
however, the related asset is not a contingent asset and its recognition is appropriate.
[IAS 37:33]
d.
Page 6
Risk Impairment 5.2 Recognition of expected credit losses
06 of Financial The impairment approach in IFRS 9 is based on expected credit losses. Therefore, it is
asset not necessary for a loss event to occur before credit losses are recognised. Instead, a
loss allowance is always recognised for expected credit losses and is remeasured at each
reporting date for changes in those expected credit losses. The only exception is for
purchased or originated credit-impaired financial assets where a different impairment
approach applies (see 5.2.5.3).
Risk Impairment 3.3.1 Measurement of net realisable value

07 of Inventory IAS 2:6 defines net realisable value as 'the estimated selling price in the ordinary course
of business less the estimated costs of completion and the estimated costs necessary to
make the sale'. The net realisable value of an item of inventory may fall below its cost for
many reasons, including damage, obsolescence, a decline in selling prices, or an
increase in the estimate of costs to complete and market the inventories.
Risk Impairment 4.2 Indications of impairment

08 of PPE 4.2.1 Indications of impairment – general
Sections 4.2.2 to 4.2.4 describe a number of indications that an impairment loss may
have occurred. In making its assessments as to the possibility of impairment losses
having arisen, the entity is required, at a minimum, to consider the indications listed. The
lists are not exhaustive, however, and all of the items listed will not apply to every entity. If
an impairment indicator that is not on these lists exists at the end of the reporting period,
a detailed impairment review is required nonetheless. [IAS 36:13]
4.2.2 Internal sources of information
The following internal sources of information may indicate that an asset is impaired: [IAS
36:12]
• evidence is available of obsolescence or physical damage of the asset;

• significant changes with an adverse effect on the entity have taken place during
the period, or are expected to take place in the near future, in the extent to which,
or the manner in which, an asset is used or is expected to be used. These
changes include the asset becoming idle, plans to discontinue or restructure the
operation to which an asset belongs, plans to dispose of an asset before the
previously expected date, and reassessing the useful life of an asset as finite
rather than indefinite; or evidence is available from internal reporting that
indicates that the economic performance of an asset is, or will be, worse than
expected.
Such evidence may include: [IAS 36:14]
• cash flows for acquiring the asset, or subsequent cash needs for operating or
maintaining it, that are significantly higher than those originally budgeted; or
• actual net cash flows or operating profit or loss flowing from the asset that are
significantly worse than those budgeted; or
• a significant decline in budgeted net cash flows or operating profit, or a significant
increase in budgeted loss, flowing from the asset; or
• operating losses or net cash outflows for the asset, when current period figures
are aggregated with budgeted figures for the future.
Impairment indicators relating to obsolescence or physical damage may be the easiest to
identify because they can be observed physically. Items such as unused factory
equipment or equipment that has been damaged by fire are two examples that may
indicate impairment.
An impairment indicator may also arise because an asset is to be taken out of use to be
sold. If the asset qualifies as held for sale, in accordance with IFRS 5, it will be measured
under the rules of that Standard and will fall outside the scope of IAS 36. However,
immediately before this reclassification, IFRS 5:18 requires the asset to be measured in
accordance with other applicable Standards. If the requirements of IAS 36 result in the
recognition of an impairment loss before reclassification, that loss should be reported
separately as an impairment loss and should not be included as part of the gain or loss
disclosed in accordance with IFRS 5:41(c) or as part of any subsequent gain or loss on
disposal disclosed in accordance with paragraph 98(c) of IAS 1).
4.2.3 External sources of information
The following external sources of information may indicate that an asset is impaired: [IAS
36:12]
Page 7
• there are observable indications that the asset’s value has declined during the
period significantly more than would be expected as a result of the passage of
time or normal use; Such a decline could be caused by a decrease in the external
market value for an asset (e.g. a head office building), or by a decrease in the
sales price of items produced by a group of assets, such as the property, plant
and equipment making up a factory.
• significant changes with an adverse effect on the entity have taken place during
the period, or will take place in the near future, in the technological, market,
economic or legal environment in which the entity operates or in the market to
which the asset is dedicated; For example, if a factory produces a product that is
judged harmful to the environment, and the government introduces a ban on the
use of such equipment after a phase-out period, the carrying amount of the
factory and the associated plant and equipment would need to be assessed for
impairment. As another example, the value of a luxury hotel would need to be
assessed if occupancy rates are declining as a result of a downturn in the
economy.
• the carrying amount of the net assets of the entity is more than its market
capitalisation; In some cases, the business prospects of the entity may not have
changed, but the sector in which the entity operates may be 'out of favor' with
market analysts, resulting in a decline in share price. In such circumstances, a
write-down may not be required, but a formal review should be carried out. In
particular, great care should be taken in determining the appropriate discount rate
with which to calculate value in use, to ensure that it is consistent with current
market assessments.
• for an investment in a subsidiary, joint venture or associate, the investor

recognizes a dividend from the investment and evidence is available that:
o the carrying amount of the investment in the separate financial

statements exceeds the carrying amounts in the consolidated financial
statements of the investee’s net assets, including associated goodwill; or
o the dividend exceeds the total comprehensive income of the subsidiary,
joint venture or associate in the period the dividend is declared; and
6.1 Measurement of recoverable amount – general

An asset or CGU is considered to be impaired when its recoverable amount declines
below its carrying amount. Following the identification of any indication of impairment, the
entity is required to make a formal estimate of the recoverable amount of the asset or
CGU. [IAS 36:8] It is only by making such an estimate that the entity can determine
whether an impairment loss has occurred. The recoverable amount of an asset is the
higher of its fair value less costs of disposal and its value in use. IAS 36 measures
impairment loss based on an assumption that the entity will choose to recover the
carrying amount of the asset in the most beneficial way. Therefore, if the entity could earn
more by selling the asset than by continuing to use it, the entity would choose to sell the
asset, and vice versa.
7.1 Fair value and costs of disposal – definitions

Fair value is defined as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date.
[IAS 36:6] No further guidance is provided on the measurement of fair value – the reader
is directed to IFRS 13).See for a discussion of the extent to which IFRS 13 affects
impairment testing under IAS 36.Costs of disposal are defined as incremental costs
directly attributable to the disposal of an asset or a CGU, excluding finance and income
tax expense. [IAS 36:6]
7.2 Costs of disposal to be deducted
Costs of disposal to be deducted in arriving at fair value less costs of disposal include:
[IAS 36:28]
• legal costs;
• stamp duty or similar transaction taxes;
• costs of removing the asset; and
• other direct incremental costs to bring the asset into condition for its sale.
Page 8
Costs such as termination benefits to employees and re-organisation expenses following
a disposal are not considered direct, incremental costs of sale and, as such, are not
deducted in arriving at fair value less costs of disposal. [IAS 36:28]
Costs of disposal that have been recognised as liabilities should not be deducted in
measuring fair value less costs of disposal. [IAS 36:28]
8 Value in use
8.1 Stages in the calculation of value in use
The calculation of value in use can be broken down into four stages:
• identification of cash-generating units (see 8.2); If the recoverable amount

of an asset can be individually determined, Stage 1 is omitted.
• estimation of expected future cash flows (see 8.3);
• determination of an appropriate discount rate (see 8.4); and
• discounting and aggregating expected cash flows to arrive at value in use
(see 8.5).
Q2 (a)
You have been the auditor of Venus Limited (VL) for past few years. During the current year’s audit, the report of
the valuation expert shows that the fair value of buildings of VL is slightly above their carrying amount. However,
during the course of audit, you discovered a copy of a draft report by the same valuer in which the value assigned to
the buildings was lower by Rs.20 million. While investigating the matter, the audit senior has identified that had the
assets been valued on the basis of the unsigned valuation report, it would have resulted in breach of a loan
covenant. You have also noted that the same valuer has been used by VL for the last many years.
Required:
Specify the steps that you would take in the above situation and discuss the possible effects on the audit report, if
the materiality limit on this audit is Rs.80 million. (10)
STUDENT CORNER
The technique to attempt this question is to pick ISA and draft the relevant concept of such ISA in a structure
way. Management expert to Auditors Expert to ISA 240 Fraud to Error to Modification to Going Concern
Answer:
• The management expert is providing the valuation service for last so many years and also 2 reports has been
identified by the auditor therefore it creates doubt over the management expert Independence.
• Auditor shall appoint its own auditor expert after evaluating the competence, capability and Independence of
Auditor Expert
• If the Auditors expert report matched with the signed report – auditor shall express unqualified opinion
• If not matched, this will be considered as a misstatement
As the misstatement indicates the possibility of fraud because management may have an incentive / pressure,
because of a loan covenant, to commit FFR therefore the course of action shall be
• The auditor shall evaluate the implications of the above misstatement in relation to other aspects of the audit,
particularly the reliability of management representations, recognizing that an instance of fraud is unlikely to
be an isolated occurrence.
• As the auditor identifies a misstatement, whether material or not, and the auditor has reason to believe that
it is or may be the result of fraud and that management (in particular, senior management) is involved, the
auditor shall reevaluate the assessment of the risks of material misstatement due to fraud and its resulting
impact on the nature, timing and extent of audit procedures to respond to the assessed risks.
• The auditor shall also consider the reliability of audit evidence previously obtained
• May consider to withdraw
• The auditor shall communicate to relevant hierarchy and authority after obtaining legal advice
Page 9
• IF auditor believes that it is not indicate the possibility of fraud hence it is an error, auditor not only modified the
opinion but the breach of covenant is the event or condition that may cast significant doubt on the company’s
ability to continue as a going concern. Therefore, auditor shall also perform following audit procedures
o Inspect going concern assessement atleast for a period 0f 12 months
o Obtain P&L and Cash Flow Forecast to assess the financial position and performance of the company
o Ensure that assumptions used by the management in preparing forecast are reasonable
o Inspect subsequent interim FS to compare forecast result with the actual result
o Inspect MOM of BOD for reference to covenant breach and financial difficulty
o Inspect correspondence file with Banks to evaluate whether any covenant had been breached and
whether bank had demand the loan amount immediately
• If auditor obtain SAAE that going concern assumption is appropriate but material uncertainty exist which is
adequately disclosed by the management than auditor shall express unqualified opinion
• If adequate disclosure not made in the financial statements, then auditor may express qualified or adverse
opinion.
Page 10
(b) You are the audit manager at the client Lavender Product Limited (LPL). Your team had proposed
various adjustments including the impairment of a plant. LPL’s CFO has agreed to record all the
adjustments including the impairment loss. However, the CFO is relm ucatanitnteoryd.isclose in the financial
ch
statements, the circumstances that lead to the impairment of plant and
Required:
Evaluate the above situation and state the implications on the audit report, if any. (05)
Answer
STUDENT CORNER – IFRS requirement
Requirement of IFRS As per the requirement of IAS 36 management needs to disclose main events and
circumstances that led to the recognition of impairment loss
Management course of Therefore management should disclose such events or circumstances

action (See diagram)
Management Agree If management agree, express the unqualified opinion but as the matter required
(provision of impairment ) significant estimates and judgement therefore auditor may
include this matter in the KAM section of the audit report
If management disagree, If management disagree to then it is a misstatement on account of non-disclosure
Is it a Misstatement?
Is it Material If the amount of impairment is material to the financial statements then auditor then
Misstatement? this will be considered as a material misstatement
Implication on audit Hence, auditor shall express Qualified opinion (except for).
report
Page 11
Q.3 You are the audit manager in GMP Chartered Accountants. The following
matters are under your consideration for the year ended 30 September 2017:
(i) Kamran Limited (KL) is in the business of manufacturing generators. On 1

October 2016, KL acquired 750,000 ordinary shares of HL (which supplies
generator components to KL), constituting 75% of the issued, subscribed and
paid-up capital against a gross consideration of Rs. 700 million. KL paid Rs.
500 million on the date of acquisition whereas Rs. 200 million was paid on 1
October 2017.
At the acquisition date, the identifiable net assets were recognized at their
carrying amount which was approximately equal to the fair value of Rs. 670
million, except the building and leasehold land whose fair value was assessed
at Rs. 130 million above their carrying amount. The fair value of NCI at the
date of acquisition was assessed at Rs. 155 million.
KL recognised goodwill amounting to Rs. 45 million on acquisition of HL,

under the full goodwill method.
(ii) Waris Limited has changed its accounting policy for property, plant and
equipment from historical cost to revaluation model.
Required:
Guide your audit team on key audit procedures with regard to theabove information. (15)
(Audit procedures related to verification of property, plant and equipment are not required)
Answer:
STUDENT CORNER - the calculation of goodwill under IFRS 3 involves potentially four
components therefore as a Starting point – Student needs to consider the following
requirement and draft the audit procedure
Page 12
• Inspect the purchase agreement to check the:

o Amount of consideration
o Number of shares acquired
o Acquisition date
• Inspect the bank statement to ensure that amount has been transferred
• Inspect the CDC statement to ensure that shares exist and are in the name of the Company
• Obtain valuation report from the management and match the amount
• Evaluate the competency, capability and objectivity/independence of the Management expert
• Evaluate the adequacy of the expert work:
o Relevance and reasonableness of the expert finding
o Relevance and reasonableness of the assumption and methodology used
o The relevance, completeness and accuracy of source data
• May consider to use the auditor expert
• Ensure that carrying amount and fair value of remaining asset are approximately same by
inquiring with the management or engaging expert
• Ensure that fair value of NCI is calculated correctly and accurately by using appropriate rate
• Understand the management process for recording impairment of goodwill if any
• Ensure that assumption used by the management are reasonable such as discount rate and
future cash flow
• Inspect subsequent interim Financial statement and compare the projected result with the
actual result
• Test the operating effectiveness of the group wide controls
• Obtain an understanding of the management process for the consolidation
• Obtain the list of intra group transaction and ensure that it has been appropriately eliminated
• Obtain the audited FS of subsidiary to ensure that accounting policies are consistent and if
not checked that adjustment are correct and accurate.
ii
STUDENT CORNER – Considering that question is for 5 marks the student primarily need to draft answer
considering the change in accounting policy instead of revaluation procedures
3.2 Changes in accounting policies

3.2.1 Circumstances in which a change in accounting policy is permitted
An accounting policy can be changed only if the change: [IAS 8:14]
• is required by an IFRS Standard; or

• results in the financial statements providing reliable and more relevant information about
the effects of transactions, other events or conditions on the entity's financial position,
financial performance or cash flows.
• Inquire with the management the reason for change in accounting policy
• Assess whether change in accounting policy result in the financial statement will provide
more reliable and more relevant information
• Whether the revaluation model has been applied for all class of asset i.e. property, plant
and equipment
• Whether change in accounting policy has been appropriately authorized and approved by
the Board of Directors
• Review the disclosure to ensure its adequacy
• Change in accounting policy has been account for and disclosed as per IAS 08 and IAS
16.
Page 13
Q4 Aster Textile Limited (ATL) manufactures industrial grade safety garments. It uses certain
chemicals whose waste needs to be disposed of in a certain manner to prevent any harm to the
environment.
The government has prescribed the safety standards which are required to be adhered to, with
regard to disposal of these chemicals. ATL has its own internally developed standards which have
been approved by some of its international customers. These customers require that ATL as well as
all its suppliers should comply with these standards. However, the standards set by the government
are far more comprehensive and stringent as compared to ATL’s internally developed standards.
ATL has approached your firm to report on compliance with its internally developed standards.
ATL has informed you that the report would be submitted to the concerned international customers.
Required:
In the light of the relevant international standards on assurance engagements:
(a) Discuss what steps would you take before deciding to accept the above assignment. (12)
(b) Assuming that you have accepted the engagement, what matters would you like to include in your
report to ensure that it is not misleading for the intended users. (03)
Student Corner
Student need to identify that in this engagement ISAE 3000 is applicable. As the requirement is to describe steps
before accepting the engagement therefore primary answer is from ACCEPTANCE activities
Answer:
The practitioner shall accept an assurance engagement only when
• The practitioner has no reason to believe that relevant ethical requirements, including independence, will
not be satisfied;
• The practitioner is satisfied that those persons who are to perform the engagement collectively have the
appropriate competence and capabilities
• The basis upon which the engagement is to be performed has been agreed, through:
o Establishing that the preconditions for an assurance engagement are present; and
o Confirming that there is a common understanding between the practitioner and the engaging party
of the terms of the engagement, including the practitioner’s reporting responsibilities.
• In order to establish whether the preconditions for an assurance engagement are present, the practitioner
shall, on the basis of a preliminary knowledge of the engagement circumstances and discussion with the
appropriate party(ies), determine whether:
• The roles and responsibilities of the appropriate parties are suitable in the circumstances; and
• The engagement exhibits all of the following characteristics:
o The underlying subject matter is appropriate;
o The criteria that the practitioner expects to be applied in the preparation of the subject matter
information are suitable for the engagement circumstances, including that they exhibit the following
characteristics:
▪ Relevance.
▪ Completeness.
▪ Reliability.
▪ Neutrality.
▪ Understandability.
• The law and regulation had already prescribed the criteria however management intends to use criteria
approved by international customer, therefore practitioner needs to obtain acknowledgement from intended
user (international customers) and management that criteria by international customers are suitable for
intended purpose (compliance with standards)
• The criteria that the practitioner expects to be applied in the preparation of the subject matter information
will be available to the intended users;
• The practitioner expects to be able to obtain the evidence needed to support the practitioner’s conclusion;
• The practitioner’s conclusion, in the form appropriate to either a reasonable assurance engagement or a
limited assurance engagement, is to be contained in a written report; and
• A rational purpose including, in the case of a limited assurance engagement, that the practitioner expects
to be able to obtain a meaningful level of assurance.
B. The Assurance Report Shall Alerts readers that the subject matter information is prepared in accordance with
special purpose criteria and that, as a result, the subject matter information may not be suitable for another purpose
and is restricted for that use and shall not be distributed to any other party other than management and international
customer who acknowledged. Page 14
Q5 You have recently completed the audit of the financial statements of Rose Limited (RL), a listed
company having a net profit of Rs. 1,500 million. You have identified following matters which will be
reported as key audit matters in the audit report:
(i) RL has pending tax litigation in which tax department has raised demand aggregating Rs.
175 million. The demand has been challenged by RL and the decision in respect of this
matter is currently pending. The amount is disclosed as a contingent liability in the financial
statements.
(ii) RL makes significant purchases from related parties and also incurs significant advertising
expenses through related parties. These transactions are properly disclosed as related party
transactions in the financial statements.
(iii) RL has decided to sell a manufacturing facility located in Faisalabad having a carrying value
of Rs. 300 million and would replace it with another facility in Gujranwala. The manufacturing
facility has been classified as non-current assets held for sale.
Required:
Draft the key audit matters section to be included in the audit report of RL relating to the above matters.
(You may assume necessary details where required) (15)
Answer:
STUDENT CORNER
1. Tax Litigation – Audit procedures mentioned in ISA 501 may help the student to draft
2. Related party – ISA 550 is relevant and as you may assume necessary details therefore ONCOB
may help the student to draft procedures from ISA 550
3. IFRS 05 is applicable and as fv is require therefore ISA 500 and ISA 620 auditor expert may help
the student to draft key audit procedures
The two general requirements for a non-current asset (or disposal group) to be classified as held for sale are
that: [IFRS 5:7]
4. the asset (or disposal group) must be available for immediate sale in its present condition subject only
to terms that are usual and customary for sales of such assets (or disposal groups); and
5. its sale must be highly probable.
4 Measuring assets (and disposal groups) held for sale

4.1 Measurement at the lower of carrying amount and fair value less costs to sell
When non-current assets and disposal groups are classified as held for sale, they are required to be measured
at the lower of their carrying amount and fair value less costs to sell. [IFRS 5:15]The comparison of carrying
amount and fair value less costs to sell is carried out on the date the non-current asset (or disposal group) is first
classified as held for sale, and then again at each subsequent reporting date while it continues to meet the held
for sale criteria.
Page 15
KEY AUDIT MATTER How our audit addressed Key Audit Matter
Tax Litigations • Discussion with tax advisor of the company and evaluated the
The company has significant judgement against the demands made by tax authorities
tax contingencies which can • Involved tax expert to consider the level of provision required in light
have a significant impact if of the nature of the company’s exposure, applicable regulation and the
materialized. Due to the high company’s correspondence with the tax authorities
level of judgment required to • Evaluated the adequacy of the disclosure in the financial statement
assess the outcome of tax
litigations, we consider it to be
a key audit matter.
Key Audit Matter How our audit addressed Key Audit Matter
Related Party Transactions • Obtained an understanding of management process related to
related party relationship and transaction
As disclosed in note 4.2 of • Perform test of controls such as authorization and approval of
these financial statement, the transactions with Related party
company has entered into • Inspect the underlying contracts or agreements, and evaluate
significant transaction with whether:
related party including some o The business rationale (or lack thereof) of the Related
transaction which are outside party transaction suggests that they may have been
the normal course of business. entered into to engage in fraudulent financial reporting
Those transactions are both or to conceal misappropriation of assets;
quantitatively and qualitatively o The terms of the Related party transaction are
material therefore we have consistent with management’s explanations; and
determined this matter as Key
Audit Matter o The Related Party transaction have been
appropriately accounted for and disclosed in
accordance with IAS 24
Key Audit Matter How our audit addressed Key Audit Matter
Non-Current Asset Held for • Inspect the Minutes of the meeting of BOD for the approval to
Sale sale facility
• Inspect the correspondence file with customers to evaluate
As referred in note 14.2 of the prospective buyer and to assess whether the sales can
these financial statements, the take place within 1 year
Company has decided to sell a • Obtain management expert report used to determine the fair
manufacturing facility located. value and evaluated the adequacy of work by assessing:
This is one of the significant o Finding and conclusion are relevant and
event and was also material to reasonable
the financial statement. Also o Assumptions are relevant and reasonable
the measurement of such o Data is complete and accurate
facility required significant • We have engaged our own auditor expert to corroborate and
estimates and judgements challengemanagement assumptions
therefore we have determined
this matter as Key Audit
Matters
Page 16
Q6 You are the quality control partner of Lotus & Co. Chartered Accountants.
You have been assigned additional responsibilities for assessment of risks associated
with the firm’s clients. At present, the following matters are under your
consideration:
(a) Clean Limited (CL) has failed to pay the fee for review of its half yearly
accounts for the six month ended 30 June 2017. The issue was
discussed with the management in the planning meeting for the audit
of the year ending 31 December 2017. The management has assured
that the amount would be paid in about 30 days. During the discussion,
the audit manager was also informed that CL has been facing liquidity
issues and it has closed two of its plants. The management has also
requested for a reduction in the audit fee for the year ending 31
December 2018 because of the decline in the volume of business.
Further, the management has requested the firm to consider some relief
as regards audit fee for the current year. (10)
r.
(10)
(b) During the review of working papers of Daffodil Limited (DL), the
engagement manager came to know that a large consignment of import
of raw material is stuck with the custom authorities. On his query he
was informed that the DL’s clearing agent was unable to resolve the
matter. However, now DL has approached another custom clearing
agent for clearing the said consignment and the matter with the custom
authorities would be resolved shortly. DL has agreed to pay 1.4% of
the value of consignment to the clearing agent. A junior member of the
team has informed the engagement manager that clearing agent
appointed by DL is the brother of the audit senior. (05)
Required:
Discuss the categories of threats involved in each of the above situations and
advise the possible course of action that may be followed.
Answer:
Student Corner
There are 2 scenarios which were applicable – reduction in fees and fees
outstanding – closure of 2 plants and liquidity issue will also give rise to
going concern which will ultimately increase the scope of work
The scenario is not covered under ICAP code of Ethics however it requires
the auditor to apply conceptual framework
Fees – Overdue
A self-interest threat might be created if a significant part of fees is not paid before the audit report
for the year ending 31 December 2017 is issued. It is generally expected that the firm will require
payment of such fees before such audit report is issued. The requirements and application
material with respect to loans and guarantees might also apply to situations where such unpaid
fees exist.
Examples of actions that might be safeguards to address such a self-interest threat include:
• Obtaining partial payment of overdue fees.
• Having an appropriate reviewer who did not take part in the audit engagement review the
work performed.
When a significant part of fees due from an audit client remains unpaid for a long time, the firm
shall determine:
(a) Whether the overdue fees might be equivalent to a loan to the client; and
(b) Whether it is appropriate for the firm to be re-appointed or continue the audit engagement.
Page 17
Level of Fees
The level of fees quoted might impact a firm ability to perform professional services in accordance
with professional standards
When entering into negotiations regarding professional services, a firm may quote whatever fee
is deemed to be appropriate commensurate with the nature and service to be rendered. However,
in such cases, firm should be careful not to quote fee lower than that charged by the chartered
accountants in practice previously carrying out the audit unless scope and quantum of work
materially differs from the scope and quantum of work carried out by the previous auditor, as it
could then be regarded as undercutting.
As management had requested for the reduction in audit fees therefore auditor needs to consider
whether the closure of 2 plants would result in the reduction of quantum and scope of work - The
closure of plants and liquidity issue may also give risk to going concern therefore scope and
quantum of work will also increase.
SIGNIFICANCE OF THREAT
Factors that are relevant in evaluating the level of such a threat include:
• Whether the client is aware of the terms of the engagement and, in particular, the basis
on which fees are charged and which professional services the quoted fee covers.
• Whether the level of the fee is set by an independent third party such as a regulatory body.
ACTIONS
Examples of actions that might be safeguards to address such a self-interest threat include:
• Adjusting the level of fees or the scope of the engagement.
• Having an appropriate reviewer review the work performed.
This Part of the Code sets out requirements and application material for chartered accountants in
practice when applying the conceptual framework. It does not describe all of the facts and
circumstances, including professional activities, interests and relationships, that could be
encountered by chartered accountants in practice, which create or might
create threats to compliance with the fundamental principles. Therefore, thein practice to be alert
for such facts and circumstances. conceptual framework requires chartered accountants in
practice to be alert for such facts and circumstances
There is a business relationship between company and the close family member of the
engagement team. Such interest or relationship is not covered in ICAP Code of Ethics however
as per above section the auditor needs to apply conceptual framework and identify and evaluate
threats and apply appropriate actions.
A self-interest or intimidation threat might be created if there is a close business relationship

between the audit client or its management and the immediate family of an audit team member.
Auditor needs to evaluate whether such business relation is significant to the client and the close
family member of the Engagement team
Examples of actions that might eliminate such a self-interest threat or intimidation thereat include:
Eliminating or reducing the magnitude of the transaction.
Removing the individual from the audit team.
Page 18
Q7 Bluebell Foundation (BF) is a non-profit organisation. It is in the process of receiving a grant from
the federal government. To receive such grant BF has to submit a report of factual findings on the
projects being run by BF. The trustees approached your firm and on their request you provided a
specimen of the report that may be issued in the givensituation.
Subsequently, you have received a letter from the trustees in which they have requested to remove
the statement from the report, “this report is not to be distributed to any other parties other than
the federal government”, as BF also intends to distribute the report to its current corporate donors.
Required:
Discuss how the firm should deal with the request of the trustees. (05)
(THE END)
Answer:
STUDENT CORNER
Factual findings are covered in ISRS 4400 “ Agreed Upon Procedures” – In the said standard Engagement
activities and report content both are applicable.
The report is restricted to those parties that have agreed to the procedures to be performed since others, unaware
of the reasons for the procedures, may misinterpret the results.
The auditor should ensure with representatives of the entity and, ordinarily, other specified parties who will receive
copies of the report of factual findings, that there is a clear understanding regarding the agreed procedures and the
conditions of the engagement
If the report is to be distributed to international donors the terms of engagement shall be agreed and even, then the
auditor shall mention in the factual finding report that Our report is solely for the purpose set forth in the first
paragraph of this report and for your information and international donor and is not to be used for any other purpose
or to be distributed to any other parties.
Page 19
The Institute of 7 June 2018


Q.1 You are the audit manager of Saqib Shaukat and Company, Chartered Accountants,
responsible for the audit of Modern Electronics Limited (MEL) for the year ended 31 May
2018. MEL is a listed company and is engaged in manufacture of wearable sports sensors, smart
watches, GPS navigation systems, vehicle cameras and fleet management system, and sells it
through a chain of distributors throughout the country.
The extracts of segment information as disclosed in the draft financial statements for theyear
ended 31 May 2018 is as follows:
GPS navigation Wearable sports All other segments Total
system sensors
2018 2017 2018 2017 2018 2017 2018 2017
------------------------------------------- Rs. in million -------------------------------------------
Revenue 6,323 7,978 4,119 5,319 3,480 2,346 13,922 15,643
Cost of sales (3,830) (5,158) (3,234) (4,149) (2,749) (1,643) (9,813) (10,950)
Gross profit 2,493 2,820 885 1,170 731 703 4,109 4,693
Net profit 1,141 1,244 257 351 133 282 1,531 1,877
Fixed assets 1980 2,329 2,395 2,661 2,777 1,662 7,152 6,652
Debtors 633 685 361 488 334 196 1,328 1,369
Inventory 640 665 378 444 294 196 1,312 1,305
The following information is also available:

(i) MEL was witnessing a shift of customers from wearable sports sensors to smart watches
which have additional features as compared to the features being offered by wearable
sports sensors. Therefore, to maintain its customer base MEL started developing its own
smart watch and successfully launched it in 2018. MEL intends to expand its product
range in the smart watch segment by expanding its manufacturing facility which would
be financed through a right issue.
(ii) On 10 April 2018 MEL publicly announced that it was closing an old (fully depreciated)
plant which was used to manufacture a component used in the wearable sports sensors
and will instead import it from China at cheaper rates. The management is considering
various options in respect of this plant. However, the affected employees were
communicated about the decision on the same date and negotiations with the labour
union were started for agreeing on the termination payments.
(iii) A significant portion of the sale of GPS navigation system consists of sale to the tourism
industry. The government had made it mandatory for all tour operators to install GPS
navigation system. The compliance has to be made by all tour operators over a period
of four years. Association representing the country’s tour operators had signed a four-
year agreement in April 2016 with MEL under which discounted sale price has been
offered to the tour operators which cannot be raised. A natural disaster destroyed the
supplier’s plant which supplied several components of the GPS navigation system and
consequently MEL has to import these components from Malaysia at twice the cost of
local purchase. At the year-end 200 contracts for supply of 4,000 GPS navigation
systems are still pending.
Required:
Identify the audit risks in the above situation and specify the key audit steps which you will
perform in respect thereof. (20)
Page 20
A. Following are the risks in the given situation and the related procedures which may be
1 undertaken:
(i) Impairment of plant and machinery of wearable sports sensors

Risk:
▪ MEL was witnessing a shift of customer from wearable sports sensors to smart
watches which has additional feature as compared to features being offered by
wearable sports censors. This can also be corroborated from the fact that revenue
has been declined by 22.5%. Therefore there is a risk of impairment of plant and
machinery of the wearable sports sensors segment because PPE may have been
impaired (recoverable amount less than carrying amount) and no impairment or
adequate impairment has been recorded by the management as per IAS 36.
Procedures:
▪ Ask the management to carry out an impairment review (if not done already) and
obtain the working prepared by the management.
▪ n an understanding of management process related to identifying , estimating and
recording impairments for PPE
▪ Review the source data used by the management for impairment testing.
▪ Assess the reasonableness of assumptions taken by the management such as
discount rate used and future cash flows.
▪ Using the appropriate data, assumptions, and methodology, recompute the
calculation.
▪ Consider involving auditor’s expert.
(ii) Overstatement of revenue / understatement of expenses:

Risk:
▪ MEL intends to expand its product range in the smart watch segment by expanding
its manufacturing facility, which would be financed through a right issue. Therefore,
there is a risk of fraud because MEL may have an incentive/pressure to commit
fraudulent financial reporting to show better results so that it would be able to issue
right shares at a much higher premium.
Procedures:
▪ Understand and evaluate NCL’s financial reporting process and the controls over
journal entries and other adjustments.
▪ Maintain professional scepticism throughout the audit.
▪ Evaluate the selection and application of accounting policies by the entity,
particularly those related to subjective measurements.
▪ Review accounting estimates for biasness
▪ Evaluate business rationale for significant transaction outside the normal course of
business
▪ Perform analytical review of revenue and expenses.
▪ Perform cut-off test to check that the vouchers have been completely recorded.
(iii) Segment reporting:

Risk:
▪ The Company has various operating segments such as wearable sports sensors,
smart watches, GPS navigation system, vehicle cameras and fleet management.
The assets of all other segments are 34% of the total assets. Therefore, there is a
risk that fleet management system, vehicle cameras or smart watches may fulfill the
quantitative criteria of being reported as a separate segment and management may
not have disclosed it as per IFRS 08.
Procedures:
▪ Inquire the total assets and revenues of each regularly reviewed segment of MEL
and verify the quantitative thresholds of being reported as a separate segment.
▪ Ensure that any segment meeting the criteria specified by IFRS is separately
disclosed.
▪ Review the reconciliations between segment information and consolidated
information to assess whether significant items are properly disclosed.
Page 21
(iv) Assets held for sale
Risk:
▪ On 10 April 2018 MEL publicly announced that it was closing an old (fully
depreciated) plant which was used to manufacture a component used in the
wearable sports sensors. The announcement took place after the year end therefore
there is a risk that the criteria for classification of non-current assets as held for sale
are met after the reporting period but disclosures in this respect are not made in the
financial statements as per IFRS 05.
Procedures:
▪ Inquire management if any decision has been finally made for sale of the plant.
▪ Read the minutes of the board of director’s meeting subsequent to the year-end to
obtain audit evidence regarding the closure of plant.
▪ Inspect the correspondence file or agreement if any with the prospective buyer.
▪ Assess whether plant is available for immediate sale and disposal within 12 months
is highly probable.
▪ If the criteria for classification of non-current assets as held for sale are met
subsequently, ensure that it is adequately disclosed in the financial statements as
per the requirement of IFRS 05.
(v) Provision for staff termination

Risk:
▪ Since MEL has made a public announcement of closure of the plant and has also
communicated the affected employees therefore a constructive obligation exists for
recognizing a restructuring provision. there is a risk that restructuring provision
might not be appropriately recorded in the financial statements as per IAS 37.
Procedures:
▪ Obtain the minutes of meeting held with the labor union to identify whether any
agreement has been reached subsequent to year end.
Review the disclosure for its adequacy and to assess whether it is made as per IAS
37.
(vi) Onerous contract

Risk:
▪ As MEL has signed a four-year agreement to supply GPS navigation system under
discounted sales price to the tour operators which cannot be raised. Due to the
natural disaster, which destroyed the supplier plant, the Company is importing from
Malaysia at twice the cost of local purchase. This is the onerous contract therefore
there is a risk of understatement of provision because provision should be recorded
as per IAS 37 and management may not have recorded or adequately recorded.
Procedures:
▪ Inspect the Purchase agreement to identify the purchase cost. Also assess whether
all cost has been included that are part of inventory as per IAS 02.
▪ Inspect sales agreement to assess the sales price.
▪ Check whether the landed cost exceeds the agreed sale price.
▪ If yes then review the assumptions made by the management for the calculation of
expected future sales.
▪ Ensure onerous contracts are appropriately recorded and disclosed in the financial
statements.
▪ Review the agreement and assess, whether MEL has a right to cancel the current or
future orders and any cancellation clause or penal provision for exiting the
agreement.
▪ Ensure that penalties if any and other legal costs etc. and duly considered in
determining the amount of provision required.
Page 22
(vii) Inventory
Risk:
MEL was witnessing a shift of customer from wearable sports sensors to smart watches
which has additional feature as compared to features being offered by wearable sports
censors. This can also be corroborated from the fact that inventory turnover days has
been increased from 39 days to 42.6 days. Further there is increased cost of
manufacturing GPS navigation system which is exceeding it’s selling price therefore
there is a risk of overstatement of inventory because inventory may have been impaired
(Cost exceeding its NRV) and management may not have recorded or adequately
recorded the provision as per IAS 02.
Procedures:
▪ Obtain a schedule of the allowance for inventory, and test the reconciliation to
the general ledger.
▪ Obtain and understanding of management’s process and policies relating to

estimating and recording the allowance for inventory
▪ Evaluate whether management’s methods and assumptions are reasonable by

inspecting the subsequent selling price
▪ Using the appropriate data, assumptions, and methodology, recompute the

calculation.
(viii) Development cost

Risk:
As MEL has started developing its own smart watches, therefor there is a risk of
overstatement of intangible asset because management may have recognized certain
expense which does not pertain to development phase criteria as per IAS 38
Procedures:
▪ Obtain technical and feasibility study / report to obtain evidence that Company has
entered into development phase as per IAS 38.
▪ Obtain the detail of development cost.
▪ Inspect the supporting documents such as invoices to ensure that expense pertains
to development phase.
(ix) TRANSLATION OF FOREIGN CURRENCY
Risk
The Company is importing components from Malaysia therefore there is a risk of

misstatement of purchases and corresponding liability because purchases may not have
been translated at appropriate rate and corresponding liability may not have been
translated and revalued at appropriate rate as per IAS 21
Procedures
▪ Obtain the foreign currency working from the management.

▪ Ensure that closing liability has been revalued and trace the same to exchange gain
or loss working.01
▪ Verify the rates used by the management from the independent source
▪ Ensure that purchases and liabilities are translated using appropriate rate.
Page 23
S.no Risk IFRS Requirement

01 Impairment of Refer risk 08 of winter 2017
P&M
02 Risk of fraud Not applicable
03 Segment 2 Core principle
Reporting The core principle of IFRS 8 is that '[a]n entity shall disclose information to enable
users of its financial statements to evaluate the nature and financial effects of the
business activities in which it engages and the economic environments in which it
operates'. [IFRS 8:1]
4.2 Definition of operating segment
An operating segment is a component of an entity: [IFRS 8:5]
a. that engages in business activities from which it may earn revenues and
incur expenses (including revenues and expenses relating to
transactions with other components of the same entity);
b. whose operating results are regularly reviewed by the entity’s chief
operating decision maker to make decisions about resources to be
allocated to the segment and assess its performance; and
c. for which discrete financial information is available.
5.1 Identification of reportable segments – general

Once the entity’s operating segments have been identified, the entity must then
determine which operating segments are reportable, i.e. those individual operating
segments for which disclosure of information is required by the Standard.
Entities are required to report separately information about each operating segment
that: [IFRS 8:11]
a. has been identified in accordance with IFRS 8:5 to 10 or results from
aggregating two or more of those segments in accordance with IFRS
8:12 ; and
b. exceeds the quantitative thresholds in IFRS 8:13 .
5.4 Quantitative thresholds
Under IFRS 8, entities are required to report separately information about an operating
segment that meets any of the following quantitative thresholds: [IFRS 8:13]
a. its reported revenue is 10 per cent or more of the combined revenue of

all operating segments. For this purpose, revenue includes both sales to
external customers and inter-segment sales or transfers; or
b. the absolute amount of its reported profit or loss is 10 per cent or more
of the greater, in absolute amount, of (i) the combined reported profit of
all operating segments that did not report a loss, and (ii) the combined
reported loss of all operating segments that reported a loss; or
c. its assets are 10 per cent or more of the combined assets of all operating
segments.
04 Asset held for Refer Q5 of winter 2017

sale
05 Restructuring 3.9.3 Restructuring provisions
provision 3.9.3.1 Definition of a restructuring
IAS 37 provides specific guidance on how the general recognition criteria for
provisions should be applied to restructurings. A restructuring is defined as a
programme that is planned and controlled by management, and materially changes
either: [IAS 37:10]
• the scope of a business undertaken by an entity; or
• the manner in which that business is conducted.
Page 24
The term 'restructuring' therefore includes events such as: [IAS 37:70]
• the sale or termination of a line of business;
• the closure of business locations in a country or region or the relocation
of business activities from one country or region to another;
• changes in management structure (e.g. the elimination of a layer of
management); and
• fundamental reorganisations that have a material effect on the nature
and focus of the entity’s operations.
3.9.3.2 Specific recognition criteria for restructuring provisions
The two principal requirements for the recognition of a provision for a restructuring are
that the entity: [IAS 37:72]
• has a detailed formal plan; and

• has raised a valid expectation in those affected that the plan will be
carried out by starting to implement that plan or by announcing its main
features to those affected by it.
The detailed formal plan must identify: [IAS 37:72]
• the business or part of a business concerned;
• the principal locations affected;
• the location, function and approximate number of employees who will

be compensated for terminating their services;
3.9.3.2-1
Identification of employees to be terminated under a restructuring plan

Generally, it is not necessary for the plan to be so detailed that it
identifies which individual employees will be leaving. However, it must
be sufficiently detailed that those employees in the employee groups
affected by the restructuring plan have a valid expectation that either
they or their colleagues in the group will be affected.
• the expenditures that will be undertaken; and
• when the plan will be implemented.
Suitable evidence that an entity has started to implement a restructuring plan will, for
example, be provided by: [IAS 37:73]
• dismantling plant; or
• selling assets; or
• the public announcement of the main features of the plan.
Note, however, that a public announcement of a detailed plan to restructure
constitutes a constructive obligation to restructure only if it is made in such a way and
in sufficient detail (i.e. setting out the main features of the plan) that it gives rise to
valid expectations in other parties such as customers, suppliers and employees (or
their representatives) that the entity will carry out the restructuring. [IAS 37:73]
Accordingly, for a plan to be sufficient to give rise to a constructive obligation when it
is communicated to those affected by it, implementation of the plan should be planned
to begin as soon as possible and to be completed within a timeframe that makes
significant change to the plan unlikely. When either there is a long delay before
commencement, or execution of the plan will take an unreasonably long time, the
timeframe allows opportunities for the plan to be changed. Thus, it is unlikely that the
reporting entity has raised a valid expectation that it is sufficiently committed to the
restructuring. [IAS 37:74]
3.9.3.4 Amounts to be included in a restructuring provision
The amounts to be included in a restructuring provision are restricted to the direct

expenditures arising from the restructuring, i.e. those that are both: [IAS 37:80]
• necessarily entailed by the restructuring; and

• not associated with the ongoing activities of the reporting entity.
3.9.3.5 Amounts to be excluded from a restructuring provision
Specific items that are excluded from restructuring provisions under IAS 37, on the
basis that they relate to the ongoing activities of the business, are: [IAS 37:81]
• retraining or relocating continuing staff;
Page 25
• marketing; and
• investment in new systems and distribution networks.
3.9.3.5-1
Relocation costs – example an entity has decided to relocate one of its employees.
The employee is aware of the impending move.
No provision should be recognised until the relocation occurs, because the relocation
relates to the ongoing activities of the business.
06 Onerous 3.9.2 Onerous contracts

Contract A provision should be recognised for the present obligation arising under an onerous
contract. [IAS 37:66] When assets used to fulfil a contract are involved, however, a
separate provision is recognised only after any impairment loss has been recognised
in respect of those assets. [IAS 37:69]
An onerous contract is defined in IAS 37:10 as a contract in which the unavoidable
costs of meeting the obligations under the contract exceed the economic benefits
expected to be received under it. In other words, a provision should be recognised for
any unavoidable net loss arising from the contract. The unavoidable costs under a
contract reflect the least net cost of exiting from the contract, i.e. the lower of: [IAS
37:68]
• the cost of fulfilling the contract; and
• any compensation or penalties arising from failure to fulfil the contract.
In respect of onerous contracts, the cost of fulfilling a contract are those costs that
relate directly to the contract, consisting of both: [IAS 37:68A]
• the incremental costs of fulfilling that contract (e.g. direct labour and
materials); and
• an allocation of other costs relating directly to fulfilling contracts (e.g.
an allocation of the depreciation charge for property, plant and
equipment used in fulfilling that contract among others).

Inventory
08 Development 4.2.1 Recognition criteria – general
cost
Provided that an item meets the definition of an intangible asset, as discussed in, it
should be recognised in the financial statements if, and only if: [IAS 38:18 & 21]
• it is probable that the expected future economic benefits that are

attributable to the asset will flow to the entity (the probability criterion);
and
• the cost of the asset can be measured reliably.
While the term 'probable' is not defined in IAS 38, it should be interpreted as 'more
likely than not', consistent with the definition in the IASB Glossary of Terms. These
recognition criteria apply both to costs incurred to acquire an intangible asset and
those incurred to generate an asset internally. The Standard imposes additional
criteria, however, for the recognition of internally generated intangible assets
When assessing the probability of expected future economic benefits, reasonable and
supportable assumptions should be used, representing management’s best estimate
of the set of economic conditions that will exist over the useful life of the asset. [IAS
38:22]
4.8.4 Research phase

Research costs are, by their nature, incurred with the intent of gaining new knowledge
rather than creating a practical application from which future economic benefits will
flow. Therefore, research costs do not meet the criteria for recognition of an internally
generated asset. Costs incurred during the research phase are required to be
expensed. [IAS 38:54]
4.8.5.1 Additional recognition criteria for internally generated intangible assets
In limited circumstances, during the development phase of a project, an entity is able

to identify an intangible asset and demonstrate that the asset will generate probable
future economic benefits. [IAS 38:58] However, in order to recognise an internally
generated intangible asset, criteria in addition to those for externally acquired
intangible assets must be met. Specifically, an intangible asset arising from
development (or from the development phase of an internal project) should be
recognised if, and only if, an entity can demonstrate all of the following: [IAS 38:57]
Page 26
• the technical feasibility of completing the intangible asset so that it will
be available for use or sale;
• its intention to complete the intangible asset and use or sell it;
• its ability to use or sell the intangible asset;
• how the intangible asset will generate probable future economic
benefits. Among other things, the entity can demonstrate the existence
of a market for the output of the intangible asset or the intangible asset
itself or, if it is to be used internally, the usefulness of the intangible
asset;
• the availability of adequate technical, financial and other resources to
complete the development and to use or sell the intangible asset; and
• its ability to measure the expenditure attributable to the intangible asset
during the development phase.
09 Translation of 3.3.1 Transactions to be recognised at spot rate at the date of the transaction
foreign The functional currency amount at which transactions denominated in foreign
Currency currencies should initially be recognised will be determined by using the exchange
rate appropriate to the transaction. This is the spot rate between the functional
currency and the foreign currency at the date of the transaction. [IAS 21:21] The date
of the transaction is the date on which the transaction first qualifies for recognition in
accordance with IFRS Standards. [IAS 21:22] for further guidance on the
determination of the date of the transaction when an entity pays or receives
consideration in advance in a foreign currency.
3.4.1 Monetary items – definition

Monetary items are defined as units of currency held and assets and liabilities to be
received or paid in a fixed or determinable number of units of currency. [IAS 21:8]
Under IAS 21, foreign currency monetary items are treated differently from foreign
currency non-monetary items. The essential feature of a monetary item is the right to
receive (or the obligation to deliver) a fixed or determinable number of units of
currency. [IAS 21:16] Conversely, a non-monetary item does not carry this right or
obligation.
3.4.2 Reporting monetary items at the end of subsequent reporting periods
At the end of each reporting period, foreign currency monetary items are translated
using the closing rate, i.e. the spot exchange rate at the end of the reporting period.
[IAS 21:23(a)]
Page 27
Q.2 Your firm has been approached by Eagle Courier Limited (ECL) to provide due diligence
review on a potential acquisition. ECL is a leading courier service company having a network
of offices throughout the country. ECL has a vast fleet of delivery vans and motorcycles.
ECL intends to use its courier industry experience and expand into food delivery business by
using its current fleet of motorcycles. However, it would require bringing on board a vast
number of restaurants and build its own online food ordering website, of which they do not
have any expertise and experience.
For this purpose, ECL has identified an online food ordering business Foodi.com (FC) for
acquisition. FC is a partnership concern and was set up by three college friends in 2014. FC
received the best ‘start-up business’ award in 2015. Founders of FC had borrowed funds from
two individual investors, which are to be repaid in 10 years.
IT, restaurant relation, customer support and administrative departments are led by the
partners. Being an online service business, the only major assets of FC are a fleet of
motorcycles obtained on an operating lease of 5 years and computers.
Apart from 500 riders, FC employs 30 staff, out of which 10 are related to IT department, 10
belong to customer support, 5 belong to restaurant liaison and the remaining 5 are responsible
for the accounts, HR and administration of the business.
Extracts from audited profit or loss statement for four years are as follows:
2017 2016 2015 2014
Revenue 55,000 50,000 20,000 10,000

Operating expenses (34,650) (30,000) (16,000) (15,000)
(5,750) (4,600) (2,875) (1,150)
14,600 15,400
(3,075) (3,155) (1,615) (1,615)
11,525 12,245 (490)
Required:
Identify and explain the matters you would focus on in your due diligence review. Also
identify any additional information / document you would require duringthe review. (15)
Page 28
Answer:
A. 2 (i) FC being a partnership business is not subject to regulation and oversight of corporate
regulatory authorities and we would need to inquire about the financial reporting
framework used for the preparation of the financial statements and whether it is
acceptable.
Documents/information required:
▪ Audited financial statements of four years
▪ Any regulatory returns filed by FC
(ii) It is crucial to identify the role of other 2 persons who have financed the business of FC.
It is important to determine whether the partners can sell their business without the
consent of the lenders further whether is there any profit sharing agreement as finance
cost has been increased significantly when profit increased
▪ Copy of partnership deed
▪ Copy of agreement with the lenders
(iii) Evaluate why the finance cost remained the same and then increased when business
became profitable.
▪ Balance of the outstanding loan
▪ Terms of repayment of loan
▪ Loan agreement
(iv) Evaluate the reasons for significant improvement in revenue/profits in 2016.
Evaluate whether the levels of revenue/profits of 2016 and 2017 are sustainable.
▪ Forecast profit and loss account for next three years should be obtained
▪ Reasonableness of assumptions on which they are based should be evaluated
▪ Number of active customers registered with FC
▪ Contracts with restaurants
(v) Though the increase in expenses appears reasonable on an overall basis i.e. based on
the increased activities (revenue). However, to assess whether the change is reasonable
we have to obtain details/breakup of major expenses.
(vi) All the partners are crucial to the success of FC, as the business relies heavily on them.
We would have to see whether ECL would be able to find adequate replacement for the
expertise of the partners. Moreover, continuity of other key staff should also be
ascertained for smooth operation of the business.
▪ Names of the key staff
▪ Job description of the staff
▪ Offering letter / Employment agreement
(vii) ECL plans to use their own delivery riders for the business. It therefore needs to be
ascertained whether the riders are employed on a fixed salary or commission plus fixed
salary and are they entitled to any redundancy payments. The same also needs to be
ascertained for other staff of FC who would not be retained.
▪ Contract with the employees/appointment letters.
Page 29
(viii) FC fleet of delivery bikes have been acquired on a five-year lease. It seems that it is a
finance lease ECL plans to use its own fleet for food delivery, so it needs to be
ascertained that whether the lease agreement contains any clause of early exit and its
associated cost.
FC fleet of delivery bikes have been acquired on a five year basis, it needs to assess if it
is classified as finance lease then whether is there any indication of impairment
▪ Lease agreement
Impairment working
(ix) The valuation of the website should also be taken into consideration. Since ECL intends
to use the online system developed by FC, the systems should be tested for security and
should be considered in valuation of the website.
▪ Security certificates obtained by FC
▪ Detail of amounts paid to developer for constructing the web site
▪ Any other certificates obtained by FC
(x) All off balance sheet items should also be taken into consideration along with the
assessment of it’s probable outcome.
▪ Names and addresses of the legal advisors of FC
▪ Names and addresses of all banks of FC
▪ Details of any pending cases against FC
▪ Details of future contracts with suppliers
(xi) The applicability of the income tax and sales tax on the business of FC should also be
considered. It should also be ensured that the tax return have been filed appropriately
and would not result in any future claims by the tax authorities.
▪ Tax returns
(xii) It also needs to be ensured that whether the information systems of FC and ECL could
be integrated.
▪ System specification of both the companies
(xiii) • Contingencies and commitment should need to be considered to assess the outcome
and outflow of economic benefit
• Details of contingencies and commitment

• Legal opinion
Page 30
Q.3 You are the audit manager of Zia Yaqoob & Company Chartered Accountants. You have
asked Aslam, one of the team members assigned on the audit of Black Sugar Limited todraft
the audit report for the year ended 31 May 2018. The extracts from the draft report are as
follows:
Adverse Opinion
In our opinion, except for the effects of the matter described in the Basis for Adverse Opinion
section of our report, the accompanying financial statements present fairly, in all material
respects the financial position of the Company as at 31 May 2018, and its financial
performance and its cash flows for the year then ended.
Basis for Adverse Opinion

The Company’s stores and spares consist of capital spares of machineries for smooth and
uninterrupted production of sugar during the crushing season. These are carried at lower of
cost and net realisable value as per IAS–2. The Company’s Chief Financial Officer has refused
to reclassify it as capital stores and spares as per IAS–16 as it would adversely affect the current
ratio, as prescribed by the financial institutions. We verified the Company’s records and
ascertained conclusively the value of the capital spare at Rs. 100 million. Had the management
stated them as capital spares, Non–Current assets would have increased by Rs. 100 million
and consequently Current Assets would have reduced by the same amount.
Emphasis of Matter Paragraph

We draw attention to note 2 to the financial statements, which describes the early adoption of
IFRS–2. However, due to time limitation, certain disclosures required by IFRS–2 could not
be provided in the financial statements. Our opinion is not modified in this respect.
Required:
Critically analyse the audit report drafted by Aslam. (11)
Page 31
Answer:
A. 3 Adverse opinion:
▪ When the auditor expresses an adverse opinion, due to the significance of the matter the
auditor states, that financial statements do not present fairly or give a true and fair view. The
“except for” phrase is used when the auditor expresses a qualified opinion due to material
misstatement.
▪ The auditor also needs to mention the applicable framework, which have not been complied
with.
▪ Apparently it seems that in this situation a qualified opinion would have been more
appropriate, since the value of capital spare parts and their depreciation may never
represent a substantial portion of the financial statements.
Basis of adverse opinion:

▪ Reference of the notes to the financial statements where the relevant information is
disclosed/discussed is missing.
▪ Aslam has stated that the auditors have conclusively assessed the value of stores at Rs.
100 million which is inappropriate. Audit procedures provide reasonable assurance, which is
less than the absolute assurance implied by the word “conclusively”.
▪ Instead of mentioning the audit procedure performed, only mentioning the value of capital
stores would have been sufficient. The description of audit procedures is only provided in
the key audit matter section.
▪ It is not appropriate to give the argument offered by the CFO and use his designation in the
audit report. This may lead to litigations against the firm for defamation. It is recommended
to use the word management or Company
▪ The financial effect of the misstatement has also not been completely discussed. If the
capital stores and spares would have been reclassified as per IAS – 16 then they may have
been subject to depreciation, income tax, income before tax, net income and equity.
▪ Reference to International Accounting Standards has been made in an inappropriate
manner which is against the best practices being followed almost universally. It should have
been ensured that full name of those standards are given rather than their acronyms.
Emphasis of matter paragraph:
As per ISA 706 early application (where permitted) of a new accounting standard that has a
material effect on the financial statements may be considered as EOMP. However
▪ non-disclosure of information results in material misstatement in the financial statements

shall not be include in EOMP instead a qualified opinion on the basis of inability to obtain
sufficient appropriate audit evidence should be expressed and in the ‘Basis for opinion
section’ the nature of the omitted information should have been described if practicable.
EOMP shall be referred to a disclosure where material effect has been disclosed as per IAS
08 not to the IFRS 02 disclosure.
Key Audit Matters
As it is a listed entity, therefore KAM section shall be included.
Page 32
Q.4 Chester Limited (CL) has introduced an equity settled share based payment plan for its
executives on 1 April 2017. Under the plan, 50 of its executives have received 100 share
options each, which will vest on 31 May 2022 if the executives remain in employment at that
date and CL’s share price increases to Rs. 180 at 31 May 2022.
Required:
Mention the key audit procedures for share based payment options described above,
assuming that evaluation of the competency and integrity of the management expert has
already been tested. (06)
Answer:
Student Corner
3.2.1 Equity-settled share-based payment transaction – definition
Appendix A of IFRS 2 defines an equity-settled share-based payment transaction as "[a] share-based

payment transaction in which the entity
a. receives goods or services as consideration for its own equity instruments (including shares or
share options), or
b. receives goods or services but has no obligation to settle the transaction with the supplier".
4.2 Vesting condition – definition

Appendix A of IFRS 2 defines a vesting condition as '[a] condition that determines whether the entity receives
the services that entitle the counterparty to receive cash, other assets or equity instruments of the entity, under
a share-based payment arrangement. A vesting condition is either a service condition or a performance
condition'. This definition is clear that vesting conditions are restricted to only service conditions) and
performance conditions). A market condition is a type of performance condition.
4.3 Service condition – definition

Appendix A of IFRS 2 defines a service condition as '[a] vesting condition that requires the counterparty to
complete a specified period of service during which services are provided to the entity. If the counterparty,
regardless of the reason, ceases to provide service during the vesting period, it has failed to satisfy the
condition. A service condition does not require a performance target to be met'.
The vesting period is '[t]he period during which all the specified vesting conditions of a share-based payment
arrangement are to be satisfied'.
4.4 Performance condition – definition

Appendix A of IFRS 2 defines a performance condition as follows.
"A vesting condition that requires:
a. the counterparty to complete a specified period of service (i.e. a service condition); the service
requirement can be explicit or implicit; and
b. specified performance target(s) to be met while the counterparty is rendering the service required
in (a).
The period of achieving the performance target(s):

a. shall not extend beyond the end of the service period; and
b. may start before the service period on the condition that the commencement date of the
performance target is not substantially before the commencement of the service period.
A performance target is defined by reference to:

a. the entity’s own operations (or activities) or the operations or activities of another entity in the
same group (i.e. a non-market condition); or
b. the price (or value) of the entity's equity instruments or the equity instruments of another entity in
the same group (including shares and share options) (i.e. a market condition).
A performance target might relate either to the performance of the entity as a whole or to some part of the
entity (or part of the group), such as a division or an individual employee."
Therefore, a performance condition (which is a vesting condition) must involve both a service condition and a
performance target. A performance target with no related service condition is a non-vesting condition (see 4.6).
A performance target that extends beyond the service period is also a non-vesting condition (see 5.3.15).
Examples of performance conditions include the vesting of options based upon:
• the total shareholder returns (TSR) of the entity, either in absolute terms or relative to a
comparator group or index (market-based);
Page 33
• meeting a specific target share price (market-based); or
• levels of revenues (non-market-based).
4.5 Market condition – definition
Appendix A of IFRS 2 defines a market condition as "[a] performance condition upon which the exercise
price, vesting or exercisability of an equity instrument depends that is related to the market price (or value) of
the entity’s equity instruments (or the equity instruments of another entity in the same group), such as:
a. attaining a specified share price or a specified amount of intrinsic value of a share option; or
b. achieving a specified target that is based on the market price (or value) of the entity’s equity
instruments (or the equity instruments of another entity in the same group) relative to an index of
market prices or equity instruments of other entities.
A market condition requires the counterparty to complete a specified period of service (i.e. a service condition);
the service requirement can be explicit or implicit".
Vesting and non-vesting conditions and their impact on the treatment of equity-settled share-based payment
transactions are considered further
A.4 (i) Verify the following information to be used in the calculation of the amount of expense
from Board Minutes and other records of the company such as payroll data:
▪ The grant date and vesting date

▪ The number of executives to whom options are awarded
▪ The number of share options awarded to each individual
▪ The required conditions attached to the options
▪ The number of executives who have accepted share based payment options
(ii) Assess whether management has appropriately applied the requirement of IFRS 02 and
assumption used by the management are reasonable in light of the IFRS 02
(iii) Agree the fair value of share options with valuer’s report and evaluate whether it is a
reliable source of evidence.
(iv) Test the operating effectiveness of the controls over how management made the
accounting estimate
(v) The relevance and reasonableness of management expert findings or conclusion and
their consistency with other audit evidence and whether they have been appropriately
reflected in the financial statement
(vi) If management expert work involves significant use of source data, the relevance,
completeness and accuracy of source data
(vii) Consider the appropriateness of the model used by the valuer to determine fair value for
the share options and review the appropriateness of the assumptions used.
(viii) Review the inputs into the option pricing model used by management to estimate the fair
value of the share options at the grant date.
(ix) Obtain and review the forecast of staffing levels or employee turnover rates relevant to
executives over the vesting period and consider whether assumptions used for the
forecast appear reasonable.
(x) Ensure that share based payment options have been accounted for and disclosed as per
IFRS – 2.
Page 34
Q.5 Nisar Khalid & Co. Chartered Accountants (NKC) has been approached by Hector Limited
(HL) a listed company, for appointment as HL’s auditors for the year ending 30 April 2019.
The core departments of NKC along with the names of the partners are as follows:
Department
Nisar Ali Khalid
Hashmat Usman Ovais
Moin Hasan
Rashid
Arif
NKC intends to appoint Rashid as the engagement partner. As part of the client acceptance
procedures, an email was circulated to all the staff of the firm to disclose any investment in
HL and its related parties by any partner/employee or their family member(s).
A summary of response of Rashid and his staff is as follows:
▪ Rashid has confirmed that he does not hold any shares in HL although his wife has
invested Rs. 2 million in a mutual fund. The mutual fund has invested 14% of its total
investment in shares of HL.
▪ Zahid has been working as an audit manager with Rashid. Zahid has disclosed that he
has invested Rs. 50,000 in the shares of Troy Limited (TL). HL owns 20% shareholding
in TL.
Response by other partners of the firm are as follows:

▪ Ali has invested Rs. 45,000 in the shares of Achilles Limited, which is the holding
company of HL.
▪ Ovais has confirmed that his son has invested Rs. 500,000 in the debentures issued by
HL.
Response by other staff of the firm:

▪ Some of the junior audit staff who are not working with Rashid and the staff of the firm’s
accounts department have confirmed holding in shares of HL of nominal amounts
ranging from Rs. 5,000 to Rs. 60,000.
Required:
In the light of Code of Ethics for Chartered Accountants, evaluate the above situation and
discuss the threats (if any) in each case along with the available safeguards if NKC decides
to accept the assignment. (15)
Page 35
Answer:
A. 5 Holding a financial interest in an audit client may create a self-interest threat. However, the
significance of the threat may vary in different circumstances, each of which is discussed
below:
Rashid
If a member of individual's immediate family has a direct financial interest or a material indirect
financial interest in the audit client, the self-interest threat created would be so significant that
no safeguards could reduce the threat to an acceptable level.
Financial interests may be held through an intermediary (for example, a collective investment
vehicle, estate or trust). The determination of whether such financial interests are direct or
indirect will depend upon whether the beneficial owner has control over the investment vehicle
or the ability to influence its investment decisions.
In the above scenario Rashid does not have any financial interest in HL. However, his wife
being an immediate family member holds financial interest, since she beneficially owns shares
in HL through a collective investment trust.
It needs to be assessed whether the wife of Rashid has control over investment and the ability
to influence the decision. If yes, such investment shall be considered as direct financial interest
and threat created would be so significant that no safeguard could reduce the threat to an
acceptable level.
If the wife of Rashid does not have control over investment and the ability to influence the
decision then such investment shall be considered as indirect investment.
It needs to be assessed whether the amount invested in the mutual fund is material to her. If
yes, a self-interest threat would be created. Then the firm should not accept the assignment
unless the units of mutual fund are disposed of or a sufficient amount is disposed of so that the
remaining amount is no longer material.
Zahid
A self-interest threat may be created if a member of the audit team, has a financial interest in
an entity and an audit client also has a financial interest in that entity. However, independence
is deemed not to be compromised if these interests are immaterial and the audit client cannot
exercise significant influence over the entity.
Since HL owns 20% shares in TL, HL can exercise significant influence over TL. However, the
materiality of the interest both for HL in TL and Zahid in TL needs to be evaluated. In case the
financial interest is material to any of the parties the threat created would be so significant that
it can only be reduced if Zahid disposes of his entire shareholding or reduces it to such an
extent that it no longer remains material or removing the Zahid from the audit team.
Ali & Ovais:
If a member of the assurance team has a direct or material indirect financial interest in an entity
that has a controlling interest in the assurance client, and the client is material to the entity, the
self-interest threat created would be so significant that no safeguards could reduce the threat to
an acceptable level.
Assurance team means all others within a firm who can directly influence the outcome of the
assurance engagement, including:
Page 36
• those who provide quality control for the assurance engagement, including those who
perform the engagement quality control review for the assurance engagement.
Therefore persons performing quality control for the engagement or providing consultation
regarding technical issues for the engagement are part of assurance team.
A self-interest threat may be created due to Ali’s holding of shares in the holding company of
HL. If HL is material to AL then firm should not appoint Ali as the engagement quality control
partner unless he disposes of his entire investment.
If Ovais’s son is dependent on him, then he would be considered as an immediate family

member and NKC could not accept the assignment, unless he disposes of all his investment.
Other employees:
Members of the audit team shall determine whether a self-interest threat is created by any
known financial interests in the audit client held by other individuals including:
(a) Partners and professional employees of the firm or their immediate family members; and
(b) Individuals with a close personal relationship with a member of the audit team.
Its significance would depend on whether any of these individuals have any relationship with
the audit team and the firm’s organizational, operating and reporting structure.
Depending upon the significance of the threat, NKC may:

▪ remove any audit team member who have any relationship with such an employee;
▪ exclude any such employee from any significant decision making; or
▪ have a chartered accountant review the work of such member of the audit team
Page 37
Q.6 (a) The following information relates to the audit of Apex Fertilizer Limited (AFL) for the
year ended 31 March 2018:
▪ AFL has incurred gross loss which is mainly because AFL’s plant was not running
on optimum capacity due to severe shortage of gas supply from the government.
However, AFL has recently made arrangements with a privately owned company
for supply of gas. Management expects that continuous supply of gas would help
AFL to convert its gross loss into gross profit, although achieving net profit would
require more efforts.
▪ Several instalments of the long term loan appearing on the balance sheet were
overdue. AFL entered into a restructuring agreement with the bank on 7 April 2018
whereby the outstanding interest has been converted into a loan of three years and
principal payments have also been relaxed. The first payment of principal is now due
in July 2019 and the amounts have been reclassified on the basis of the restructuring
agreement.
▪ The method for the depreciation of plant and machinery has been changed from
straight line to units of production method.
▪ The directors’ report includes the following information:
“We have entered into a gas supply arrangement with Karim Gas Limited from
August 2018. A continuous gas supply will help us to attain the optimum production
level and record profits in the next financial year. Furthermore, several cost saving
measures have been taken, as a result of which fixed costs have reduced by 15%.
The company has entered into a restructuring agreement whereby the lenders
considering the potential of the company’s vision and strategies have further extended
and relaxed the terms of future payments. As a result, our liquidity position has
improved which is depicted by a much improved current ratio.”
Required:
(i) As the audit manager what issues would you like to discuss with the management in
respect of the above (other than the issue of going concern)? (10)
(ii) What could be the possible impact on the audit report if the management does
not agree with your point of view about the issues raised in(a) above? (04)
Answer:
STUDENT CORNER
4.3A.8 Breaches of covenants (entities that have adopted the January 2020
amendments)
When a condition of a long-term loan arrangement is breached on or before the end of the reporting period
with the effect that the liability becomes payable on demand, the liability is classified as current. This is so,
even if the lender has agreed, after the reporting period and before authorization of the financial
statements for issue, not to demand payment as a consequence of the breach. The liability is classified as
current because, at the end of the reporting period, the entity does not have the right to defer settlement
for at least 12 months after that date. [IAS 1:74]
IMPAIRMENT OF PLANT AND MACHINERY – PLEASE REFER RISK 08 of winter 2017
7.5.1 Method of depreciation should reflect expected consumption of economic

benefits
It is necessary to select a method of applying depreciation that results in the carrying amount of the asset
being allocated as fairly as possible to the periods expected to benefit from the use of the asset. The
method used should be that which reflects most closely the pattern in which the asset’s economic benefits
are expected to be consumed by the entity. [IAS 16:60]
Another useful basis is the unit of production method, which apportions the cost of the asset over its
productive life measured in terms of the units produced or machine hours utilised in relation to the total of
such units or hours estimated to comprise the productive life of the asset. This method is theoretically
superior to the straight-line and reducing balance methods in that it more accurately matches costs with
Page 38
the consumption of economic benefits, if the life of the asset can be measured with some precision in terms
of its ultimate total output. This method is commonly used in the oil, gas and other extractive industries,
where the life of an asset may be expressed in terms of a quantity of output and production assets have no
further value once mineral reserves have been extracted.
More generally, alternative methods of depreciation (e.g. decreasing charge depreciation and the sum-of-
digits method, or 'rule of 78') are acceptable under IFRS Standards only if they reflect the pattern in which
the asset’s economic benefits are expected to be consumed. As a consequence, a method based on tax
allowances granted (e.g. the double declining balance method) is not permitted unless it also reflects the
expected consumption pattern of the asset.
7.5.5 Change in depreciation method

IAS 16 requires that the depreciation method applied to an item of property, plant and equipment should
be reviewed at least at the end of each financial year. Except when there is a change in the expected
pattern of consumption of economic benefits embodied in the asset, the depreciation method adopted
should be applied consistently from period to period. If there has been a significant change in the expected
pattern of consumption of benefits, the depreciation method is changed to reflect the changed pattern. The
change is accounted for as a change in accounting estimate in accordance with IAS 8. [IAS 16:61]
Therefore, a change from one method of recognising depreciation to another does not constitute a change
in accounting policy but is accounted for as a change in accounting estimate in accordance with IAS 8. The
carrying amount of the asset is written off using the new method over the remaining useful life,
commencing with the period in which the change takes place. Separate disclosure of the impact of the
change is required if the change has a material effect in the current period or is expected to have a material
effect in subsequent periods.
Page 39
A.6 (a) (i) ▪ We will inform the management that restructuring agreement had been
entered after the year-end therefore; it is non-adjusting event as per IAS 10.
The financial liabilities need to be classified as current liability because they
are due to be settled with in twelve months after the reporting period.
Agreement to reschedule the loan has been completed after the reporting
period and hence classification between short and long-term portions should
still be based on the position prior to restructuring.
▪ The signing of the restructuring agreement after the reporting date, would
needs to be disclosed as a non-adjusting event.
▪ We will also discuss whether classification of bank loan into current liability
will result in any breach of covenant.
▪ It also needs to be discussed how the management has calculated the

expected units to be produced by the plant and whether the change in the
depreciation would result in a more fair presentation of the plant’s utilization.
Also, ask the management that whether the change in the depreciation
method is reasonable and has been applied prospectively and is reasonable.
▪ It also needs to be brought in the management’s information that any

depreciation method once adopted needs to be consistently applied.
We will also need to discuss with the management that as per IAS 08
management need to provide disclosure in the financial statement with
respect to change in accounting estimates
▪ Due to severe shortage of gas supply from the Government the Company is
unable to run its plant on optimum capacity, which resulted in a gross loss,
therefore we will also have to ask the management, that whether any exercise
for determination of impairment has been carried out.
▪ We will also inquire whether arrangement of gas with privately owned

Company requires any investment (such as construction of pipeline).
▪ We will also inquire whether there is any take or pay clause with Government
for supply of gas.
▪ The directors’ report state that fixed costs have been decreased by 15% due
to measures taken by the management, whereas, a significant portion thereof
is due to change in depreciation method. Hence, it needs to be discussed
what measures were taken by AFL which led to reduction in fixed cost by
15%.
▪ The directors’ report (other information) states the gas supply arrangement
with Karim Gas Limited will help AFL to attain optimum production level and
record profits in next financial year. However, as per management
explanation, it would only help the company to record gross profit rather than
recording net profit. Therefore, there is an inconsistency between Directors
report (other information and management explanation.
If other information is materiality misstated, we will request management to
amend the directors’ report in this regard.
▪ As restructuring agreement entered subsequent to the yearend, therefore
bank loan shall not be classified as non-current liability. There is an
inconsistency between Directors report and financial statement because
restructuring took place after the year-end therefore bank loan will still be
classified as current liability due to which current ratio will not improve.
As other information is materially misstated we will request management to

change the Directors Report.
▪ We will have to inform the management that if the identified material

misstatement of other information is not corrected, it may undermine the
credibility of the financial statements and the auditor’s report thereon.
Page 40
OR
Such misstatements is material as it may inappropriately influence the
economic decisions of the users for whom the auditor’s report is prepared.
(ii) ▪ As per IAS 10 restructuring of bank loan subsequent to the yearend is non-
adjusting event therefore we will request management to classify it as a
current liability.
If management refused to classify it as a current liability, then this is the

misstatement on account of application of accounting policy.
If the impact is material we will express a qualified opinion and if the impact
is material and pervasive we will express adverse opinion, we will also have
to describe the financial effects of the material misstatement in the basis of
opinion section of the report.
▪ If management refuse to amend the Directors report the misstatement would

be considered as material because it will influence the economic decision of
the user.
Since the directors’ report forms part of the annual report, a statement that
describes the uncorrected material misstatement of the other information
should
be included in a separate section under the heading of “Other
information”.
Auditor may also consider to issue disclaimer opinion or with draw from
engagement.
Page 41
(b) During the audit of a listed client Pixel Limited (PL), you became aware that a legal action
has been instituted against PL by a competitor, on account of infringement of patent
rights. The company’s lawyer was not able to give any estimate about the outcome of
the case.
No provision was made in the financial statements for the possible loss as a result of the
claims (which are considered to be material), although details of those legal claims were
fully disclosed in the notes.
Required:
Draft how the above matter would be reported in the key audit matter section of the
audit report. (You may assume necessary details) (05)
Answer:
(b) Contingent liabilities

Refer note x to the financial statements.
How our audit addressed the key audit
Key audit matter
matter
The assessment of the existence of the Our audit procedures included the
present legal obligation, analysis of the following:
probability of the related payment and
determining a reliable estimate, requires We had discussions with the Company’s
significant management’s judgment to legal advisors in respect of the outcome of
assess whether it should be recognized as the case and reasonableness of the
provisions or disclosing as contingent disclosure.
liability
We inquired the management and those
Due to the level of judgement relating to charged with governance and also
valuation and presentation of contingent reviewed the subsequent correspondence
liabilities, this is considered to be a key with the competitor to assess the amount
audit matter. involved in litigation.
We also involved our legal expert to

assess the outcome of the case.
We evaluated the adequacy of the

disclosure in the financial statements, in
particular the disclosure of the uncertainty
in estimation and its quantification.
Page 42
Q.7 Kiran is the audit senior responsible for the audit of Xengen Limited. She has noticed that a
large number of journal entries were processed near the year end.
Required:
(a) What controls should she expect to be in place for recording and processing of journal entries?
(07)
(b) What course of action should the audit team take if serious deficiencies are identified during
the control testing process? (07)
(THE END)
Answer:
STUDENT CORNER-
a- To draft internal control for JE – The student should refer various types of control activities such as
Authorisation and approval, Segregation of Duties, Physical Control, Performance Review and Information
Processing
the auditor test JE to address the risk of fraud (MOC) – if there are severe deficiencies it means there may be
certain JE which may be fictitious or fraudulent therefore objective 03 of ISA 240 would be applicable
A.7 (a) (i) Policies and procedures involving journal entries and other adjustments should
be documented and available to personnel involved in initiating the entries to the
general ledger/transaction processing systems.
(ii) Only Authorised personnel should have the right to post journal entries.
(iii) Entries should be identified with adequate descriptions and/or supporting

documentation including calculations.
(iv) There should be segregation of duties i.e. each entry should be signed by the
preparer and approved by the authorized personnel.
(v) Authority limits for approval of journal entries should be well defined.
(vi) Each Journal entry should be sequentially numbered.
(vii) Standardized forms should be used for standard journal entries (e.g. forms
containing the account numbers of ledgers in which the entry is to be posted)
(viii) Automated exception reports of entries such as amounts in excess of certain
limits, credit entries in accounts where only debit entries are posted, entries in
rarely used accounts, etc. should be regularly generated and reviewed.
(b) If the auditor identifies significant control deficiency, the auditor shall evaluate whether
such a misstatement is indicative of fraud. If there is such an indication, the auditor
shall evaluate the implications of the misstatement in relation to other aspect of audit,
particularly the reliability of management representation, recognizing that an instance
of fraud is unlikely to be an isolated occurrence
If the auditor has reason to believe that it is or may be the result of fraud and
management in particular senior management is involved, the auditor shall reevaluate
the assessment of risk of material misstatement and modify the nature timing and
extent of further audit procedures, such as:
▪ Identify the ledger accounts in which most of the journal entries were processed,
for e.g. (revenue or fixed assets).
▪ Inquire accounting and data entry personnel whether they were requested to make
any unusual entries during the period.
▪ Made inquiry with the senior management regarding the nature of such entries
▪ Less reliance on control and more reliance on substantive procedures.
▪ Focus on those JE that were made at quarter end or year-end.
Page 43
The auditor shall communicate the significant deficiencies to Those Charged with
Governance along with the description of the deficiencies and an explanation of their
potential effects.
If the auditor has significant concern about the integrity of management auditor may
consider to withdraw from engagement after communicating to those charged with
governance.
The auditor may also consider to determine whether there is a professional or legal
requirement to report to the person who made the audit appointment.
If the auditor has identified or suspects a fraud, the auditor shall determine whether
there is a responsibility to report the occurrence or suspicion to a party outside the
entity. Although the auditor’s professional duty to maintain the confidentiality of client
information may preclude such reporting, the auditor’s legal responsibilities may
override the duty of confidentiality in some circumstances. The auditor may consider it
appropriate to obtain legal advice to determine the appropriate course of action in the
circumstances.
Page 44


Q.1 You are the engagement manager in Hasan Abdali and Company, Chartered Accountants.
One of your clients is Falcon Limited (FL) which owns six shopping malls and four office
building complexes in different cities for rental purposes. FL also constructs and sells
residential apartments in major cities of Pakistan.
The following matters were discussed in the planning meeting of the audit for the year
ending 31 December 2018:
(i) CFO informed that FL has implemented a new enterprise resource planning system
(ERP). He stated that FL has successfully revamped the entire accounting system
through this new ERP.
(ii) A shopping mall located in Multan has been witnessing low turnout of customers. FL
has been trying to persuade its tenants for not vacating their shops and have offered that
they pay 50% of the rent and pay the remaining amount when conditions improve. Some
of the tenants have accepted FL’s offer and have formally negotiated a two-year
relaxation period.
(iii) FL’s head office was shifted to a central location in a newly constructed building. Two
floors of the building which were surplus to FL’s need have been rented out to MM
Limited (MML) which is owned by a director of FL. MML provides maintenance
services to various building projects. FL and MML have agreed that FL will not charge
any rent for the two floors in consideration for free maintenance of Multan shopping
mall and the head office.
(iv) Construction of four residential projects started during the year. The projects are in
various stages of completion. About 70% of the apartments have already been booked.
FL offers different terms to its customers depending upon which option theychoose.
(v) The balcony of one of the apartments constructed in 2012 fell off, severely injuring three
persons. The news surfaced in the media and caused severe criticism on FL and a show-
cause notice was also received by FL from a regulatory authority. FL’s management is
of the view that the construction was up to the required standards and the residents had
made some modifications which caused this incident.
Required:
Discuss the audit risks that exist in the above scenario and suggest the key audit procedures
to be performed in respect of the identified risks. (23)
Page 45
Risk Audit Risk Audit Procedures
Heading
Classific The shopping malls and building • Inquire with the management whether there Is any
ation of complexes are for rental purposes. land or building which is held for undetermined use or
shopping Therefore there is a risk of for rental purpose
malls classification of assets because it • Inspect the rental agreement to identify and land or
and should be classified as IP and building that has been rented
building management may not have classified • Inspect the Minutes of the meeting of those charged
complex it IP instead as OOP. with Governance to evaluate business decision of
es acquiring land and building
Impairme Shopping mall located in Multan • Obtain an understanding of management process

nt of IP – witnessed low turnout of customers related to identifying, estimating and recording
If cost and some of the customers are impairments for fixed assets to determine whether it
model vacating the shops. Therefore there is appropriate in the circumstances and in
is a risk of overstatement of IP accordance with the applicable financial reporting
Because IP may have been impaired framework i.e. IAS 36
and no impairment or adequate
impairment may have been recorded • Check / inspect that assumptions used by the
by the management as per IAS 36. management such as discount rate and future cash
flows are reasonable
• Obtain management expert report or consider

involving auditor’s expert
• Perform subsequent event procedures such as

subsequent interim FS to compare the projected
result with the actual result
Fair If the assets may have been • Ensure that all the assets for similar class are
value of measured using FV model. There is revalued
IP – If FV a risk of misstatement of the • Evaluate the competence, capabilities and objectivity
model valuation of IP Because FV of IP may of management expert
used not have been determined accurately • Evaluate the adequacy of the expert work:
(assumptions may not be o Relevance and reasonableness of the expert
reasonable)
finding
o Relevance and reasonableness of the
assumption and methodology used
o The relevance, completeness and accuracy
of source data
• Engaged our own auditor expert to corroborate and
challenge management expert report
Impairme A shopping mall located in Multan • Understand and evaluate the management process to
nt of has been witnessing low turnout of identify long outstanding receivable and to estimate
Receivab Customer and vacating the shops. the allowance for doubtful debt to determine whether it
le Therefore there is a risk of is appropriate in the circumstances and in accordance
overstatement of Receivable with the applicable financial reporting framework.i.e.
Because Receivable may have been IFRS 09
impaired and no impairment or • Obtain management working on allowance for
adequate impairment may have been doubtful debt and check whether assumption such as
recorded by the management as per model used, PD and LGD used by the management is
IAS 36. reasonable
• Obtain debtors aging analysis and change in debtor
days to identify long outstanding receivable
• Check subsequent receipts to obtain evidence
regarding the recoverability
Revenue The customer has accepted • Inspect sales agreement to understand the terms and
recogniti management offer and agreed to pay condition with respect recoverability
on as per 50% of the rent and the remaining • Assess the reasonableness of assumptions used
IFRS 15 amount after 2 years if conditions and estimates made by the management to
improve. Therefore there is a risk of recognize revenue considering variable
overstatement of revenue Because
consideration
Page 46
as per contract there is variable • Evaluate the accounting policy and ensure that it is
consideration and management may consistent with the requirement of IFRS 15
not have estimate the variable
consideration accurately as per IFRS
15
Classific The customer has accepted • Obtain the breakup of receivable bifurcated between
ation of management offer and agreed to pay current asset and non-current asset
Receivab 50% of the rent and the remaining • Inspect the agreement to assess the timings and
le amount after 2 years if conditions amounts of cash flows and recalculate the current and
improve. Therefore there is a risk of non-current assets amount
classification of receivable Because
receivable shall be classified as non-
current asset as per IAS 01 and
management may have classified it
as current asset
Valuation The customer has accepted • Inspect the agreement to assess the timing and amount
of management offer and agreed to pay of cash flows
Receivab 50% of the rent and the remaining • Evaluate the assumption used by the management to
le amount after 2 years if conditions such as discount rate and timing and amount of cash
improve. Therefore there is a risk of flows·
valuation of receivable Because it
includes significant financing
component and shall be discounted
using an appropriate discount rate as
per IFRS 15 and management may
not have discount.
Classific Two floor from the head office • If any land or building has been used for both
ation of building has been rented out. purpose, ensure that whether it can be separable by
Head Therefore there is a risk of inspecting the agreement to assess terms and
office classification of Building Because condition
building building is used for more than 1 • Inspect the expert report that is engaged by the
purposes and both the parts shall be management to ensure that both properties can be
classified separately (subject to separately identifiable and can be sold separately
certain condition) and management • If separable ensure that amount allocated to IP and
may not have classified it separately OOP is accurate by ensuring that assumptions are
reasonable
Related Two floors has been rented out to the • Confirming or discussing specific aspects of the
party Company who have common director transactions with intermediaries such as banks, law
disclosur Therefore there is a risk that RP firms, guarantors, or agents,
e transaction may have not been • Confirming the purposes, specific terms or amounts of
adequately disclosed in FS as per the transactions with the related parties.
IAS 24 • Where applicable, reading the financial statements or
other relevant financial information, if available, of the
related parties for evidence of the accounting of the
transactions in the related parties’ accounting records.
Revenue The Company offers different terms • Inspect the sale agreement to identify terms and
recogniti to its customers depending upon condition to evaluate performance obligation
on as per which option they choose for the sale • Obtain an understanding of management process to
IFRS 15 of residential projects. Therefore recognized revenue and ensure that it is consistent
there is a risk of misstatement of with the requirement of IFRS 15
revenue Because each contract may • Evaluate the accounting policy such point of time or
have different performance obligation over the time and ensure that it is consistent with the
and consequently may have different requirement of IFRS 15
revenue recognition criteria (Point of • Evaluate the adequacy of expert engaged to determine
time of Over the Time) and the amount of revenue recognition by
management may not have recorded
o Relevance and reasonableness of the expert
the revenue as per IFRS 15.
finding
o Relevance and reasonableness of the
assumption and methodology used
o The relevance, completeness and accuracy of
source data
Page 47
Provision The accident in the balcony of one of • Inquiry of management including in-house legal
or the apartment severely injured 3 counsel to obtain an understanding of the legal cases
continge persons and show because notice • Inspect correspondence between the entity and its
nt liability was also received from the regulator. external legal counsel
Therefore there is a risk that • Send direct confirmation to the external legal counsel
Provision may not have been to know the outcome of the case
recorded or if it is a contingent • Ensure that any contingent liability has been
liability may not have been appropriately recorded as per IAS 37 or any provision
adequately disclosed as per IAS 37. has been appropriately recorded in the FS.
IT •
SYSTEM
S.no Risk IFRS REQUIREMENT

Description
01 Investment 2.2 Investment property – definition
property
Investment property is defined in IAS 40 as follows. [IAS 40:5]
Investment property is property (land or a building–or part of a building–or both) held (by
the owner or by the lessee as aright-of-use asset) to earn rentals or for capital
appreciation or both, rather than for:
a. a. Use in the production or supply of goods or services or for

administrative purposes; or
b. b. Sale in the ordinary course of business.
2.3.3 Ancillary services

If an entity provides ancillary services to the occupants of its property, the property is
accounted for as investment property provided that the services are an 'insignificant'
portion of the arrangement. [IAS 40:11]
02 Impairment Refer risk 08 of winter 2017

of IP 8 Compensation for impairment of investment property
Impairments or losses of investment property, related claims for or payment of

compensation from third parties and any subsequent purchase or construction of
replacement assets are separate economic events and are accounted for separately.
[IAS 40:72] Therefore [IAS 40:73]:
• impairments of investment property are recognised in accordance with

IAS 36;
03 Fair value of 5.1.1 Selection of accounting policy for investment property – general
IP In general, IAS 40 (1) allows an entity to choose whether it adopts a fair value model or
a cost model for investment property, and (2) requires that, having decided on its policy,
an entity should apply that model to all of its investment property. [IAS 40:30]
04 Impairment Refer risk 06 of winter 2017

of
Receivable
Page 48
05 Revenue 7.2.1 Variable consideration

recognition 7.2.1.1 Requirement to estimate variable consideration – general
If the consideration includes a variable amount, the entity is required to estimate the
amount of consideration to which it will be entitled in exchange for transferring the
promised goods or services to the customer. [IFRS 15:50]
When estimating the amount of consideration to which it is entitled, an entity needs to
consider the variable consideration constraint
7.2.1.2 Identification of variable consideration
Examples of variable consideration include discounts, rebates, refunds, credits, price
concessions, incentives, performance bonuses and penalties Consideration can also
vary if entitlement to the consideration is contingent on the occurrence or non-occurrence
of a future event. Examples include a product sold with a right of return or a fixed amount
promised as a performance bonus on achievement of a specified milestone. [IFRS 15:51]
7.2.1.3 Selection of method for estimating variable consideration
One of the following methods should be used to estimate the amount of variable
consideration, depending on which method better predicts the amount of consideration
to which the entity will be entitled: [IFRS 15:53]
a. the expected value method – this may be appropriate when the entity has a
large number of contracts with similar characteristics and is calculated as
the sum of probability-weighted amounts in a range of possible
consideration amounts; and
b. the most likely amount – this may be appropriate when a contract has only
two possible outcomes (e.g. the amount received is based on whether a
performance bonus is achieved, or not). It is the single most likely amount
in a range of possible consideration amounts (i.e. the single most likely
outcome of the contract).
6 Classification 4.2.4 Assets classified as non-current

of All assets other than those that meet the definition of a current asset are classified as
Receivable non-current. [IAS 1:66]
IAS 1 uses the term 'non-current' to include tangible, intangible and financial assets of a
long-term nature. It does not prohibit the use of alternative descriptions provided that the
meaning is clear. [IAS 1:67]
7 Significant 7.4.5 Deferred consideration - measuring the amount of revenue when a

financing transaction includes a significant financing component
component 7.4.5-1
Deferred consideration: measuring the amount of revenue when a transaction includes
a significant financing component. When a significant financing component is identified,
IFRS 15:60 requires 'an entity to adjust the promised amount of consideration for the
effects of the time value of money'.
IFRS 15:61 states as follows.
The objective when adjusting the promised amount of consideration for a significant
financing component is for an entity to recognise revenue at an amount that reflects the
price that a customer would have paid for the promised goods or services if the customer
had paid cash for those goods or services when (or as) they transfer to the customer (i.e.
the cash selling price).
However, IFRS 15:64 states, in part, as follows.
To meet the objective in [IFRS15:61] when adjusting the promised amount of

consideration for a significant financing component, an entity shall use the discount rate
that would be reflected in a separate financing transaction between the entity and its
customer at contract inception. That rate would reflect the credit characteristics of the
party receiving financing in the contract, as well as any collateral or security provided by
the customer or the entity, including assets transferred in the contract.
Page 49
08 Property help 2.3.2 Property held for more than one purpose
for more than In circumstances when property is held partly for capital appreciation and/or rentals, and
one purpose partly for the production of goods or services or administrative purposes, the two parts
are accounted for separately if they could be sold, or leased out under a finance lease,
separately. If they could not be sold (or leased out under a finance lease) separately, the
property is accounted for as an investment property only if an insignificant portion is held
for use in the production or supply of goods or services or for administrative purposes.
[IAS 40:10]IAS 40 does not include any guidance as to what constitutes an 'insignificant'
portion for this purpose. This is a deliberate omission – the Basis for Conclusions on IAS
40 explains that quantitative guidance has not been provided because the Board
concluded that such guidance could lead to arbitrary distinctions.
9 Related 5.3.1 Requirement to disclose details of other transactions with related parties –
Party general
Disclosure
In addition to the compensation of key management personnel), an entity is required to
disclose details of any other transactions with its related parties during the periods
covered by the financial statements. If such transactions have occurred, IAS 24 requires
disclosure of: [IAS 24:18]
• the nature of the related party relationship; and

• information about the transactions and outstanding balances, including
commitments, necessary for an understanding of the potential effect of
the relationship on the financial statements.
The following examples are cited in the Standard of related party transactions that require
disclosure: [IAS 24:21]
• purchases or sales of goods (finished or unfinished);
• purchases or sales of properties or other assets;
• rendering or receiving of services;
• leases;
• transfers of research and development;
• transfers under licence agreements;
• transfers under finance arrangements (including loans and equity
contributions in cash or in kind);
• provision of guarantees or collateral;
• settlement of liabilities on behalf of the entity or by the entity on behalf of
that related party; and
• commitments to do something if a particular event occurs or does not
occur in the future, including executory contracts (recognized and
unrecognized).
10 Revenue 9.2 Revenue recognised over time

recognition 9.2.1 Criteria for recognition of revenue over time
When any of the following criteria are met, this demonstrates that the entity is transferring
control of a good or service over time (i.e. satisfying a performance obligation over time)
and, consequently, should recognise revenue over time: [IFRS 15:35]
the customer simultaneously receives and consumes the benefits provided by the entity’s
performance as the entity performs;
a. the performance of the entity creates or enhances an asset (e.g. work in

progress) that the customer controls as the asset is created or enhanced;
or
b. the entity’s performance does not create an asset with an alternative use to
the entity and the entity has an enforceable right to payment for
performance completed to date.
9.3.1.1 Recognition of revenue over time when reasonable measure of progress

available
For each performance obligation satisfied over time (see 9.2), revenue is recognised over
time by measuring the progress towards complete satisfaction of that performance
Page 50
obligation. The objective is to depict the performance in transferring control of goods or

services promised to a customer (i.e. the satisfaction of an entity’s performance
obligation). [IFRS 15:39]
Risk Provision or Refer risk 04 of winter 2017

05 contingent
liability
Q.2 During the audit of Leather Goods Limited (LGL), it came to the knowledge of the audit team
that LGL has been dumping its chemical waste in an open area outside the city, without proper
treatment as per the required standards. When confronted, the Chief Financial Officer did not
consider it a serious issue and informed that LGL has managed to receive the required
certificate from the relevant regulatory authority.
Required:
Evaluate the above situation and explain what course of action the auditor would need to
take. (14)
• An understanding of the nature of the act and the circumstances in which it has occurred; and
• Further information to evaluate the possible effect on the financial statements such as
Possible effect on FS Audit Procedures
Going concern issue due to license termination Going concern assessement atleast for the period of
12 months
Cash flow and P&L Forecast
Assumptions are reasonable
Correspondence with regulator
Environmental cleaning cost /provision Ensure that assumption used by the management in
determining the amount of provision is reasonable
Penalty by Regulator Inspect the laws and regulation to assess the amount
of penalty
Inspect the correspondence file with regulator to
determine whether any penalty has been imposed
• The auditor shall discuss with appropriate level of management including TCWG in order to obtain
additional audit evidence unless prohibited by laws and regulation
• If management or, as appropriate, those charged with governance do not provide sufficient
information that supports that the entity is in compliance with laws and regulations and, in the
auditor’s judgment, the effect of the suspected non-compliance may be material to the financial
statements, the auditor shall consider the need to obtain legal advice.
• If management or, as appropriate, those charged with governance do not provide sufficient
information that supports that the entity is in compliance with laws and regulations and, in the
auditor’s judgment, the effect of the suspected non-compliance may be material to the financial
statements, the auditor shall consider the need to obtain legal advice.
• The auditor shall evaluate the implications of identified or suspected noncompliance in relation to
other aspects of the audit, including the auditor’s risk assessment and the reliability of written
representations, and take appropriate action.
• The Auditor needs to inspect the certificate from regulatory authority to assess whether such certificate
was issued before or after the date of dumping chemicals
• Inspect the correspondence file with the regulator to evaluate whether any such noncompliance was
communicated by the regulator to the Company
Page 51
• Auditor needs to check whether any payment made to regulator authority is in the normal course of
business or whether it represent any bribery
• Auditor also needs to assess whether He needs to communicate such non compliances to appropriate
regulatory authority after obtaining legal advice
Page 52
Q.3 You are the audit partner of Mansoor Noorani and Company, Chartered Accountants.
Following are the audit issues being faced on different clients:
(a) The previous year’s audit report of RP Limited was qualified by the predecessor auditor
for not recording impairment loss of Rs. 67 million on plant and machinery. However,
the management has recorded the impairment in the current year. Profit before tax for
current and prior year is Rs. 500 million and Rs. 300 millionrespectively.
(b) The management of DC Limited has informed you that they have not disclosed a
material litigation relating to an oil spill from its vessel as the disclosure would be
detrimental to the legal defence of the entity.
Required:
Discuss the auditor’s course of action along with implications on theaudit report. (12)
Answer:
STUDENT CORNER
Relevant section of ISA 710 which are reproduced below
• The previous year audit opinion was qualified by the previous auditor on account of non-recording of
impairment.
• The management has recorded the impairment in the current year which is also the Material Misstatement
because it is the departure from the requirement of IAS 08 which requires to restate the Financial statement
if material – As Rs.67 million represents 13.4% of PBT therefore it is a material misstatement
• The auditor shall request management to restate the financial statement in accordance with the requirement
of IAS 08.
• IF management restate – Auditor shall express unqualified opinion and does not refer to previous year
modification in the opinion and basis for opinion section
• If management do not restate the auditor shall express qualified opinion and refer to the corresponding
figure in the basis for qualified opinion
• In any case the auditor shall include OMP in its audit report describing that previous year audit was
performed by another firm of chartered accountants who through their report dated had expressed qualified
opinion.
Page 53
3(b)
IFRS BOX
3 Fair presentation and compliance with IFRS Standards
3.1 Requirement for fair presentation
Financial statements should present fairly the financial position, financial performance and cash flows of an
entity. Fair presentation requires the faithful representation of the effects of transactions, other events and
conditions in accordance with the definitions and recognition criteria set out in the Conceptual Framework.
The application of IFRS Standards, with additional disclosure when necessary, is presumed to result in
financial statements that achieve a fair presentation. [IAS 1:15]
3.2.2 Departures from IFRS Standards necessary to comply with national law
3.2.2-1
Departures from IFRS Standards necessary to comply with national law Financial statements should not be
described as complying with IFRS Standards when they involve departures from IFRS Standards that are
necessary to comply with national law. For example, consider an entity that is incorporated in a country
where legislation does not permit unrealised gains to be reported in profit or loss. The entity prepares its
financial statements in compliance with IFRS Standards including measuring derivatives at fair value;
however, to comply with the national laws, fair value gains on those derivatives are taken directly to equity
and are not recognised in profit or loss until the derivatives are derecognised. The entity cannot claim
compliance with IFRS Standards. The fact that an entity is prevented by legislation from complying with
IFRS Standards does not change the requirement in IFRS Standards.
3.5.1 Departure from IFRS Standards required when compliance would be

misleading
In extremely rare circumstances, management may conclude that compliance with a requirement in an IFRS
would be so misleading that it would conflict with the objective of financial statements set out in the
Conceptual Framework. In such circumstances, IAS 1 requires the entity to depart from that requirement 'if
the relevant regulatory framework requires, or otherwise does not prohibit, such a departure'. [IAS 1:19]
As per IAS 37 management needs to disclose the material litigation relating to oil spill
As per IAS 01 – the management may depart from the requirement of IFRS if:
• Required by law or regulation

• To achieve true and fair view
As there is no such condition exist therefore auditor shall request management and TCWG to make adequate
disclosure in the financial statements
If management made adequate disclosure in the financial statements – the auditor shall evaluate the adequacy of
disclosure. The auditor shall also discuss with legal advisor and obtain legal confirmation.
If management do not make adequate disclosure in the financial statements – it will be considered as a
misstatement on account of non-disclosure. If the impact Is material auditor shall express qualified opinion. If the
auditor believes the impact Is material and pervasive the auditor shall express adverse opinion.
Page 54
Q.4 Dildar Textile Limited (DTL) has a factory situated in Faisalabad. DTL has been facing acute
shortage of power supply, due to which it has not been able to fulfil its orders within the
committed time. Directors of DTL have decided to install gas driven power plant, to resolve
the issue of power breakdown and has approached its bank for a loan of Rs. 500 million
to finance the required expenditure.
To meet the bank’s requirement, DTL has prepared a forecast cash flow for the next three
years. The following further information is available:
(i) DTL intends to supply the surplus electricity produced to the national grid. Directors
expect an increase in the cash flow due to the proceeds of sale of electricity.
(ii) DTL plans to procure a vacant plot next to its facility for installation of theplant.
(iii) The installation of plant is expected to be completed by 30 June 2019.
(iv) Currently, 40% of the production is exported and the rest is sold locally. DTL is expecting
a rise in export as well as local orders by 30% and 20%respectively.
(v) Other major outflows pertain to raw material, payroll cost and marketing costs.
Required:
DTL has asked your firm of chartered accountants to provide a report on the forecast. State
the key examination procedures to be used in respect of the cash flow forecast. (10)
Answer:
• Inspecting the unfulfilled customer order to ensure that assumption regarding rise in local and export orders are
reasonable
• Inspect the supplier / vendor correspondence file to ensure that plant is expected to be completed by June 30,
2019
• Obtain the pro forma invoice / quotation for the procurement and installation of the generators.
• Inspect the correspondence file with gas regulator to assess whether gas connection will be made available to
the Company
• Inspect latest tariff rate to assess the gas rates use din PFI and ensure that it has been increased based on
historical financial information
• Inspect the technical and feasibility report to assess the total capacity of the plant
• Recalculate the excess electricity available to the plant by subtracting local requirement with total capacity
• Review the foreign exchange rates used for translating the exports sales.
• Inspect the market rate to verify the selling price used to sale excess electricity
• Observe the vacant plot and inspect the correspondence file with the buyer to ensure that new plant will be
installed at such plot
• Inspect that raw material, labour and other variable overhead cost had been increased proportionately in line
with increase in sales
• Inspect sales agreement with customer to assess its expiry and its impact on PFI
• Inspect purchase agreement with supplier to assess its expiry and its impact on PFI
• Perform recalculation and clerical checks
• When any elapsed portion of the current period is included in the prospective financial information, perform
procedure on the historical information
Page 55
Q.5 (a) You are the quality control partner in a firm of chartered accountants. Your firm has been
approached by Beta (Private) Limited (BPL) for appointment as the auditors for the year
ending 30 June 2019.
Your firm was also hired by BPL for valuation of its investment in an unlisted company
on August 2018. The valuation engagement had concluded in September 2018 and the
amount of investment is material to BPL’s financial statements.
Required:
Being the quality control partner, advise whether the audit of BPL could be accepted by
the firm. Also discuss the relevant threats, if any. (06)
Answer:
VALUATION SERVICES – Becomes an AUDIT CLIENT

BPL becomes an audit client during or after the period covered by the financial statements on which the firm will express an
opinion, the firm shall determine whether any threats to independence are created by:
(a) Financial or business relationships with the audit client during or after the period covered by the financial
statements but before accepting the audit engagement; or
(b) Previous services provided to the audit client by the firm or a network firm.
As the firm is providing valuation services to an audit client may create self-review threat.
A firm shall not provide a valuation service to an audit client that is not a public interest entity if:
• The valuation involves a significant degree of subjectivity; and

• The valuation will have a material effect on the financial statements on which the firm will express an opinion
Threats to independence are created if a non-assurance service was provided to an audit client during, or after the period
covered by the financial statements, but before the audit team begins to perform the audit, and the
service would not be permitted during the engagement period.
Examples of actions that might be safeguards to address such threats include:
• Having an appropriate reviewer review the audit and non-assurance work as appropriate.
• Engaging another firm outside of the network to evaluate the results of the non-assurance service (valuation service) or
having another firm outside of the network re-perform the non-assurance service (valuation service) to the extent necessary to
enable the other firm to take responsibility for the service.
Page 56
(b) You are the statutory auditor of two listed companies, Alpha Limited and Gama Limited.
Both the companies are in conflict with each other and involved in two major litigations.
Required:
Identify the threats involved in the above situation and also suggest related safeguards,
if any. (06)
CONFLICT OF INTEREST
A threat to objectivity or confidentiality may be created when a chartered accountant in practice performs services
for clients that are in dispute with each other.
The significance of the threat shall be evaluated and appropriate safeguard applied:
• The existence of separate practice areas for specialty functions within the firm, which might act as a barrier
to the passing of confidential client information between practice areas.
• Policies and procedures to limit access to client files.
• Confidentiality agreements signed by personnel and partners of the firm.
• Separation of confidential information physically and electronically.
• Specific and dedicated training and communication.
Examples of actions that might be safeguards to address threats created by a conflict of interest include:
• Having separate engagement teams who are provided with clear policies and procedures on maintaining
confidentiality.
• Having an appropriate reviewer, who is not involved in providing the service or otherwise affected by the
conflict, review the work performed to assess whether the key judgments and conclusions are appropriate.
Page 57
Q.6 (a) Explain the difference between:

(i) Type 1 report and type 2 report. (03)
(ii) Scope of assurance engagement under the ‘Inclusive Method’ and under the ‘Carve
out Method’ (03)
(b) You have been assigned the area of related parties in an audit of the financial
statements of a listed company where there are significant related party transactions.
Required:
Highlight what controls would you expect to be present in the company for the related
party transactions. (05)
Page 58
Student Corner –Control over related parties are mentioned in ISA 550
6(b) Controls over Related Party

Internal ethical codes, appropriately communicated to the entity’s personnel and enforced, governing the
circumstances in which the entity may enter into specific types of related party transactions.
•• Policies and procedures for open and timely disclosure of the interests that management and those charged with
governance have in related party transactions.
•• The assignment of responsibilities within the entity for identifying, recording, summarizing, and disclosing related
party transactions. Timely disclosure and discussion between management and those charged with governance of
significant related party transactions outside the entity’s normal course of business, including whether those charged
with governance have appropriately challenged the business rationale of such transactions (for example, by seeking
advice from external professional advisors).
•• Clear guidelines for the approval of related party transactions involving actual or perceived conflicts of interest,
such as approval by a subcommittee of those charged with governance comprising individuals
independent of management.
•• Periodic reviews by the internal audit function, where applicable.
•• Proactive action taken by management to resolve related party disclosure issues, such as by seeking advice from
the auditor or external legal counsel.
•• The existence of whistle-blowing policies and procedures, where applicable.
Page 59
Q.7 (a) Your firm Gul Khan and Company, Chartered Accountants (GK) is the auditor of Yameen
Corporation Limited (YCL), a listed company which has three subsidiaries. In the
planning meeting, the Chief Financial Officer of YCL informed you about the following
developments which took place during the year ending 31 December2018:
(i) Asia Power Limited (APL) was incorporated in a foreign country named Blueland
in January 2018. YCL is the main sponsor and holds 75% shares in APL. Rest of
the shares are held by a local sponsor. APL is being audited by a firm in Blueland.
APL is providing project management services to a power plant in Blueland. The
fee for project management services is agreed at USD 30 million while the expected
cost is USD 22.5 million. The revenue is being recognized on identified milestone
basis in the books of APL.
(ii) There was a major reshuffle in one of the business segments of YCL which resulted
in several employees being laid off. The reshuffling was carried out when several
ghost employees were identified by the internal audit department. Consequently,
the management of YCL decided to outsource its payroll processing department
along with few other activities related to the finance department to another
company.
Required:
In light of the above mentioned information what considerations should be taken into
account while devising the over-all audit strategy. (13)
Note: Audit procedures are not required
Answer:
STUDENT CORNER – ISA 300 will help you to identify general points that we consider in audit strategy. For
more specific points considering the requirement of question the student then need to refer the relevant ISA
As per ISA 300

Characteristics of Engagement
The financial reporting framework OF APL, including any need for reconciliations to financial reporting framework
of YCL
The nature of the control relationships between a YCL and its components i.e. APL that determine how the group
is to be consolidated.
The reporting currency to be used by APL, including any need for currency translation for the financial information
audited.
Reporting Objective
Communication with auditors of APL regarding the expected types and timing of reports to be issued and other
communications in connection with the audit of APL.
Significant Factors, Preliminary Engagement Activities, and Knowledge Gained

on Other Engagements
The determination of materiality for APL and communication thereof to component auditors in accordance with ISA
600.2
Preliminary identification of areas where there may be a higher risk of material misstatement such as revenue
recognition
AS per ISA 600
Understanding the Group, Its Components, and Their Environments

The auditor is required to identify and assess the risks of material misstatement
through obtaining an understanding of the entity and its environment including group wide controls
Page 60
Understanding the Component Auditor

If the group engagement team (YCL) plans to request a component auditor to perform work on the financial
information of a component, the group engagement team shall obtain an understanding of the following
(a) Whether the component auditor understands and will comply with the ethical requirements that are relevant to
the group audit and, in particular, is independent.
(b) The component auditor’s professional competence
(c) Whether the group engagement team will be able to be involved in the work of the component auditor to the
extent necessary to obtain sufficient appropriate audit evidence.
(d) Whether the component auditor operates in a regulatory environment that actively oversees auditors.
Responding to Assessed Risks

24. The auditor is required to design and implement appropriate responses to
address the assessed risks of material misstatement i.e. response over revenue recognition.
• Involvement of expert to determine the milestone achieved by the component

• Evaluate the revenue recognition policy and ensure that it is consistent with the requirement of IFRS 15
• Perform test of controls on revenue recognition
The group engagement team shall also determine the nature, timing and extent of its
involvement in the work of the component auditors
ii YCL – Fraud – Outsource – Internal Audit

• As the fraud was identified by Internal Audit therefore to
what extent, the work of the function can be used, or internal auditors can be used to provide direct assistance, for
purposes of the audit.
• The entity’s use of service organizations and how the auditor may obtain evidence concerning the design or
operation of controls performed by them.
o the user auditor (YCL) shall obtain an understanding of how a user entity uses the services of a service
organization in the user entity’s operations,
▪ The nature of the services provided by the service organization and
the significance of those services to the user entity,
o The nature and materiality of the transaction processed
o The degree of interaction between the activities of the service organization and those of the
user entity; and
o The nature of the relationship between the user entity and the service organization
o the user auditor shall evaluate the design and implementation of relevant controls at the user entity that
relate to the services provided by the service organization, including those that are applied to the
transactions processed by the service organization
o If the user auditor is unable to obtain a sufficient understanding from the user entity, the user auditor
shall obtain that understanding from one or more of the following procedures:
o Obtaining a type 1 or type 2 report, if available;
o Contacting the service organization, through the user entity, to obtain specific information
o Visiting the service organization and performing procedures that will provide the necessary
information about the relevant controls at the service organization; or
o Using another auditor to perform procedures that will provide the necessary information about the
relevant controls at the service organisation
.
ISA 240 – Fraud
o Auditor shall maintain professional skepticism throughout the audit,

o Assign and supervise personnel taking account of the knowledge, skill and ability of the individuals
o Incorporate an element of unpredictability in the selection of the nature, timing and extent of audit
procedures
o Auditor shall consider this fraud on other aspect of audit
Page 61
(b) You are the audit manager in a firm of chartered accountants. The audit of a client
TC Limited (TCL) is in the finalisation stage. TCL has a foreign subsidiary,WCL.
The financial statements of WCL are not in compliance with IFRS-15 as the regulator in
foreign country has deferred adoption of IFRS-15. Your audit team has asked TCL’s
management to assess the impact due to non-adoption of IFRS-15 and revise the
financial statements accordingly. According to the management of TCL, the local
auditor of WCL has expressed an unqualified audit report on WCL’s financial
statements. They believe that the auditor should rely on the report issued by WCL’s
auditor. In this respect they have referred to previous year’s audit report which clearly
states that the firm’s opinion was based solely on the report issued by the subsidiary’s
auditor.
Required:
Discuss how you will respond to the argument presented by TCL’s management. (05)
(THE END)
Answer:
IFRS BOX
10.2 Uniform accounting policies
Consolidated financial statements should be prepared using uniform accounting policies for like transactions
and other events in similar circumstances. [IFRS 10:19]
When such group accounting policies are not adopted in the financial statements of a member of the group,
appropriate adjustments should be made in preparing the consolidated financial statements to ensure
conformity with the group’s accounting policies. [IFRS 10:B87]
ICAP CIRCULAR May 12, 2015
Page 62
b.
As per IFRS 10
Consolidated financial statements should be prepared using uniform accounting policies for like transactions and
other events in similar circumstances
When such group accounting policies are not adopted in the financial statements of a member of the group,
appropriate adjustments should be made in preparing the consolidated financial statements to ensure conformity
with the group’s accounting policies
Therefore, based on the above requirement, TCL shall record appropriate adjustment
According to management as WCL auditor has expressed an unqualified opinion therefore auditor shall rely on
subsidiary’s auditors report is not correct because subsidiary’s financial statements are prepared in accordance with
local applicable financial reporting framework
As the Group Auditor express an opinion on the applicable financial reporting framework on which IFRS 15 is
applicable therefore management needs to record adjustment else it would be considered as a material
misstatement which requires a modified opinion
Also, according to management the auditor has stated in its last year report that firm’s opinion was based solely on
the report issued by the subsidiary’s auditor is relevant in the last year but is not relevant for the current year because
ICAP has adopted ISA 600 and consequently issuance of 2018 Regulations by SECP eliminates the previous
concept of division of responsibilities, thus making the group auditor responsible for the audit opinion on the
consolidated financial statements, without making reference in the audit report to any other auditor involved in the
audit of subsidiaries
Page 63


Q.1 Your firm has been appointed as the auditor of Best Industries Limited (BIL) for the year
ending 30 June 2019. BIL is a listed company and has three production plants. Plants A and
B manufacture industrial chemicals whereas Plant C is used in manufacturing of various
cosmetic and skin care products.
The following information has been gathered by the audit team:
(i) Ghufran is the CEO and holds, directly and indirectly, majority of the shareholdings in
BIL. There are seven other directors on the board who meet four times a year to approve
the quarterly financial statements and endorse the decisions taken by Ghufran during
the quarter.
(ii) Considering the decline in demand of the products, BIL has taken the following
decisions during the year:
▪ Close Plant B with effect from 31 August 2019. The public announcement of this
decision was made on 15 April 2019.
▪ Introduce a new incentive package for distributors in January 2019 to boost the sales
of industrial chemicals. The sales commission rate is dependent on achieving the
various annual target levels set by the BIL’s management.
▪ Launch a customer loyalty program in February 2019 in which customers are
awarded loyalty points on each purchase of cosmetic and skin care products from
selected retail outlets and online stores. The management believes that this initiative
would increase the demand of cosmetic and skin care products.
(iii) Staff at production and marketing departments are hired at low salaries but they are
given high annual bonuses on achieving their targets.
(iv) Last year, BIL was selected for tax audit in which the income tax department had
disallowed certain business expenditures. BIL filed an application against the order
issued by the income tax department. However, it lost the first appeal and has recently
filed a second appeal to the relevant income tax authority.
Required:
that you would perform to address those risks. (24)
Page 64
S.No Risk Heading Audit Risk Audit Procedures

1 Initial Audit Since it is the first year audit of best 1. Obtain Last year audited financial statements.
Engagement Industries limited therefore there is a 2. Inspect whether previous year audited
risk that opening balances might be balances are appropriately carried forward.
materially misstated and are not 3. Verify whether accounting policy applied on
carried forward correctly or the opening balances are appropriate.
accounting policy might not be 4. Review working paper of predecessor auditor.
consistently applied.
2 Closure of Company has decided to close the 1. Inquire management if any decision has been
Plant plant Therefore there is a risk that finally made for sale of the plant.
the criteria for classification of non- 2. Inspect the minutes of the board of director’s
current assets as held for sale are meeting to obtain audit evidence regarding
met and not being classified as held decision of the closure of plant
for sale as per IFRS 05 or 3. Inspect the correspondence file or agreement if
Criteria met after the reporting period any with the prospective buyer
but disclosures in this respect are not 4. Assess whether plant is available for
made in the financial statements as immediate sale and disposal within 12 months
per IFRS 05. is highly probable
5. If the criteria for classification of non-current
assets as held for sale are met subsequently,
ensure that it is adequately disclosed in the
financial statements as per the requirement of
IFRS 05
3 Management Since Ghufran holds majority 1. Review accounting estimates for biases and
over ride of shareholding directly and indirectly evaluate whether the circumstances producing
control and also the CEO therefore there is the bias represents risk of material
a risk of Management Override of misstatement due to fraud
Control 2. Test the appropriateness of JE by
a. Making inquiries of individual involved
in the financial reporting process
b. Select JE at the end of the reporting
period or consider it throughout the
period
c.
3. Evaluate whether the business rationale for
significant transaction outside the course of
business suggest FFR or MOA
4 Impairment of Considering the decline in demand of
Plant B Company’s product therefore there is • Obtain an understanding of management process
a risk that plants may have been related to identifying, estimating and recording
impaired and no adequate impairments for fixed assets to determine whether it
impairment may have been recorded is appropriate in the circumstances and in
by management in accordance with accordance with the applicable financial reporting
IAS 36 framework i.e. IAS 36
• Check / inspect that assumptions used by the

management such as discount rate and future cash
flows are reasonable
• Obtain management expert report or consider

involving auditor’s expert

subsequent interim FS to compare the projected
result with the actual result
5 Sales Commission paid to distributors are The auditor shall:

Commission dependent on achieving the annual 1. Inspect the GDN to ensure that all sales are
sales target therefore there is a risk occurred
of fraud because there is an 2. Perform late cut off testing to ensure that
incentive / pressure to commit FFR revenue of future periods is not recorded in the
by overstating sales current year
Page 65
3. Performing substantive analytical procedures

relating to revenue using disaggregated data, for
example, comparing revenue reported by month
and by product line or business segment during the
current reporting period with
comparable prior periods. Computer-assisted audit
techniques may be useful in
identifying unusual or unexpected revenue
relationships or transactions
4. Confirming with customer’s certain relevant
contract terms and the absence of
side agreements, because the appropriate
accounting often is influenced by such
terms or agreements and basis for rebates or
the period to which they relate are often poorly
documented
6 Staff given Staff at production and marketing The auditor shall:

High annual department are hired at low salaries 1. Obtain an understanding of the targets sets by
bonuses but are given high annual bonuses the management
on achieving their targets therefore 2. Inspect the GDN to ensure that all sales are
there is a risk of fraud because staff occurred
has incentive / pressure to commit 3. Being physically present at one or more locations
FFR. at period end to observe goods being shipped or
being readied for shipment (or returns awaiting
processing) and performing other appropriate sales
and inventory cutoff Procedures such as perform
late cut off testing to ensure that revenue of future
periods is not recorded in the current year
7 Restructuring As management has decided to 1. Obtain and understand the management

provision close plant B therefore there is a risk process regarding the recording of
that management may not have restructuring provision
restructuring provision in accordance 2. Inspect the correspondence with the labour
with the requirement of IAS 37 union / agreement if any to ensure that amount
of provision is correct
3. Perform subsequent event procedures such as
subsequent agreement / payment if any
8 Inventory Since there is a decline in demands The auditor shall:

of BIL product therefore there is a 1. Understand the management’s process
risk that BIL’s inventory may have regarding recording of impairment.
been impaired and no impairment 2. Obtain ageing analysis of inventory to identify
have been recorded by management obsolete inventory which needs to be impaired.
in accordance with IAS 2. 3. Inspect subsequent selling price of inventory.
9 Tax As BIL has been disallowed by tax The auditor shall:
authorities some business 1. Inspect with BIL’s tax advisor regarding the
expenditure and has lost the first outcome of the second appeal.
appeal therefore there is a risk that 2. Send confirmation to tax and legal advisor
management may not have recorded 3. Considering the use of own auditor expert to
provision. assess the outcome of the case
10 Customer The Management has launched Obtain an understanding of CLP from management
Loyalty customer loyalty program therefore Inspect document to assess the terms and condition
Programmed there is a risk that revenue may not and evaluate the transaction price and performance
have been recorded as per IFRS 15 obligation
Evaluate reasonableness of management assumption
regarding the expectation of point redemptions.
Ensure that revenue has been recorded as per IFRS
15.
Page 66
S.no Risk description IFRS / ISAREQUIREMENT
01 Initial Audit ISA 510
Engagement Audit Procedures
Opening Balances
5. The auditor shall read the most recent financial statements, if any, and the
predecessor auditor’s report thereon, if any, for information relevant to
opening balances, including disclosures.
6. The auditor shall obtain sufficient appropriate audit evidence about
whether the opening balances contain misstatements that materially affect
the current period’s financial statements by:
(a) Determining whether the prior period’s closing balances have been
correctly brought forward to the current period or, when appropriate, have
been restated;
(b) Determining whether the opening balances reflect the application of
appropriate accounting policies; and
(c) Performing one or more of the following:
(i) Where the prior year financial statements were audited, reviewing the
predecessor auditor’s working papers to obtain evidence regarding the
opening balances;
(ii) Evaluating whether audit procedures performed in the current
period provide evidence relevant to the opening balances; or
(iii) Performing specific audit procedures to obtain evidence regarding the
opening balances.
02 Closure of Plant Refer Q5 of winter 2017
03 Management over Audit Procedures Responsive to Risks Related to Management Override of
ride of control Controls
33Irrespective of the auditor’s assessment of the risks of management
override of
controls, the auditor shall design and perform audit procedures to:
(a) Test the appropriateness of journal entries recorded in the general ledger
and other adjustments made in the preparation of the cr. In designing and
performing audit procedures for such tests, the auditor shall:
(i) Make inquiries of individuals involved in the financial reporting process
about inappropriate or unusual activity relating to the processing of journal
entries and other adjustments;
(ii) Select journal entries and other adjustments made at the end of a
reporting period; and
(iii) Consider the need to test journal entries and other adjustments
throughout the period. (Ref: Para. A42–A45)
(b) Review accounting estimates for biases and evaluate whether the
circumstances producing the bias, if any, represent a risk of material
misstatement due to fraud. In performing this review, the auditor shall:
(i) Evaluate whether the judgments and decisions made by
management in making the accounting estimates included in the
financial statements, even if they are individually reasonable,
indicate a possible bias on the part of the entity’s management
that may represent a risk of material misstatement due to fraud.
If so, the auditor shall reevaluate the accounting estimates taken
as a whole; and Perform a retrospective review of management judgments
and assumptions related to significant accounting estimates reflected in the
financial statements of the prior year.
(c) For significant transactions that are outside the normal course of business
for the entity, or that otherwise appear to be unusual given the auditor’s
understanding of the entity and its environment and other information
obtained during the audit, the auditor shall evaluate whether the business
rationale (or the lack thereof) of the transactions suggests that they may have
been entered into to engage in fraudulent financial reporting or to conceal
misappropriation of assets. (Ref: Para. A49)
04 Impairment of Refer risk 08 of Winter 2017
Plant B
05 Sales Commission Specific Responses—Misstatement Resulting from Fraudulent
06 Staff given High Financial Reporting
annual bonuses Examples of responses to the auditor’s assessment of the risks of material
misstatement due to fraudulent financial reporting are as follows:
Revenue Recognition
Page 67
● Performing substantive analytical procedures relating to revenue using
disaggregated data, for example, comparing revenue reported by month and
by product line or business segment during the current reporting period with
comparable prior periods. Computer-assisted audit techniques may be useful
in identifying unusual or unexpected revenue relationships or transactions.
● Confirming with customer’s certain relevant contract terms and the
absence offside agreements, because the appropriate accounting often is
influenced by such terms or agreements and basis for rebates or the period
to which they relate are often poorly documented. For example, acceptance
criteria, delivery and
payment terms, the absence of future or continuing vendor obligations, the
right to return the product, guaranteed resale amounts, and cancellation or
refund provisions often are relevant in such circumstances.
● Inquiring of the entity’s sales and marketing personnel or in-house legal
counsel regarding sales or shipments near the end of the period and their
knowledge of
any unusual terms or conditions associated with these transactions.
● Being physically present at one or more locations at period end to observe
goods being shipped or being readied for shipment (or returns awaiting
processing) and performing other appropriate sales and inventory cutoff
procedures.
● For those situations for which revenue transactions are electronically
initiated, processed, and recorded, testing controls to determine whether
they provide assurance that recorded revenue transactions occurred and are
properly recorded.
07 Restructuring Refer risk 05 of Summer 2018
provision
08 Inventory Refer risk 07 of winter 2017
09 Tax Refer risk 04 of winter 2017
10 Customer Loyalty 6.3.5.1 Customer options for additional goods or services – general
Programmed Customer options to acquire additional goods or services for free or at a
discount come in many forms, including sales incentives, customer award
credits (or points), contract renewal options or other discounts on future
goods or services. [IFRS 15:B39]
When a contract grants the customer an option to acquire additional goods
or services, that option gives rise to a performance obligation in the contract
only when it provides a material right to the customer that the customer would
not have received without entering into that contract (e.g. a discount is
incremental to the range of discounts typically given for those goods or
services to that class of customer in that geographical area or market). If the
option provides a material right to the customer, the customer is, in effect,
paying the entity in advance for future goods or services. Therefore, the entity
should defer the recognition of revenue allocated to that option until those
future goods or services are transferred, or when the option expires. [IFRS
15:B40]
If the amount that the customer would pay for the additional good or service
reflects the stand-alone selling price for that good or service, the option does
not provide the customer with a material right even if the option can be
exercised only by entering into a previous contract. In these circumstances,
the entity has merely made a marketing offer, and it will account in
accordance with IFRS 15 only when the customer exercises the option to
purchase the additional goods or services. [IFRS 15:B41]
Page 68
Q.2 (a) Your firm has been hired by Pedro Limited to assist the management in preparation of
certain financial information. You are in disagreement with some of the adjustments
made by the management in the financial information and consider these to be
inaccurate.
Required:
Discuss how you would resolve the disagreement along with the implication, if any,
on the report. (05)
Answer:
STUDENT CORNER – As per ISRS 4410
34 If the practitioner becomes aware during the course of the engagement that:
(a) The compiled financial information does not adequately refer to or describe the applicable financial reporting
framework; (Ref: Para.A53)
(b) Amendments to the compiled financial information are required for the financial information not to be
materially misstated; or (Ref: Para. A54–A56)
(c) The compiled financial information is otherwise misleading, (Ref: Para. A57)
the practitioner shall propose the appropriate amendments to management.
35. If management declines, or does not permit the practitioner to make the proposed amendments to the
compiled financial information, the practitioner shall withdraw from the engagement and inform management
and those charged with governance of the reasons for withdrawing. (Ref: Para. A58)
36. If withdrawal from the engagement is not possible, the practitioner shall determine the professional and legal
responsibilities applicable in the circumstances.
If the practitioner become aware during the course of engagement that

• Amendments to the compiled financial information are required for the financial information not to be materially
misstated; or
• The compiled financial information is otherwise misleading
• The practitioner shall propose the appropriate amendments to management.
• If management declines, or does not permit the practitioner to make the proposed amendments to the compiled
financial information, the practitioner shall withdraw from the engagement and inform management and those
charged with governance of the reasons for withdrawing.
• If withdrawal from the engagement is not possible, the practitioner shall determine the professional and legal
responsibilities applicable in the circumstances.
• If Practitioner is required to issue report – the practitioner shall not refer to ISRS in its report.
Page 69
(b) You are the audit manager of a listed company, Brace Limited (BL). During your
discussion with the audit team deputed on the review assignment of BL’s interim
financial statements for the half year ended 31 May 2019, the following matters are
highlighted:
(i) Auditor was not asked to attend the stock count at the end of the period.
Consequently, the audit team relied on the physical count sheets provided by the
management.
(ii) BL has significant accumulated losses and its current liabilities exceed the current
assets.
(iii) Provision for bad debts is in line with the prior period. However, age-analysis of
debtors has not been used.
(iv) Due to time constraints, the review of subsequent events has not been carried out
by the audit team.
Required:
Discuss how you would deal with the above matters and the possible implications of
each of the above matters on the review report. (10)
Answer:
STUDENT CORNER – to draft this answer student needs to consider inquiry and analytical procedures – in
addition to that student should refer to ISRE 2400 to identify specific procedures such as going concern
subsequent event that are mentioned in ISRE 2400. Refer para 47 to 65 of ISRE 2400
OVERALL SCOPE / OBJECTIVE AS PER ISRE 2400

The auditor should make inquiries, primarily of persons responsible for financial and accounting matters, and
perform analytical and other review procedures to enable the auditor to conclude whether, on the basis of the
procedures performed, anything has come to the auditor’s attention that causes the auditor to believe that the
interim financial information is not prepared, in all material respects, in accordance with the applicable financial
reporting framework.
1. Stock Count
The auditor is not required to perform the stock count. Hence it is not the scope limitation. However, auditor may
perform the following review procedure
• Management process for inspecting and counting inventory
• Inquire management about any old and obsolete inventory
If the auditor performed above procedures and not found any material misstatement – Unmodified conclusion shall
be expressed
2. Going Concern
This is the events and condition that may cast significant doubt on the entity’s ability to continue as a going concern
therefore auditor shall
• Inquire of management as to its plans for future actions based on its going concern assessment, the
feasibility of these plans, and whether management believes that the outcome of these plans will improve
the situation; and
• Consider the adequacy of the disclosure about such matters in the interim financial information
• If adequate disclosure is made in the interim financial information, the auditor should add an emphasis of
matter paragraph to the review report to highlight a material uncertainty relating to an event or condition
that may cast significant doubt on the entity’s ability to continue as a going concern.
Page 70
3. Bad Debt Expense

• The auditor may perform inquiries with management whether assumptions used by the management are
reasonable
• The auditor may also perform analytical procedures such as receivable turnover days and bad debt
expense is in line with revenue and receivable
• If the auditor performed above procedures and not found any material misstatement – Unmodified
conclusion shall be expressed
4. Subsequent Event
• The auditor should inquire whether management has identified all events up to the date of the review report
that may require adjustment to or disclosure in the interim financial information. It is not necessary for the
auditor to perform other procedures to identify events occurring after the date of the review report.
• If the auditor performed above procedures and not found any material misstatement – Unmodified
conclusion shall be expressed
Page 71
Q.3 You are a partner in a firm of chartered accountants. Your firm has recently been approached
by an off-shore entity incorporated in British Virgin Island for appointment as an auditor for
the year ending 30 September 2019. The entity is following locally developed accounting
standards in the preparation of its financial statements.
On your query regarding availability of records and information, the entity has informed you
that they will electronically send the scanned copies of the records/information required for
the audit purpose.
Required:
Discuss the matters that your firm should consider before accepting the above audit engagement.
(11)
Answer:
STUDENT CORNER:
The only trick that can help the students to draft the answer is to understand the audit diagram. The
question pertains to before acceptance therefore ISA 300 – Preliminary engagement activities is relevant.
• Consider whether local laws and regulation allows the local auditor to audit offshore entity
• Consider whether offshore local laws and regulations allows the company to appoint auditor that are
not registered in the Country.
PRELIMINARY ENGAGEMENT ACTIVITIES
The auditor shall undertake the following activities at the beginning of the
current audit engagement:
• Performing procedures required by ISA 220 regarding the continuance
of the client relationship and the specific audit engagement;
oThe integrity of the principal owners, key management and those charged with governance of the entity;
oWhether the engagement team is competent to perform the audit engagement and has the necessary
capabilities, including time and resources;
o Whether the firm and the engagement team can comply with relevant ethical requirements; and
o Significant matters that have arisen during the current or previous audit engagement, and their
implications for continuing the relationship.
• Communicate with the previous auditor to identify any reason why the above engagement shall not be accepted
• Evaluating compliance with relevant ethical requirements, including independence, in accordance with ISA 220
and
• Establishing an understanding of the terms of the engagement, as required by ISA 210
o whether FRF is acceptable
EVALUATION OF SUFFICIENT APPROPRIATE AUDIT EVIDENCE
The information that is available to the auditor is in scanned copies therefore it is less reliable
Also, auditor needs to perform certain procedures such as:
• Observation of inventory count and fixed assets
• Inspection of Inventory and fixed assets
• Observation of internal controls
• If the limitation on the scope of auditor’s work is such that the auditor believes the limitation will result in the
auditor disclaiming an opinion on the financial statements, the auditor shall not accept such a limited
engagement as an audit engagement
Page 72
Q.4 Alpha Textile Limited (ATL) is a long standing listed audit client of your firm. Haris has been
the audit engagement partner of ATL for the last five years. The firm is considering to appoint
Munir as ATL’s engagement partner and Haris either as ATL’s quality control review partner
or client relationship partner.
Required:
In the light of Listed Companies (Code of Corporate Governance) Regulation, 2017 and
ICAP’s Code of Ethics, discuss the validity of Haris’s appointment either as ‘quality control
review partner’ or ‘client relationship partner’. (08)
Answer:
Haris has been the Audit Engagement Partner of ATL for the last 5 years therefore familiarity and self-interest
threats might be created.
Examples of actions that might be safeguards to address such familiarity or self-interest threats include:
• Changing the role of the Haris on the audit team or the nature and extent of the tasks the Haris performs.
• Having an appropriate reviewer who was not an audit team member review the work of the Haris
• Performing regular independent internal or external quality reviews of the audit of ATL
Audit Clients that are Public Interest Entities

As ATL is a PUBLIC Interest Entity, Haris shall not act in any of the following roles, or a combination of such
roles, for a period of more than seven cumulative years unless the law prescribes a shorter period (the “time-on”
period):
(a) The engagement partner;

(b) The individual appointed as responsible for the engagement quality control review; or
(c) Any other key audit partner role.
After the time-on period, the individual shall serve a “cooling-off” period which is 5 years.
As per ICAP code of Ethics Haris can be Quality Review Partner or Client Service Partner for a period of 2 more
years.
However as per COCG

All listed companies other than those in the financial sector shall, at the minimum, rotate the engagement partner
after every five years.
Therefore, based on the local laws and regulations which shall prevail over the ICAP Code of Ethics hence Haris
cannot be the Engagement Partner and the cooling off period shall be applied based on ICAP Code of ETHICS
which is 5 years.
Also as the time on period is 5 years based on local laws and regulation therefore he can also not be involved as
the Quality Partner
As per ICAP Code of Ethics – Key Audit Partners i.e. defined as The engagement partner, the individual
responsible for the engagement quality control review, and other audit partners, if any, on
the engagement team who make key decisions or judgments on significant matters with respect to the audit of the
financial statements on which the firm will express an opinion.
If the firm believes that involvement of Haris as a client service partner will enabled, him to make key decisions or
judgement or significant matters with respect to audit of the financial statements of ATL then he cannot be
involved as Client service partner.
Page 73
Q.5 (a) On 25 March 2019, your firm issued the audit report on the financial statements of Noor
Limited (NL) for the year ended 31 December 2018. During the first week of June 2019,
NL’s management has requested you to issue the report on summarized financial
statements for the year ended 31 December 2018 for the use of its potential investor after
incorporating the effect of a material litigation decided in favor of NL on 31 May 2019.
Required:
Discuss your firm’s responsibility in respect of gathering the audit evidence and
issuing a report on summarized financial statements. (05)
Answer:
One of the key procedures on summarized financial statement is as follow:
Compare the summary financial statements with the related information in the audited financial statements to
determine whether the summary financial statements agree with or can be recalculated from the related
information in the audited financial statements.
The opinion that auditor express on summarized financial statement is as follow:

The accompanying summary financial statements are consistent, in all material respects, with the audited
financial statements, in accordance with [the applied criteria];
12. The auditor’s report on the summary financial statements may be dated later than the date of the auditor’s
report on the audited financial statements. In such cases, the auditor’s report on the summary financial
statements shall state that the summary financial statements and audited financial statements do not reflect
the effects of events that occurred subsequent to the date of the auditor’s report on the audited financial
statements.
13. The auditor may become aware of facts that existed at the date of the auditor’s report on the audited financial
statements, but of which the auditor previously was unaware. In such cases, the auditor shall not issue the
auditor’s report on the summary financial statements until the auditor’s consideration of such facts
in relation to the audited financial statements in accordance with ISA 560 has been completed.
The Auditor cannot accept the management request to issue report on summarized financial statements after
incorporating the effect of material litigation decided in favor of the company after the date of audit report on the
financial statements of the company because the SFS are not prepared in accordance with the FS – As FS does
not reflect such litigation event.
However, Auditor shall perform procedures based on ISA 560 because fact has become known to the auditor
after the date of audit report – if management agree to amend FS (incorporating litigation) then auditor may
accept to issue report on SFS
Page 74
(b) The following situations have arisen at different audit clients of your firm. The year-end
in each case is 31 March 2019:
(i) Afzal Limited is a listed company. During its audit of financial statements, the
provincial sales tax authority has seized the accounting records of the company
on the charges of tax evasion. (05)
(ii) Gems Limited (GL) is a leading manufacturer of jewelry made from precious
stones. GL sources the stones from three suppliers located in Khyber Pakhtunkhwa
(KPK). On 10 May 2019, a severe earthquake struck KPK destroying the mines
and the stone extraction units located in KPK. GL’s plant was also partially
damaged due to the earthquake.
Upon discussion with the management, you came to know that one of the GL’s
plants was affected by the earthquake and due to adequate insurance, they would
be able to claim the loss amount from insurance company. They further informed
that GL could continue to use the other plantsfor production. (10)
Required:
Discuss your firm’s course of action along with the implications on the audit report.
Answer:
Student Corner
AFZAL LIMITED – The student primarily drafted the answer from ISA 705 which is not correct – there is a tax
evasion which creates doubt over management integrity therefore ISA 240 will apply and thereafter ISA 705 will
apply
GEMS LIMITED – There are various plant and machinery but still it’s a going concern issue because of the
destruction of mines and the company is unable to purchase from supplier
1 AFZAL LIMITED
Course of Action
As the provincial tax authority has seized the accounting record of the Company on the charges of tax evasion
therefore it may indicate the possibility of fraud therefore the course of action shall be
• The auditor shall evaluate the implications of the above tax evasion in relation to other aspects of the audit,
particularly the reliability of management representations, recognizing that an instance of fraud is unlikely to
be an isolated occurrence.
• If the auditor identifies a misstatement, whether material or not, and the auditor has reason to believe that it is
or may be the result of fraud and that management (in particular, senior management) is involved, the auditor
shall reevaluate the assessment of the risks of material misstatement due to fraud and its resulting impact on
the nature, timing and extent of audit procedures to respond to the assessed risks.
• The auditor shall also consider the reliability of audit evidence previously obtained
• May consider to withdraw
• The auditor shall communicate to relevant hierarchy and authority after obtaining legal advice
• If the auditor believes based on the audit evidence obtained that it does not indicate the possibility of fraud,
then it will be considered as a scope limitation beyond the control of an entity therefore auditor would be
unable to obtain SAAE
• If the impact is material auditor shall express qualified opinion
• If the impact is material and pervasive auditor shall express Disclaimer
Page 75
2.GEMS LIMITED
Page 76
Q.6 During the audit of Shahid Limited, your IS audit team has reported the followingissues:
(i) The client did not have an approved business continuity plan.
(ii) There were several program changes made during the year which were not approved by
the higher management. However, a complete log of program changes was maintained.
(iii) IDs of the employees who have left the company are not deleted on a timely basis.
Required:
Discuss the possible course of action that you may take in respect of the above identified issues.
(Reporting implications are not required) (12)
Answer:
APPROVED BUSINESS CONTINUITY PLAN
Approved business continuity plan is the element of GITC – however it will not affect the overall audit strategy and
audit plan because this will not affect the initiation, processing and recording of transaction.
However, auditor may communicate such deficiency in Internal Control to TCWG as per the requirement of ISA
260.
Program Changes
Program changes is the element of GITC – and it will affect the way the transaction is initiated, processed and
recorded. Therefore, there is a risk that unauthorized changes may have been made.
As program changes are not approved by higher management this is the severe control deficiency however
auditor may have performed indirect control to test the operating effectiveness of Control
Such indirect control may include:

• Obtain understanding about program changes
• Understand the application that initial, process or record transaction in the financial statements
• Review the logs maintained by the management to ensure that program changes are as per the requirement
If the auditor concludes that Controls over program changes are ineffective the auditor needs to change its audit
strategy and audit plan by performing following audit procedures:
• Test manual controls – such as whether program changes are reviewed and approved including
reconciliation exercise;
• Perform extensive substantive procedures such as inspection of supporting document; and
• Perform substantive analytical procedures.
However, auditor may communicate such deficiency in Internal Control to TCWG as per the requirement of ISA
260.
ID’s of the Company not deleted
ID’s of the Company are not deleted may create a risk that unauthorized changes may be made. This is a severe
control deficiency and auditor needs to test indirect control to test the operating effectiveness of controls by:
• Obtain the list of employees resigned during the year;

• Inspect the leave form to establish the last date of employee; and
• Obtain the logs and ensure that no activity has been conducted from the id of such employees.
If the auditor concludes that Controls over program changes are ineffective the auditor needs to change its audit
strategy and audit plan by performing manual control and extensive substantive procedures including substantive
analytical procedures.
Page 77
Q.7 During the audit of consolidated financial statements of Voltage Limited (VL), for the year
ended 31 May 2019, you have identified the following matters which will be reported as key
audit matters in the audit report:
(i) VL has acquired 65% shares in Pyrus Limited.

(ii) VL has entered into a major project in relation to the development and maintenance of
its electricity transmission infrastructure which is expected to be completed over a three
year period.
Required:
Draft the key audit matters section to be included in the audit report of VL’s consolidated
financial statements. (You may assume necessary detailswhere required) (10)
(THE END)
Key Audit Matter How the matter addressed in our Audit

Acquisition of Pyrus Limited • Inspected the acquisition agreement to verify the
Refer to note 1.3 of these financial statements that number of shares acquired, consideration paid
describes that Company has acquired 65% shares of and acquisition date
Pyrus limited for the consideration of Rs. 3 billion • We have challenged the management assumption
to determine FV of net asset acquired
The acquisition was significant event and was material • We have engaged our auditor expert to
to the financial statements. corroborate FV of net asset
Acquisition required significant estimates and • Ensure that fair value of NCI is calculated
judgement therefore we have determined this matter correctly and accurately by using appropriate rate
as a KAM • We have evaluated the adequacy of disclosures
Key Audit Matter How the matter addressed in our Audit

Development and maintenance of electricity • Test the operating effectiveness of control over the
transmission infrastructure recognition of expenditure as asset
Refer to note 1.3 of these financial statements that
describes that Company has undertaken major project • Inspect the supporting document to verify the cost
in relation to development and maintenance of and nature of the expenditure to assess whether
electricity transmission infrastructure amounting to Rs. amount pertains to capitalized nature
3billion
The acquisition was significant event and was material • Challenged the management assumption and
to the financial statements. judgement regarding useful life, residual value and
Also the capitalization of amount required significant recognition criteria.
estimates and judgement therefore we have
determined this matter as a KAM
Page 78


Instructions to examinees:
(i) Answer all EIGHT questions.
(ii) Answer in black pen only.
Q.1 HT Ragib and Company, Chartered Accountants (HTRC) is a member firm of an

international firm of chartered accountants, HT Network. HTRC has offices in Karachi,
Lahore and Islamabad.
You are the audit manager at Karachi office of HTRC. You are responsible for the audit of
Health Pharma Limited and its group financial statements for the year ended 30 November
2019. The extracts of the draft planning memorandum for the group audit prepared by the audit
senior are as follows:
Name of company Remarks
Health Group (Consolidated) 70,127 4,764 58,304 286

Health Pharma Limited (HPL) 38,487 5,850 36,563 322 Refer note 1
Fair Cosmetics Limited (FCL) 24,773 (2,371) 24,484 129 Refer note 2
Services (Private) Limited (SPL) 273 (47) 155 2 Refer note 3
Quality Chemicals Limited (QCL) Refer note 4
Note 1: HPL is the holding company and owns 100% shareholdings in FCL and SPL.
Note 2: FCL is audited by HTRC’s Lahore office. Since FCL is being audited by HTRC’s
Lahore office, no further procedures have been planned for obtaining the
understanding of the component auditor.
Note 3: SPL was incorporated in 2014 in United Arab Emirates (UAE) and is being audited
by a member firm of HT Network in UAE. Since SPL operates in foreign jurisdiction,
detailed audit procedures have been planned and confirmation will be sent to assess
the component auditor’s ethics, competence and the regulatory environment.
Note 4: HPL has disposed-off its entire shareholdings in QCL, a wholly owned subsidiary on
30 June 2019 at a gain of Rs. 450 million. QCL is being audited by HTRC’s
Islamabad office. Since QCL is no more part of the group as at 30 November 2019,
no procedures have been planned at the group level.
Required:
(a) Critically evaluate the extracts of the planning memorandum prepared by the audit senior and
advise the course of action. (15)
(b) Suggest five key audit procedures to verify the disposal of the subsidiary. (05)
Page 79
Answer 01
HEALTH GROUP CONSOLIDATED
Student Box – This question is 100% covered from ISA 600- Student needs to link the requirement the
ISA 600
The group materiality is Rs. 286 million however the materiality of HPL is Rs 322 million which is higher than the
group materiality.
AS per ISA 600 para 21c
To reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected
misstatements in the Health Group Consolidated financial statements exceeds materiality for the Health Group
Consolidate financial statements as a whole, HPL standalone materiality shall be lower than materiality for the
Health Group financial statements as a whole.
The GET shall determine the component materiality which is lower than the Group Materiality
Fair Cosmetics Limited
As the FCL is audited by the firm Lahore office therefore no procedures have been planned for obtaining the
understanding of the component auditor
As per ISA 600 para 4

In accordance with ISA 220,1 the group engagement partner is required to be satisfied that those performing the
group audit engagement, including component auditors, collectively have the appropriate competence and
capabilities. The group engagement partner is also responsible for the direction, supervision and performance of
the group audit engagement.
Also FCL is a significant component as its asset represents 42% of total assets therefore Group Engagement
partner shall obtain an understanding of component auditor that among other things include:
• Whether the component auditor understands and will comply with the ethical requirements that are
relevant to the group audit and, in particular, is independent.
• The component auditor’s professional competence
• Whether the group engagement team will be able to be involved in the work of the component auditor to
the extent necessary to obtain sufficient appropriate audit evidence
• Whether the component auditor operates in a regulatory environment that actively oversees auditors.
Services (Private) Limited

The total assets of the company are 0.2% of total assets of the group therefore it may not be a significant
component although auditor also needs to assess whether it is likely to include significant risks of material
misstatement of the group financial statements due to its specific nature or circumstances.
After all the consideration if the GET concludes that component is not significant the GA shall perform analytical
procedures at group level
In the extent of the group engagement team’s involvement in the work of the component
auditor will vary based on the group engagement team’s understanding of that component auditor. The fact that
the component is not a significant component becomes secondary. For example, even though a component is not
considered a significant component, the group engagement team nevertheless may decide to be involved in the
component auditor’s risk assessment, because it has less than
serious concerns about the component auditor’s professional competency (for example, lack of industry specific
knowledge), or the component auditor does not operate in an environment that actively oversees auditors.
Quality Chemicals Limited (QCL)

QCL is not the subsidiary at the yearend however the profit and loss account will be consolidated therefore GET
needs to consider whether component is significant and if it is significant auditor shall obtain an understanding of
component auditor and shall communicate the component materiality, risk, response to assessed risk, Group
Accounting policy and name of related party.
Page 80
Part (b).
• Inspect the sale agreement to verify:
o Number of shares disposed
o Sale proceed
o Transaction date
• Inspect the CDC statement to ensure that no shares are held by the Company
• Inspect the bank statement to ensure that amount has been received
• Ensure that all the assets and liabilities and NCI of the subsidiary has been derecognized from the
consolidated statement of financial position
• Recalculate the gain on disposal
Page 81
Q.2 Rehmat Pakistan Limited (RPL) has share based payment plan for its employees. RPL’s employees
receive share options subject to certain vesting conditions. Discuss the key controls that RPL is
expected to employ while carrying out the valuation ofshare options. (07)
Answer:
Student Corner: For such questions the student may consider control activities such as Authorisation and
Approval, Segregation of Duties, Physical Control, Performance Review and Information processing
• Inspect the share based payment agreement to ensure that it is properly authorized and approved
• The appointment of management expert is authorized and approved considering all the factors such as
competency, capability and independence and regulatory requirement (if any)
• Data used to value the share based payments are authorized and approved
• Model used to determine the valuation of share based payment is appropriate
• Assumptions used in the valuation of SBP is authorised and approved
• Senior management conduct performance review on the valuation of SBP
Page 82
Q.3 You are the audit manager assigned to the audit of Astron Computers Limited (ACL) for the
year ended 30 November 2019. Following information is available:
(i) The main business of the company is the importation of servers, laptops, desktop
computers, LCD screens and related accessories for sales to large customers and
retailers. ACL was incorporated in 2002 and operated profitably until 2016 when it
turned into a loss-making entity due to increased availability of refurbished computers
in the market.
(ii) Extracts from the draft profit and loss account:
2019 2018
---- Rs. in million ----
Sales 430 648
Cost of sales (388) (583)
Loss before taxation (32) (64)
(iii) Draft statement of financial position:

2019 2019
Assets 2018 Equity & liabilities 2018
Rs. in million Rs. inmillion
Non-current assets Equity and reserves
Fixed assets 45 51 Share capital 6 6
Deferred tax 27 24 Reserves 27 50
72 75 33 56
Current assets Non-current liabilities
Inventories - in hand 97 90 Warranty provision 9 16
Inventories - in transit 12 7
Trade receivables 90 81 Current liabilities
Cash and bank 1 2 Payables 50 30
200 180 Running finance 172 138
Provisions 8 15
230 183
272 255 272 255
(iv) In June 2019, ACL decided to discontinue import and sale of desktop computers and
LCD screens and to concentrate selling servers and laptops. It also decided to introduce
an All-In-One PC which is not currently available in the refurbished market. To further
boost the sales, ACL has started offering extended warranties in addition to a two-year
warranty period for all of its products at a nominal increase in price. ACL is presently
negotiating with its bank to enhance the running finance facility in order to meet the
additional working capital requirements.
(v) In September 2018, ACL had entered into contracts with two leading chains of schools
for supplying 20,000 desktop computers and LCD screens at a nominal margin. ACL
has already supplied 6,000 units before deciding to discontinue this product segment.
ACL is presently negotiating with the management of both schools to change the
contract from the supply of desktop computers and LCD screens to All-In-One PC. One
of the schools has agreed to this change while negotiations with other school is in
progress. In case, the other school does not agree to the change, ACL would either
terminate the contract by paying a penalty of Rs. 6 million or procure the remaining
units from any other supplier whose cost might be even more than the contractprice.
(vi) In May 2019, ACL ordered desktop computer accessories at a landed cost of Rs. 20
million from a company based in Hong Kong. Due to the political unrest in Hong Kong,
the shipment was delayed for more than five months despite the ordered units were
manufactured on time. On discontinuance of the business of desktop computers and
LCD screens, ACL asked the manufacturer to cancel the order. However, the
manufacturer refused to cancel the order. In November 2019, the manufacturer shipped
the ordered units which were received by ACL on 2 December 2019. CEO has
informed that they are under negotiation with a local distributor to dispose of the entire
desktop computer accessories.
Page 83
Required:
that you would perform to address those risks. (22)
S.no Risk Audit risk Audit procedures Student Corner

Heading
01 Going Due to continuous losses • Obtain GCA from ISA 570 – going concern
Concern since 2016, working capital management at least for procedures are useful
issue and current liability the period of 12 months
exceeds its current assets • Obtain cash flow and P&L
there is a risk that material forecast
uncertainty exist which may • Ensure that assumption
not be adequately disclosed used by the management
by the management or going are reasonable
concern assumption my not • Inspect subsequent
be appropriate and interim FS to assess the
management may have financial position and
prepared FS on going concern financial performance of
basis the Company.
02 Provision for To further boost the sales, • Obtain an understanding I have drafted many audit
Warranty ACL has started offering of management process procedures but in exams
extended warranties in to record warranty you need to draft only 2 to
addition to a two-year provision and ensure that 3.
warranty period for all of its it is consistent with the
products at a nominal requirement of IAS 37
increase in price however • Inspect agreement to
provision for warranty has identify the revised
been declined from Rs. 16 warranty terms and
million to Rs. 09 million condition
• Inquire with the
management why
warranty provision has
been declined
• Ensure that assumption

used by the management
are reasonable such as
no. of claims, cost
required etc. are
reasonable
• Perform subsequent event

procedure such as
subsequent warranty
claims filed by customer
• Inspect correspondence
file with customer
•
03 Fraudulent Company is negotiating with • Evaluate Accounting In order to show better
Financial bank to enhance running Policy result management may
Reporting finance facility therefore there • Assumption used by the commit fraud at FS level –
is a risk of fraud because management are therefore FS level and
management may have an reasonable MOC procedures that are
incentive / pressure to commit • Test JE mentioned in ISA 240 are
FFR by Overriding Controls helpful
04 Provision for Due to increased availability of 4.4.3 Recognition of
Inventory refurbished computers in a • Understand and evaluate deductible temporary
market sales had declined the management process differences
significantly and inventory to identify obsolete,
Page 84
turnover days has been impaired inventory and to

increased from 1.8 months to estimate the provision to A deferred tax asset
3 months therefore there is a determine whether it is should be recognised for
risk that inventory may have appropriate in the all deductible temporary
been impaired and no circumstances and in differences to the extent
impairment or adequate accordance with the IAS that it is probable that
impairment may have been 02 taxable profit will be
recorded by the management available against which
as per IAS 02 • Obtain inventory ageing the deductible temporary
to identify old obsolete difference can be utilised,
inventory unless the deferred tax
asset arises from the
• Inspect subsequent sales initial recognition of an
to identify subsequent asset or a liability in a
selling price to ensure that transaction that: [IAS
NRV is reasonable. 12:24]
• is not a business
combination; and
• at the time of the
transaction, affects
neither accounting
profit nor taxable profit
(tax loss).
05 Impairment The revenue has declined • Understand and

of Account significantly however evaluate the
Receivable receivable has been management process
increased from 1.5 months to to identify long
2.5 months therefore there is a outstanding
risk that receivable may have receivable and to
been impaired and no estimate the
impairment or adequate allowance for doubtful
impairment may have been debt to determine
recorded by the management whether it is
as per IFRS 09 appropriate in the
circumstances and in
accordance with the
applicable financial
reporting
framework.i.e. IFRS
09
• Obtain management
working on allowance
for doubtful debt and
check whether
assumption such as
model used, PD and
LGD used by the
management is
reasonable
• Obtain debtors aging

analysis and change
in debtor days to
identify long
outstanding
receivable
• Check subsequent
receipts to obtain
evidence regarding
the recoverability
Page 85
06 Foreign As the Company is engaged in • Obtain foreign exchange

Currency the business of import working from
Translation therefore there is a risk of management and
misstatement of purchases recalculate based in
and corresponding liability independent 3rd party rate
because purchases may not • Ensure that monetary
have been translated at liabilities are translated
appropriate rate and using appropriate rate
corresponding liability may not
have been translated and
revalued at appropriate rate
as per IAS 21.
07 Deferred Company has deferred tax • Understand the

Tax Asset asset of Rs. 27 million and management process to
company is continuously recognize deferred tax
incurring losses Therefore
asset and evaluate
there is a risk of
overstatement of deferred tax whether it is consistent
asset Because sufficient with IAS 12
taxable profit may not be • Perform procedures to
available in the future due to test operating
some reasons mentioned in effectiveness of controls
going concern point and
over recognition of
management may still
recognized deferred tax asset deferred tax asset
• Obtain the projections for
taxable profit for next 5
years
• Ensure that assumptions
used by the management
are reasonable such as
forecast sales, purchase,
accounting profit and etc.
• Check that taxable profit
is projected based on
Income Tax Ordinance,
2001
• Inspect the latest tax
return of the Company to
ensure that projections
are made based on the
updated returns and
decisions
• Inspect the
correspondence file
between regulatory
authority and the
Company to ensure that
projected taxable profit
are calculated based on
the updated decisions
• Inspect subsequent
interim FS to compare the
projected results with the
actual results
•
Page 86
Inventory In In November the • Inspect shipping 9.4.7 Shipping terms

Transit manufacturer shipped the document to assess when 9.4.7-1
order however it was not risk and reward is Impact of shipping terms
received till the year end If it is determined that
transferred
therefore there Is a risk that revenue should be
management may not have • Inspect subsequent GRN recognised at a point in
recognized inventory in transit to ensure that inventory time, an analysis of the
that was in transit has contractual terms will form
been received part of the assessment of
• Inspect sales invoice to when control passes. The
terms of shipping
ensure that it is recorded
contracts will typically
at correct amount. specify when title passes
and will also affect when
the risks and rewards of
ownership transfer to the
customer; accordingly,
they will be relevant in the
assessment of two of the
five indicators of transfer
of control set out in IFRS
15:38
Synthetic FOB destination
shipping terms When
goods are shipped 'free
on board' (FOB) shipping
point, typically the terms
of the contract specify that
title passes to the buyer
when the goods are
shipped, and the buyer is
responsible for any loss in
transit. On the other hand,
when goods are shipped
FOB destination, typically
title does not pass to the
buyer until delivery, and
the seller is responsible
for any loss in transit.
Generally, when goods
are shipped with standard
FOB destination shipping
terms, control of the
goods will be transferred
to the customer when the
goods arrive at the point
of the agreed destination.
However, entities should
carefully consider both
the terms of the contract
and other relevant facts
and circumstances to
determine when control of
the goods is transferred to
the customer, especially
when a contract contains
shipping terms which are
not standard.
Onerous In case, the other school does • Inspect agreement to

Contract not agree to the change, ACL verify the amount of
would either terminate the penalty
contract by paying a penalty of
• Inspect the
Rs. 6 million or procure the
remaining units from any other correspondence file with
supplier whose cost might be
Page 87
even more than the contract the other to assess the

price therefore there is a risk amount of procurement
that management may not • Recalculate the amount of
have recorded onerous
onerous contract
contract
whichever is lower of
Page 88
Q.4 Basit and Company, Chartered Accountants has been appointed as auditor of Toys Pakistan
Limited, a subsidiary of a listed company incorporated in China, for the year ended 30
September 2019.
Basit and Company is required to audit following two sets of financial statements:
(i) Financial statements prepared to meet the statutory requirements of Pakistan. The audit
report is expected to be issued on 10 December 2019.
(ii) Financial statements prepared to meet the requirements of consolidation in China.
These financial statements would only be used by the group management in China. The
framework that has been used for the preparation of these financial statements is a
special purpose framework. The audit report is expected to be issued on 20 December
2019.
Required:
Discuss the additional matters that Basit and Company may include in its audit report on
the financial statements prepared for consolidation purpose. (06)
Answer:
Para 14 of ISA 800

The auditor’s report on special purpose financial statements of Toys Limited shall include an Emphasis of Matter
paragraph alerting users of the auditor’s report that the financial statements are prepared in accordance with a
special purpose framework and that, as a result, the financial statements may not be suitable for another purpose.
The auditor may deem it appropriate to refer, in an Other Matter paragraph in the auditor’s report on the special
purpose financial statements of Toys Limited, to the auditor’s report on the complete set of general purpose financial
statements or to matter(s) reported therein
the auditor may include an Other Matter paragraph in the auditor’s report, referring to the fact that another set of
financial statements has been prepared by the same entity in accordance with another general purpose framework
and that the auditor has issued a report on those financial statements.
The auditor may include OMP with respect to first year of audit
The financial statements of the Company for the year ended September 30, 2018,
were audited by another auditor who expressed an unmodified opinion on those
statements on December 02, 2018.
Page 89
Q.5 Your firm has been appointed as the auditor of Helsinki Limited (HL), a listed company, for
the year ended 30 September 2019. The previous year’s audit was performed by another firm
of chartered accountants who expressed an unmodified opinion. In a recent meeting with the
client, it has been agreed that audit report will be signed on or before 20 December2019.
The materiality has been determined at Rs. 10 million. Your audit team has brought the
following significant matters to your notice on the completion of audit field work:
(i) A receivable balance of Rs. 6 million witha related party has been identified which has
not been disclosed in the financial statements. HL’s management is of the view that
since the balance is not significant, there is no need to disclose the amount, nature of
transaction and nature of relationship.
(ii) While reviewing the previous year’s annual report, your team has noticed that there
were number of reports and analysis which formed part of the annual report. On asking
the management regarding the date when the current year’s information would be
available to the audit team, the management responded that directors’ report would be
provided on 10 December 2019 and all remaining reports would be provided on 18
December 2019.
(iii) While reviewing the provision for employees’ compensated absences, the audit team
has noticed that the working is prepared on the basis of basic salary, whereas the
employees are entitled for compensated absences on the basis of gross salary. On further
investigation it is found that the same error was made in the last year as well. The
management has agreed to adjust the entire amount in current year.
Required:
Evaluate the above matters and discuss your firm’s course of action along with implications
on the audit report, if any. (20)
Answer:
Student Corner
Related Party – Related party’s transaction are qualitatively material too and that related party is
identified by auditor
Other Information- obtaining other information is relevant considering the question and requirement
ISA 710 – Misstatement exist in prior period but unmodified opinion issued by auditor
Page 90
Evaluation Course of Action Audit report

• Related party If auditor identified RP or significant transaction If management not disclosed then this is
transaction is not with RP, the auditor shall: the misstatement on account of non-
quantitatively material • Communicate to other team members disclosure as Related party transaction is
however qualitatively • Request management to identify all Qualitatively Material therefore auditor
material. transaction with the newly identified RP shall express Qualified opinion
• Related party • Inquire why control enable to identify RP
transaction is identified relation or transaction
by the auditor which • Perform substantive appropriate
was not previously procedures – inquiries and verifying the
communicated by the new terms and conditions
management to Auditor • Reconsider the risk that RP relationship
and transaction exist and management has
not disclosed to the auditor
• If non-disclosure intentional – evaluate the
implication for audit as per ISA 240
• The auditor’s • Determine, through discussion with • If management do not provide other
responsibilities relating management, which information at the date of audit report –
to other information document(s)comprises the annual report, the auditor shall mention in the other
apply regardless of and the entity’s planned manner and timing information section of the auditor’s
whether the other of the issuance of such document(s); report that other information that is
information is obtained • Make appropriate arrangements with expected to obtain after date of audit
by the auditor prior to, management to obtain in a timely manner report
or after, the date of the and, if possible, prior to the date of the • If auditor concludes that material
auditor’s report. auditor’s report, the final misstatement exist in other information
• As Auditor has rsion of the document(s) comprising the annual the auditor shall request management
observed that certain report; and and TCWG to correct
other information was • When some or all of the document(s) • If the other information is not
not obtained last year determined in will not be corrected the auditor shall report
therefore auditor shall available until after the date of the auditor’s those misstatements in other
perform procedures to report, request management to information section or
obtain other provide a written representation that the final Withdraw from an engagement or
information version of the document(s) disclaim an opinion
will be provided to the auditor when available,
and prior to its issuance
by the entity, such that the auditor can
complete the procedures required by this ISA.
Auditor may find it useful to request WR such

as
• Management has informed the auditor of all
the documents that it expects to issue that
may comprise other information;
•The financial statements and any other
information obtained by the auditor prior to the
date of the auditor’s report are consistent with
one another, and the other information does
not contain any material
misstatements; and
•With regard to other information that has not
been obtained by the auditor prior to the date
of the auditor’s report, that management
intends
to prepare and issue such other information
and the expected timing of such issuance.
Page 91
• As the misstatement • If The amount of misstatement is material • If management restate the prior
exist in the prior period to the financial statement Auditor shall period FS therefore clean opinion
financial statements request management and those charged shall be expressed on the current
on which previous with governance to amend the FS and period financial statements however
auditor has express request auditor to reissue auditor’s report. auditor may include EOMP
unqualified opinion. • If the FS amended and auditors report • If management refuse to restate the
reissued, then the auditor shall express financial statement, then it is the
unqualified opinion on the current period material misstatement on account of
only. application of accounting policy and
• If the FS are not amended and is relevant to the current period
consequently auditors report not reissued, therefore auditor shall qualify /
then request management to appropriately adverse the opinion and includes
account for and disclosed as per IAS 08. corresponding figure in the basis for
modified opinion.
Page 92
Q.6 Your firm, Hatim Manzoor and Company, Chartered Accountants is the auditor of Paints
Limited (PL) for the year ending 31 December 2019. On 1 December 2019, PL has acquired
controlling interest in Brush Limited (BL). Your firm also has a contract with BL for providing
accounting and bookkeeping services until 31 December 2020. BL has requested your firm to
keep providing the services until an alternate solution is workedout.
Required:
Evaluate the threat(s) in the above scenario and discuss whether the firm can continue
providing the services to both the clients till conclusion ofthe audit. (10)
Answer:
Brush Limited is the Related Entity of Paints Limited because Paints limited has direct control over the client
When the audit team knows, or has reason to believe, that a relationship or circumstance involving any other related
entity of the client is relevant to the evaluation of the firm’s independence from the client, the audit team shall include
that related entity when identifying, evaluating and addressing threats to independence.
An entity (Brush Limited) might become a related entity of an audit client (Paints Limited) because of acquisition. A
threat to independence and, therefore, to the ability of a firm to continue an audit engagement might be created
because the firm is providing book keeping and accounting services to brush limited which may create self-review
threat
In these circumstances the firm shall identify and evaluate current interests and relationships with the related entity
(Brush Limited) that, taking into account any actions taken to address the threat, might affect its independence and
therefore its ability to continue the audit engagement after the effective date of the merger or acquisition; (As the
Brush Limited is a Public Interest Entity and the audit firm is providing accounting and book keeping services to its
related entity therefore these services can only be provided if it is of routine or mechanical nature provided that
if
• the personnel providing the services are not audit team members and:
• Services are immaterial to the FS of Paints limited
The firm shall take steps to end any interests or relationships (Accounting and Book Keeping Services) if it is not of
routine or mechanical nature
if the interest or relationship cannot reasonably be ended by the effective date of the acquisition, the firm shall:
(a) Evaluate the threat that is created by the interest or relationship; and
(b) Discuss with those charged with governance the reasons why the interest or relationship cannot reasonably be
ended by the effective date and the evaluation of the level of the threat.
If, those charged with governance request the firm to continue as the auditor, the firm shall do so only if:
(a) The interest or relationship will be ended as soon as reasonably possible but no later than six months after the
effective date of the merger or acquisition;
(b) Any individual who has such an interest or relationship, including one that has arisen through performing a non-
assurance service that would not be permitted by Section 600 and its subsections, will not be a member of the
engagement team for the audit or the individual responsible for the engagement quality control review; and
(c) Transitional measures will be applied, as necessary, and discussed with those charged with governance.
Examples of such transitional measures include:
o Having a chartered accountant review the audit or non-assurance work as appropriate.

o Having a chartered accountant, who is not a member of the firm expressing the opinion on the financial
statements, perform a review that is equivalent to an engagement quality control review.
o Engaging another firm to evaluate the results of the non-assurance service or having another firm re-
perform the non-assurance service to the extent necessary to enable the other firm to take responsibility
for the service.
Page 93
Q.7 While conducting the audit of financial statements of Ghurair Limited, it has been discovered
that the company has received a material amount in bank, recorded as sales. On inquiry, the
finance department has informed that this amount represents a price increase claim received
from a foreign customer. It has also confirmed that there is no previous history of receiving
such claim from any foreign customer. Documentary evidence relating to the transaction has
been requested but has not been provided yet.
Required:
Discuss the implications of the above transaction on the completion of the audit. Also
recommend the action(s) in this regard which the firmshould take. (05)
Answer:
STUDENT CORNER
The most important thing in the question is to pick that this is the noncompliance with anti-money laundering
therefore ISA 250 will be apply
This is the suspected noncompliance with anti-money laws and regulation therefore auditor shall:
• Obtain an understanding of the nature of the act and the circumstances in which
it has occurred; and
• Further information to evaluate the possible effect on the financial Statements such as
• Penalty
• revoking of license
• disclosure
• reversal of revenue
• The auditor shall discuss the matter, unless prohibited by law or regulation, with the appropriate level of
management and, where appropriate, those charged with governance to obtain additional audit evidence
• If management or, as appropriate, those charged with governance do not provide sufficient information that
supports that the entity is in compliance with laws and regulations and, in the auditor’s judgment, the effect of
the suspected non-compliance may be material to the financial statements, the auditor shall consider the need
to obtain legal advice.
• If sufficient information about suspected non-compliance cannot be obtained, the auditor shall evaluate the
effect of the lack of sufficient appropriate audit evidence on the auditor’s opinion.
• The auditor shall evaluate the implications of identified or suspected noncompliance in relation to other aspects
of the audit, including the auditor’s risk assessment and the reliability of written representations, and take
appropriate action.
• If the auditor has identified or suspects non-compliance with laws and regulations, the auditor shall determine
whether law, regulation or relevant
ethical requirements:
• Require the auditor to report to an appropriate authority outside the entity such as SBP or FIA and NAB
• Establish responsibilities under which reporting to an appropriate authority outside the entity may be
appropriate in the circumstances
Page 94
Q.8 Masala (Pvt.) Limited (MPL) produces a range of packed spices for last many years. Currently,
MPL sells its products in Karachi and Lahore only. MPL is now planning to expand its business
to all major cities of Pakistan and United Arab Emirates. For this purpose, it intends to seek a
financing of Rs. 2 billion from a local bank. MPL’s CFO has prepared a five year cash flow
forecast and has presented it to your firm forreview.
The following further information is available:
(i) MPL signed a three-year contract with a distributor, Asif Brothers (AB) under which AB
was given exclusive right of distribution in Karachi and Lahore. The contract is about to
expire in June 2020. AB makes payment to MPL within 45 days from the date of sales. The
contract specifies AB’s rights to bonus on achieving the salestarget.
(ii) MPL is in negotiation with many distributors in Islamabad, Peshawar, Quetta, Multan and
Dubai for distribution of its packed spices. The directors wish to sign a five-year contract
with a credit period of 30 days. It is expected that contract will be finalised by February
2020.
(iii) In order to meet the additional demand to be raised through expansion, MPL is planning
to set up additional manufacturing facility in Karachi.
Required:
Discuss the key examination procedures that your firm would perform in respect of the information
from (i) to (iii). (10)
(THE END)
Answer:
• Inspect the distribution agreement with Asif Brothers to assess the payment to distributor is reasonable in the
cash flow.
• Inspect the distributor agreement to ensure that agreement will expire in June 2020.
• Inspect the aging of distributor to ensure that 45 days’ credit term assumption is reasonable.
• Inspect the distributor agreement to ensure that volume and sales amount used in the forecast is reasonable.
• Inquire with the management whether the agreement would be renewed – Inspect the correspondence file
with AB to assess the renewal of the agreement.
• Inspect the agreement to assess the final settlement amount and ensure that the same is incorporated in the
forecast.
• If the agreement will not have renewed – inspect the correspondence file with other distributor to assess the
terms and condition and ensure that the same is incorporated in the forecast.
• Inspect the correspondence file with new distributor to assess the term of agreement i.e. 5 years as the cash
flow forecast is also for 5 years.
• Inspect the correspondence file with new distributor to ensure that credit period is 30 days.
• Inspect the feasibility report to ensure that volume, price and amount used for sales in new avenues is
reasonable.
• Inspect the correspondence with new / potential customer to assess the quantities of orders.
• Inspect the correspondence file with new distributor to ensure that agreement will be finalized by Feb 2020
and any cash inflows not included before that in cash flow forecast.
• Inspect the quote provided by vendor to assess the cash flow and ensure that the same is included in the cash
flow forecast.
• Inspect the correspondence file with the vendor to assess when the new plant will be installed and operational.
Page 95


(i) Answer all SEVEN questions.
Q.1 You are the audit manager at Haroon Rahim and Company, Chartered Accountants
responsible for the audit of Fit Bit Limited (FBL) for the year ended 30 November 2020. FBL
is a listed company and is engaged in the manufacturing of fitness equipment and related
accessories. FBL sells its products all over the country through a chain of distributors.
The extracts from the draft financial statements for the year ended 30 November 2020 are as
follows:
2020 2019
------ Rs. in million ------
Revenue from sale of fitness equipment 71,000 70,000
Revenue from subscription of plans 30,000 -
Profit before tax 500 400
Property, plant and equipment 6,600 6,900
Intangible assets 1,000 250
Advance from customers 10,000 200
Stock in trade 16,000 15,800
During the month of October 2020, due to faulty pad used in a newly manufactured fitness
equipment, 60 accidents were reported where FBL had paid compensation aggregating Rs. 30
million. Upon identification of fault, the sale of this equipment was immediately suspended
until the matter was resolved in a month’s time. The entire compensation amount paid to
customers has been reported in the financial statements as receivable from a supplier who had
supplied such faulty pads.
On 1 January 2020, FBL launched a mobile application that generates personalized exercise
and diet plans considering an individual user’s physical and medical conditions. The
application has received an overwhelming response as large number of domestic and foreign
customers have subscribed for it. Following information is available in this respect:
(i) The application was developed in-house with the support of a leading software house.
(ii) Each customer has an option to subscribe biannual or annual plan.
(iii) All the subscription plans are paid in advance; however, each subscriber has an option
to cancel the plan within 30 days and claim the refund of the entire subscription amount.
Required:
to be performed in respect of the identified risks. (22)
Page 96
Audit Risk Key Audit Procedures
1) Due to fault in newly manufactured • Obtain an understanding of management process to

fitness equipment, accidents held and record sales return
sale of equipment’s have been • Inspect correspondence file with customers to assess the
suspended until the matter resolved, amount of provision
however sales has been increased by Rs • Check actual return subsequent to the year-end ensure
1 million Therefore there’s a risk of that corresponding provision has been recorded by the
overstatement in Revenue as management
Management may not adjust sale return
in revenue as per IFRS15.
• Inquire and Understand mgt. process to record revenue

2) and ensure that it is consistent with the requirement of
Further FBL received Advance IFRS 15
Subscription Charges for its application, • Inspect the agreement to identify performance obligation
subscriber has option to claim refund of and transaction price
subscription money. Therefore, there’s a • Ensure that advance record as Revenue over the period
risk of overstatement in value of of subscription, not a single point of time.
Revenue earned from application
subscribers. Therefore, there is a risk of
overstatement of revenue because Mgt.
may have recorded whole subscription
charges received as revenue at point of
time rather than recording it over the
period. Revenue might be recorded
without satisfaction of Performance
Obligation. Refund liability might not be
accounted for adequately as per IFRS15.
3) Sale of equipment suspended until • Obtain an understanding of mgt process related to
matter resolved Therefore there’s a risk identifying, estimating recording impairment for inventory.
of overstatement in valuation of • Perform NRV testing by inspecting the subsequent
inventory. Inventory may have been selling price (if any) or management plan
impaired and no impairment or adequate • Evaluate the cost of necessary changes required to be
impairment has been recorded by the made in the current inventory of the equipment, to bring
management as per IAS 02. them in a saleable condition
4) Foreign Customers have also subscribed • Obtain schedule of Foreign exchange and match the
FBL’s launched application. Therefore, balance with the GL
there’s a risk of misstatement in amount • Recalculate revenue earned from foreign customers by
revenue and receivable recognized. Mgt. using appropriate exchange rate.
may not have translated revenue as per • Retranslate the corresponding receivable at the year end.
accurate spot rate. Mgt. might translate
foreign currency in appropriately.
Incorrect gain or loss might be
recognized in PL.
5) Application developed by FBL in house • Obtain technical and feasibility study / report to obtain
with support of leading software house. evidence regarding development phase as per IAS 38
Therefore there’s a risk of overstatement • Obtain the detail of development cost
in valuation of intangible asset because • Inspect the supporting documents such as invoices to
there’s possibility that mgt. has check date and amount to ensure that development cost
capitalized expenditures pertaining to has been capitalized only for development phase as per
research phase , instead of recording it IAS 38.
as expense in PL. Mgt. might have
capitalized application as intangible
before it met all capitalization criteria of
IAS 38 i.e. capitalized before eligibility.
Page 97
6) 60 accidents were reported against FBL, • Inquire from management including in house legal
for which FBL has paid 30m as Counsel to determine the number and amount of claims
compensation. Therefore, there’s risk • Read Minutes of meeting of TCWG to obtain an
that there might be some other suit filed understanding and nature of claims
against entity and risk of understatement • Inspect Correspondence file between customers and FBL
of Provision. Management of FBL may to determine the claims filed by the customers
not recorded provision despite of • Send confirmation to the lawyer of FBL in order to know
existence of probability of outflow of the current status of case and possibility of resource
resources as per IAS37 or recorded outflow.
provision with lower amount or doesn’t • e) Since IAS37 involves significant assumptions and
disclosed any contingent liability (where estimates therefore access whether management
possibility of outflow of resources is assumption while calculating amount of resource outflow
remote as per IAS37). is reasonable or not.
7) Entire compensation amount paid to • Obtain correspondence between Mgt and supplier for
customers as compensation has such compensation.
recorded as receivable in FS from • Obtain the legal advisor’s opinion on the matter and the
supplier of faulty pads. Therefore, there’s request sent to the supplier for compensation.
a risk of overstatement in asset. There’s • Obtain an agreement signed b/w mgt and Supplier in order
possibility that inflow of economic benefit to verify whether Supplier is legally obliged for
is probable and required to be disclosed compensation or mgt. has recorded fictitious asset.
in FS as Contingent asset as per IAS 37 • Send confirmation to supplier to establish the rights of
or realization of income is not virtually such receivable
certain and management has recorded • Insect subsequent receipt if any
receivable incorrectly.
8) Further customers may also claim • Obtain an understanding of management process to

compensation under warranty against record warranty provision and ensure that it is consistent
faulty equipment’s Therefore there’s a with the requirement of IAS 37
risk of understatement in value of • Ensure that assumption used by the management are
warranty claim provision because Mgt reasonable such as no. of claims, cost required etc. are
may not recorded provision as per IAS reasonable
37. • Perform subsequent event procedure such as subsequent
warranty claims filed by customer
• Inspect correspondence file with customer
9) Application subscriber customers may • Obtain an understanding of management process to

cancel the subscription with in 30days. record refund liability and ensure that it is consistent with
Therefore, there’s a risk of non- the requirement of IFRS 15
recognition of refund liability by mgt. mgt. • calculate the number of subscribers whose trial period is
may not have recorded Refund liability. yet to expire at the year end.
As per IFRS 15. • ensure that assumption used by the management are
reasonable by comparing the amount of provision with
the past result
• Inspect subsequent status of the subscription cancel to
assess the adequacy of the provision.
10) Due to faulty production there is a risk • Obtain an understanding of management process related
that fitness equipment may have been to identifying, estimating and recording impairments for
impaired and no impairment or adequate fixed assets to determine whether it is appropriate in the
impairment has been recorded by the circumstances and in accordance with the applicable
management as per IAS 36. financial reporting framework i.e. IAS 36.
• Check / inspect that assumptions used by the
management such as discount rate and future cashflows
are reasonable
• Obtain management expert report or consider involving
auditor’s expert
subsequent interim FS to compare the projected result
with the actual result
Page 98
Risk No Risk Description IFRS requirement

01 Sales Return 3.2 Core principle of IFRS 15
The core principle of IFRS 15 is that an entity recognizes revenue to depict the
transfer of promised goods or services to customers, reflecting the amount of
consideration to which the entity expects to be entitled in exchange for those
goods or services.
6.3.4.2-3
Accounting for a refund of purchase price following customer’s return of a
defective item. Entities will sometimes provide a customer with a full or partial
refund in respect of a defective item. This might be the only option offered to the
customer (i.e. the entity does not offer to repair or replace defective items);
alternatively, the customer may be entitled to choose between receiving a refund
and having the defective item repaired or replaced. A right to receive such a
refund might sometimes be described as a 'warranty'.
When amounts are expected to be refunded to a customer in relation to a
defective product, a refund liability should be recognized in accordance with IFRS
15:55 . The amount that is expected to be refunded is consideration payable to a
customer, and therefore reduces revenue in accordance with IFRS 15:70 to 72.
Because the consideration to the customer includes a variable amount, the entity
would also need to estimate the transaction price in accordance with IFRS 15:53
to 57.
02 Revenue 3.2 Core principle of IFRS 15

recognition The core principle of IFRS 15 is that an entity recognizes revenue to depict the
transfer of promised goods or services to customers, reflecting the amount of
consideration to which the entity expects to be entitled in exchange for those
goods or services.
a. 7.2.3 Refund liabilities

b. If an entity receives consideration from a customer and expects to refund
some or all of that consideration to the customer, a refund liability is
recognized. The refund liability is measured at the amount of
consideration received (or receivable) to which the entity does not expect
to be entitled (i.e. amounts not included in the transaction price). The
refund liability is updated at the end of each reporting period for changes
in circumstances and corresponding changes made to the transaction
price and, therefore, the contract liability. IFRS 15 includes specific
guidance when the refund liability relates to a sale with a right of return
(see 7.2.2). [IFRS 15:55]
c. 7.2.3-1
d. Distinction between a refund liability and a contract liability refund liability
does not meet the definition of a contract liability in IFRS 15:106 (see
7.7.1) because it does not represent an entity’s obligation to transfer any
goods or services to a customer. Instead, a refund liability represents an
entity’s obligation to return consideration received from a customer if the
products are returned.
e. Accordingly, a refund liability should not be regarded as a contract liability
(or netted against a contract asset) for the purposes of providing the
disclosures for contract liabilities, or assets, including those set out in
IFRS 15:116(a) and (b) and IFRS 15:118.
f. For example, Entity A Sells Product X to 10 separate customers for
CU100 each. Customers are entitled to return Product X over a specified
period and receive full refund of the price they paid (i.e. Entity A does not
charge a restocking fee). On the basis of its historic experience, Entity A
expects that one of these products will be returned and, in accordance
Page 99
with IFRS 15:B21, recognizes a refund liability of CU100 for the one
product out of 10 that it expects will be returned. In addition to Product X,
Entity A also sells Product Z (considered a separate performance
obligation from Product X). One of the 10 customers that purchased
Product X has, under the same contract, prepaid CU1,000 for Product Z
for which, in accordance with IFRS 15:106, Entity A recognises a contract
liability of CU1,000.

Inventory
04 Foreign Exchange Refer risk 09 of summer 2018
05 Recognition of g. 4.8.6 Cost of an internally generated intangible asset
Intangible Asset h. The requirement that an intangible asset should be initially recognised at
its cost applies equally to internally generated intangible assets. Cost
includes all costs incurred from the date on which all of the recognition
criteria (i.e. those for purchased as well as for internally generated
intangible assets) are met. If costs have been expensed prior to the
recognition criteria being met, they may not be reinstated upon
satisfaction of the criteria. [IAS 38:65 & 71]
Similar to self-constructed items of property, plant and equipment, the cost of an

internally generated intangible asset includes all directly attributable costs
necessary to create, produce and prepare an asset to be capable of operating in
the manner intended by management. These costs may include: [IAS 38:66]
• expenditure on materials and services used or consumed in
generating the intangible asset;
• the salaries, wages and other employment-related costs of
personnel directly engaged in generating the asset;
• borrowing costs, in accordance with the requirements of IAS 23
Borrowing Costs (see chapter A18); and
• any other expenditure that is directly attributable to generating the
asset, such as fees to register a legal right and the amortisation of
patents and licences that are used to generate the asset.
IAS 38 specifically prohibits the inclusion of the following items in the cost of an
internally generated intangible asset: [IAS 38:67]
• selling, administrative and other general overhead expenditure
unless this expenditure can be directly attributed to preparing the
asset for use;
• clearly identified inefficiencies and initial operating losses incurred
before an asset achieves planned performance; and
• expenditure on training staff to operate the asset.
06 provision Refer risk 04 of winter 2018

07 Compensation An entity should only recognise a financial asset or a financial liability in its
receivable statement of financial position when it becomes a party to the contractual
provisions of the instrument. [IFRS 9:3.1.1]
Arrangements that are recognised as financial assets and liabilities are as follows.
• Unconditional receivables are recognised as an asset when the
entity becomes a party to the contract and, as a consequence, has
a legal right to receive cash. [IFRS 9:B3.1.2(a)]
08 Provision for Refer risk 02 of winter 2018

warranty
09 Refund Liability Refer risk 02 of this question
PPE
Page 100
Q.2 You are the audit manager at HTC and Company, Chartered Accountants. Following matters
relating to a joint audit of Petro Oil Limited are brought into your attention by audit team:
(a) The joint auditors have agreed upon an audit strategy through which they have
segregated audit areas for both the firms.
Required:
Discuss how your firm can ensure before finalization of the audit report that the work
carried out by the other joint auditor has been in accordance with the agreed audit
strategy. (05)
(b) There is a difference of opinion on impairment of intangible assets. Your firm wants to
issue a qualified report whereas the joint auditor is convinced with the management’s
explanation and intend to issue an unmodified report.
Required:
Discuss the course of action available to your firm. (04)
Answer:
Page 101
Page 102
Q.3 You are the audit manager at Moosa and Company, Chartered Accountants responsible for
the audit of Beta Bank Limited (BBL). While planning the audit for the year ending 31
December 2020, you come across a news published in a national newspaper that BBL has
suffered a cyber-attack which has resulted in theft of depositors’ confidential data.
Required:
Discuss the course of action you should plan in response to cyber-attack. (12)
Answer 03
Student Corner- The question was easy but the most difficult thing was to pick the standard. In this question ISA 250
is applicable.
The cyber-attack on the bank has resulted in the breach of confidential data therefore the bank may have non complied
with laws and regulations. Therefore, auditor shall perform following audit procedures
Possible effect Course of Action
Going concern issue due to license termination Going concern assessment at least for the period of
12 months
Cash flow and P&L Forecast
Assumptions are reasonable
Correspondence with regulator
Provision for customer loss Inspect the correspondence file with customer to
assess whether any losses are claimed
Performed subsequent event procedures
Penalty by Regulator Inspect the laws and regulation to assess the amount
of penalty
Inspect the correspondence file with regulator to
determine whether any penalty has been imposed
• The auditor shall discuss with appropriate level of management including TCWG in order to obtain additional
audit evidence unless prohibited by laws and regulation
appropriate action.
• Reconsider the audit strategy and audit plan to evaluate whether the auditor needs to rely on GITC and
Applications control
Page 103
Q.4 You are the audit manager responsible for the audit of Kekra Pakistan Limited (KPL). KPL
has various production facilities across the country. Your audit team has brought the following
matters to your notice which require your guidance:
(i) KPL is required to decommission its production facilities and restore the site at the end
of their economic life. Notes to the financial statements for the year ended
30 September 2020 contain the following disclosures related to decommissioning
provision:
v. in million
Balance at the beginning of the year 7,126
Provision made during the year 371
Reversal due to changes in estimates (1,471)
Unwinding of discount 720
Balance at the end of the year 6,746
(ii) As a result of decrease in demand, the management adjusted its medium-term and long-
term price assumptions and discount rates, which had a significant impact on asset
valuation. At 30 September 2020, KPL recognized an impairment of Rs. 2,184 million
against the carrying value of cash generating unit.
Required:
Brief the audit team regarding the significance of the above matters and the audit procedures
to be performed in this respect. (15)
Answer:
STUDENT CORNER
IFRS BOX
4.4.1 IFRIC 1 – scope
IFRIC 1 provides guidance on how to account for the effect of changes in the measurement of existing
decommissioning, restoration and similar liabilities. For example, such liabilities may exist for decommissioning
a plant, rehabilitating environmental damage in extractive industries, or removing equipment. IFRIC 1 applies to
changes in the measurement of any existing decommissioning, restoration or similar liability that is both: [IFRIC
1:2]
• recognised as part of the cost of an item of property, plant and equipment in accordance with IAS
16 (or, for entities that have adopted IFRS 16, as part of the cost of a right-of-use asset in
accordance with that Standard); and
• recognised as a liability in accordance with IAS 37.
The guidance below deals with how to account for changes in the measurement of an existing decommissioning,
restoration or similar liability that result from changes in the estimated timing or amount of the outflow of
resources required to settle the obligation, or a change in the discount rate.
4.4.2 Cost model
If the related asset is measured using the cost model: [IFRIC 1:5]
• changes in the liability are added to, or deducted from, the cost of the related asset in the current
period, except that the amount deducted from the cost of the asset must not exceed its carrying
amount. If a decrease in the liability exceeds the carrying amount of the asset, the excess is
recognised immediately in profit or loss; and
• if the adjustment results in an addition to the cost of an asset, the entity should consider whether
this may indicate that the new carrying amount of the asset may not be fully recoverable. If so,
the asset should be tested for impairment in accordance with IAS 36.
Page 104
Answer 04
The decommissioning of production facilities required significant estimates and judgement regarding
• Future cash out flow
• Discount rate
• Useful life
Therefore, there is a significant risk and required special audit consideration by the engagement team.
Based on the disclosure the provision has been made further it means there might be decommissioning cost w.r.t some
new production facilities and a material reversal due to change in estimates. Audit team needs to consider whether there
is any change in circumstances and accounting and disclosure is adequate as per IFRIC 01.
AUDIT PROCEDURES
• Inquire management about the reason for further provision
• Inspect agreement / Document to evaluate the decommissioning requirement
• Obtain an understanding of management process to record decommissioning provision and ensure that is
consistent with the requirement of IFRIC 01
• Test controls over the recording of decommissioning provision
• Perform procedures to ensure that assumptions are reasonable such as:
o Discount rate
o Future cash flow
o Useful life
• perform subsequent event procedures such as to compare the cost of any actual restoration cost with the
provision
• perform procedure to ensure that discount rate used by the management is current market based
• inquire management why provision has been reversed and whether is there any change in circumstances
resulting in a change in provision or is it an error
b. Identification of CGU and the calculation of impairment required significant estimates and judgement therefore
required special audit consideration.
Audit Procedures:
• Obtain an understanding of management process that how it identified CGU and calculate the recoverable
amount and is it consistent with the requirement of IAS 36
• Ensure that cash flow projection is based on most recent budget and forecast
• Ensure that assumption used by the management in calculating future cashflows such as growth rate price are
reasonable
• Inspect the subsequent interim FS and compare the projected result with the actual result
• Compare the current year result with the last year budget and forecast
• Ensure that discount rate used by the management is pre tax that reflects the current market assessment of the
time value of money and the risk specific to the asset.
• Inquire whether management has determined fv – cost to sale and if yes:
o Evaluate the competency, capability and independence of management expert
o Evaluate the adequacy of expert work:
▪ Finding and conclusion are relevant and reasonable
▪ Assumptions are relevant and reasonable
▪ Data is complete and accurate.
Page 105
Q.5 Salman Qasim is an audit senior of Ibrahim & Company, Chartered Accountants. He joined
the ongoing audit of Kalam Limited (KL) which was under completion stage. During the
audit, he came to know that the newly appointed Chief Financial Officer (CFO) is a close
friend of the audit manager which was not disclosed by him to the firm. He decided to disclose
this matter to the engagement partner; however, he came to know that the engagement partner
has been out of country for last one month and has not yet discussed the progress of the audit
with the audit team. He then wrote an email to the firm’s quality control partner and brought
all such observations in his knowledge.
Required:
Discuss the professional and ethical issues arising in the above situation and advise the
course of action that the firm’s quality control partner should take. (13)
Answer 05
Student Corner
The answer is from Code of ethics and ISA 220 – as there is a quality issue and this is the audit engagement therefore
ISA 220 will apply
As per ISA 220 – The EP shall take the overall responsibility for the quality of the audit engagement
In the Question following quality of audit engagements are affected:
ENGAGEMENT PERFORMANCE
the engagement partner has been out of country for last one month and has not yet discussed the progress of the audit
with the audit team. The engagement partner shall take responsibility for:
(a) The direction, supervision and performance of the audit engagement in compliance with professional standards and
applicable legal and
regulatory requirements; and
(b) The auditor’s report being appropriate in the circumstances.
ETHICAL REQUIREMENT:
Throughout the audit engagement, the EP shall remain alert for evidences of breach of relevant ethical requirement. In
the above question newly appointed CFO is a close friend of audit manager. This is the family and personal relationship
which will create:
• Self-interest threats
• Familiarity threats
• Intimidation threats
The significance of the threat shall be evaluated and appropriate actions shall be applied:
• Removing the audit management from ET:
• Review the work of audit manager
As there is a breach of ICAP Code of Ethics therefore the firm shall take following actions
Page 106
Page 107
Q.6 You are the audit manager of Zafar Iqbal & Company, Chartered Accountants. You have
asked one of the team members assigned on the audit of Brown Sugar Limited to draft the
Key Audit Matter section of the audit report for the year ended 30 June 2020. The extracts
from the draft report are as follows:
Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most
significance in our audit of the financial statements of the current period. These
matters were addressed in the context of our audit of the financial statements as a
whole, and in forming our opinion thereon, and we do not provide a separate opinion
on these matters. In addition to the matter described in the Basis for Adverse Opinion
section, we have determined the matter described below to be the key audit matter to
be communicated in our report.
How our audit addressed

Key audit matter key audit matter
In the course of conducting a Our key audit procedures in this area included
sales tax audit for the period amongst others were:
from January 2019 to ▪ We reviewed the correspondence of the
December 2019, FBR raised company with relevant tax authorities and tax
certain issues with respect to advisors including judgements or orders
the company’s sales. On May
passed by the competent authorities.
2020, the company received an
order in which demand of Rs. ▪ We also obtained and reviewed confirmations
100 million was raised. The from the company’s external tax advisor for
company has filed an appeal the latest status of the case.
with the appellant board andis ▪ We involved internal tax experts to assess and
confident that it would be review the management’s conclusion on this
decided in company’s favor. matter.
▪ We verified all the journal entries posted in the
Due to the materiality and
significance of the above matter ledgers related to legal expenses.
we have considered this tax ▪ We obtained representation from the
contingency as a key audit management regarding the favourable
matter. outcome of the matter.
Based on the procedures performed, we concluded

that there is no material misstatement
and contingency has been adequately disclosed.
Required:
Critically analyse the Key Audit Matter section of the audit report. (1
Page 108
Answer 06
S.no Analysis Suggestion
01 No subheading of KAM The auditor shall give appropriate subheading of the matter on
which a KAM has been communicated.
In the above scenario the appropriate subheading could be
Tax Contingency / Litigation
02 There is no reference of disclosure The description of each key audit matter in the Key Audit Matters
made in the FS section of the auditor’s report shall include a reference to the
related disclosure(s), if any, in
the financial statements
02 The auditor has provided so much The auditor shall address Why the matter was considered to be
original information and has not one of most significance in the audit and therefore determined to
emphasized on why the matter has be a key audit matter.
been determined as a KAM The adequacy of the description of a key audit matter is a matter
of professional judgment. The description of a key audit matter is
intended to provide a sufficient and balanced explanation to
enable intended users to understand why the matter was one of
most significance in the audit and how the matter was addressed
in the audit.
It is appropriate for the auditor to seek to avoid the description of
a key audit matter inappropriately providing original information
about the entity.
The description of a key audit matter is not usually of itself
original information about the entity, as it describes the matter in
the context of the audit.
04 The auditor has communicated that Tax contingency involves significant estimates and judgement
due to materiality and significance of regarding the outcome of the case, timing and amount of cash
the matter we have considered tax outflow and the adequacy of disclosure
contingency as a KAM. Merely the
materiality and significance are not
the criteria to determine KAM
05 Following audit procedures are not The amount of detail to be provided in the auditor’s report to
the key audit procedures describe how a key audit matter was addressed in the audit is a
• We verified all the journal entries matter of professional judgment. In accordance with paragraph
posted in the ledgers related to 13(b), the auditor may describe:
legal expenses. Aspects of the auditor’s response or approach that were most
• We obtained representation from relevant to the matter or specific to the assessed risk of material
the management regarding the misstatement;
favourable outcome of the matter.
07 The auditor has expressed adverse If one or more matters other than the matter(s) giving rise to an
opinion and simultaneously uses adverse opinion are determined to be key audit matters, it is
the following conclusion in the particularly important that the descriptions of such other key
KAM audit matters do not imply that the financial statements as a
ased on the procedures performed, we whole are more credible in relation to those matters than would
concluded that there is no be appropriate in the circumstances, in view of the
material misstatement and adverse opinion
contingency has been adequately
disclosed.
Page 109
Q.7 (a) You are employed as an audit manager in Bashir and Company, Chartered Accountants.
One of your clients, Davidsons Pharma Limited (DPL), is considering to acquire 60%
shareholding in Sehat Healthcare (Pvt.) Ltd. (SHPL) and has requested your firm to carry
out a due diligence.
During the fieldwork of due diligence exercise, your team has brought the following
matters to your attention:
(i) A major customer which accounts for 10% of SHPL’s annual sales has refused to
place further sale orders. On inquiry, it was revealed that competitor has offered
significant discount of 12% to increase its market share.
(ii) DPL has central distribution model where single distributor has non-exclusive rights
countrywide with commission rate of 5%. All sales made to the distributor on 30
days’ credit. On the Other hand, SHPL has a regional distribution model where
multiple distributors are involved country wide with commission rates ranging from
2% to 4%. Under this model, all sales are made on cash.
Required
Discuss how the above matters are to be investigated for due diligence review and also
recommend the additional procedures to be performed in this respect. (12)
Answer:
(Ai)
Termination of Supply agreement:

Loss of a major customer may lead to a reduction in forecast revenue by as much as 10% per year. It is vital to establish
all potential revenue and cost implications due to loss of the customer to ascertain the impact on the overall acquisition
price.
The switching of major customer has wider implications if the competitor is directly targeting the major customers of
DPL. It is possible that other major customers may also switch to the competitor, which would have further implications
on future revenue and cost forecasts.
Additional procedures:
• Analytically review the revenue earned from the customer to help determine an appropriate estimate for the
potential loss of future revenues and cash inflows.
• Identify other major customers and review any supply agreements in place to determine their expiry.
• Obtain any correspondence to identify any renegotiation occurred on the terms of their agreements.
• Analyze the impact of aggressive competitive marketing strategy to offset the impact of discount offered by
competitor.
• Review minutes of board of directors meeting which may give an insight about the reasons of losing this
customer.
• Inquire the management about the possibility of offering discount by analyzing the profitability analysis.
• Assess the Goodwill of brand name may have any impact in offsetting the impact of discount.
• Review the subsequent sales trend to analyze the magnitude of loss of sales and measures taken by
management accordingly.
• Review the subsequent IMS/ third party sales report to assess the increase in market share of competitor due
to discount.
Page 110
(Aii)
Distribution Model:
The existing central distributor model of DPL is nonexclusive so DPL can also change its model by involving regional
distributors considering the business rationale, commission rates, credit period, product portfolio, distributor claims, etc.
DPL also needs to determine the distribution model to be adopted for SHPL by carrying out the cost benefit analysis
and considering the group synergies created by both models especially when SHPL’s existing regional model yields
saving in commission rates and have favorable credit terms as compared to DPL central model.
Additional procedures:
• Review the existing distribution agreements of SHPL with regional distributors to determine the terms of
agreement are aligned with national distributor.
• Inquire from the management of DPL, whether the information management system in DPL can cater multiple
distributors.
• Perform the cost benefit analysis considering the product portfolio of SHPL for difference in commission rates,
payment terms, product expiry claims, product availability, frequency of sale reporting and increase in
administrative.
(b) Your firm has been approached by Agar Products Limited for audit of accounts
receivable and accounts payable reported in the financial statements. The financial
statements were prepared in accordance with the general purpose framework and is
audited by another firm of chartered accountants.
Required:
Discuss the matters you would consider before accepting the above assignment. (04)
(Ignore the ethical considerations for the acceptance of the audit)
ANSWER 7b
Compliance with the requirements of ISAs relevant to the audit of a single financial statement or of a specific element
of a financial statement may not be practicable when the auditor is not also engaged to audit the entity’s complete set
of financial statements. In such cases, the auditor often does not have the same understanding of the entity and its
environment, including its internal control, as an auditor who also audits the entity’s complete set of financial statements.
The auditor also does not have the audit evidence about the general quality of the accounting records or other
accounting information that would be acquired in an audit of the entity’s complete set of financial statements.
Accordingly, the auditor may need further evidence to corroborate audit evidence acquired from the accounting records.
In the case of an audit of a specific element of a financial statement, certain ISAs require audit work that may be
disproportionate to the element being audited. For example, although the requirements of ISA 570 (Revised) are likely
to be relevant in the circumstances of an audit of a schedule of accounts receivable, complying with those requirements
may not be practicable because of the audit effort required.
If the auditor concludes that an audit of a single financial statement or of a specific element of a financial statement in
accordance with ISAs may not be practicable, the auditor may discuss with management whether another type of
engagement might be more practicable such as Agreed Upon Procedures as per ISRS 4400
Page 111


(i) Answer all SIX questions.
Q.1 (a) MF Momin, Shams & Company is a firm of chartered accountants (the firm) which was
initially registered with two partners namely Momin and Shams, in the year 2011 with
offices in Karachi and Islamabad. In 2020, the firm got affiliation with a reputed
international firm namely Missouri Fox (MF) which resulted in increase in clientele of
the firm especially in the province of Punjab. As a result, the firm has established its
new office in Lahore.
You are the quality control partner in the firm. While reviewing the annual revenue
earned by the firm for the year ended 31 December 2020, you have extracted the
following information from the firm’s books of accounts:
Firm’s offices Firm’s partners

Clients Karachi Islamabad Lahore Momin Shams Others
------------------------ Rs. in ‘000 ------------------------
Audit and assurance
services
Pervez Limited (PL) 2,730 - - - 2,730 -
Amin (Pvt) Ltd (APL) - - 1,680 - - 1,680
Salman Limited (SL) - 4,000 - 4,000 - -
Tania Limited (TL) 1,100 - - - 1,100 -
Other clients 3,800 3,000 6,000 3,000 1,800 8,000
Consultancy and
other services
Pervez Limited (PL) 500 2,000 500 - - 3,000
Amin (Pvt) Ltd (APL) - - 1,480 - - 1,480
Salman Limited (SL) 1,500 - 1,300 - - 2,800
Tania Limited (TL) 200 - - - 200 -
Other clients 4,170 6,000 2,040 3,000 3,170 6,040
14,000 15,000 13,000 10,000 9,000 23,000
Other information:
(i) PL, SL and TL are listed companies whereas APL is the first multinational client
of the firm.
(ii) All the clients have already re-appointed the firm for their subsequent statutory
audit.
(iii) Shams is also entitled to 20% additional commission of the total fees earned from
PL.
Required:
In the light of ICAP’s Code of Ethics for Chartered Accountants, evaluate the
implications of revenue earned from PL, APL, SL and TL on the firm and suggest the
safeguard(s), if any, available to the firmand partners. (12)
Page 112
Ans.1 (a) When the total fees generated from an audit client by the firm expressing the audit opinion represent
a large proportion of the total fees of that firm, the dependence on that client and concern about losing the
client create a self-interest or intimidation threat.
Pervez Limited (PL): Revenue earned from PL is 30.3% of Shams’s revenue and 23% of Karachi office. It
represents a large proportion of the revenue from one partner and one office of the firm. The significance is
further increased as Shams is also entitled to earn additional 20% commission on total revenue of Rs. 5.73
million generated from PL so his objectivity might be compromised. Even though the revenue from PL is still
below 15% of the firm’s total revenue given in the code, it needs to be under consideration that any further
increase in the fee charged to PL or any additional assignment may make it above the 15% threshold.
Safeguard available to the firm The firm should consider increasing the client base of Shams to mitigate the risk
and reduce the dependence on the audit client. The firm should also consider rotating this client to some other
partner. Shams should reduce dependency on PL by refusing other assignments or rotate it to some other
partner when providing those services. An appropriate review should also be conducted by a reviewer who does
not take part in the engagement review process.
Amin (Pvt.) Limited (APL): The revenue earned from APL is 24.3% of Lahore revenue which represents a
large proportion of the revenue of one office of the firm. The significance is further increased as APL is the first
multinational client of the firm so it is qualitatively significant to the firm. It further increases the significance as
Lahore office is also a newly established office.
Safeguard available to the firm Although Lahore office is a newly established office, the client base will
eventually grow and the office dependence on APL might further decrease in future. In the meantime, the firm
should consider to increase client base of the office by assigning other assignments. The firm may also consider
assigning the other assignments of PL to Lahore office if acceptable to the client.
Salman Limited (SL): The revenue earned from SL is 16% of firm’s total revenue which exceeds 15% threshold
given in the Code. The significance is further increased as revenue earned from SL is 26.7% of Islamabad office
revenue and 40% of Momin’s revenue which represents a large portion of the Islamabad office and Momin’s
Revenue.
Safeguard available to the firm The firm shall disclose the fact to those charged with governance that the total
of such fees represents more than 15% of the total fees received by the firm. Prior to the audit opinion being
issued on the financial statements, a chartered accountant, who is not a member of the firm expressing the
opinion on the financial statements, performs an engagement quality control review of that engagement; or a
professional body performs a review of that engagement that is equivalent to an engagement quality control
review (“a pre-issuance review”).
After the audit opinion on the financial statements has been issued, and before the audit opinion being issued
on the next year’s financial statements, a chartered accountant, who is not a member of the firm expressing the
opinion on the financial statements, or a professional body performs a review of the second year’s audit that is
equivalent to an engagement quality control review (“a post-issuance review”).
Tania Limited (TL): The revenue earned from TL does not represent a large proportion of the revenue of the
firm or Karachi office. Since it is 14.4% of Sham’s total revenue, therefore it needs to be considered that any
further increase in revenue or any additional assignment may make it large proportion for Shams’ revenue.
Safeguard available to the firm Firm should closely monitor any additional billing to TL so that it remains
within the prescribed limits.
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(b) Other clients in (a) include Hafiz Limited (HL) and Chand Limited (CL) which have
not yet paid the audit fees for the year ended 30 June 2020. The audit report for HL was
issued three months ago but HL has still not paid the balance 50% of audit fee, while
the audit report for CL has not been issued due to certain pending issues.
Required:
Discuss the course of action available to the firm in the above situation. (03)
(b) Hafiz Limited (HL): Even though 50% of the fees has been received from HL, a significant part is still
outstanding for last three months. The firm shall:
 determine whether it is appropriate for the firm to be re-appointed or continue the audit engagement.
 consider whether the overdue fees might be equivalent to a loan to the client.
Safeguard available to the firm If the outstanding fees is not paid before next year’s report, the firm shall
discuss with the audit committee and those charged with governance to pay the fee at earliest.
Chand Limited (CL): Since the audit report of CL has not been issued due to some pending matters, the firm
should ask the client to pay audit firm a significant part of the fees. Safeguard available to the firm
 The firm should also appoint an appropriate reviewer who did not take part in the audit engagement.
 If the outstanding fees is not paid before next year’s report, the firm shall discuss with the audit committee
and those charged with governance to pay the fee at earliest.
Page 114
Q.2 You are the audit manager in a firm of chartered accountants responsible for the statutor y
audit of Hackney Pharma Limited (HPL) which is principally engaged in the business of
manufacturing and sale of pharmaceutical products.
2021 2020
Description
---------- Rs. in '000 ----------
Sales 3,343,214 3,213,435
Sales returns (72,519) (73,202)
Sales – net 3,270,695 3,140,233
Cost of sales (1,895,590) (1,860,579)
Selling & marketing expenses (94,089) (93,629)
During the planning meeting for the year ended 31 May 2021, HPL’s management informed
you about the recall notice issued in respect of HPL’s flagship product ‘Azteca’. The notic e
was published in a local newspaper on 1 May 2021. The notice was issued on the advice of
the drug regulatory authority following complaints received with regard to development of
unexpected side effects in some users of the product.
Azteca is a patent product under the licensing agreement with Global Healthcare Laboratorie s
(GHL), a multinational company, signed in year 2017. Under the agreement, HP L
manufactures and sells Azteca for 10 years against payment of upfront license fee of Rs. 30 0
million. HPL is also subject to penalties in case of use of substandard raw material in th e
manufacture of Azteca. The raw material is imported from foreign countries. Currently, GHL
is investigating the reason for the defect/unexpected side effects.
The management has also informed you that this product recall has not only affected HPL ’s
sales but has also created working capital issues. HPL took immediate steps such as
commenced negotiation with the bank for financing working capital and launched aggressive
marketing campaign in May 2021 to boost the sale of its other products.
Required:
to be performed in respect of identified risks. (22)
Page 115
RISK HEADING Audit Risk Key Audit Procedures
1) Provision for Sales Notice issued on advice of Drug • Obtained an understanding of

Return regulatory authority against HPL’s management process for recording
flagship product “Azteca” also the provision for sales return
provision of sales return has been • Obtained sales return provision
decreased despite of increased in sales working and test the completeness
and recall notice, therefore; there’s a and accuracy of date
risk of understatement of sales return • Check that assumptions used by
Provision because Management of the management are reasonable
HPL may not have recorded • Check the subsequent sales return
provision or adequate provision and ensure that adequate provision
has been recorded.
2) Impairment of Azteca is a patent product under • Obtain an understanding of mgt
Intangible asset licensing agreement with GHL. Notice process related to identifying,
against licensed product Azteca estimating recording impairment
indicates that there’s possibility that for intangible asset in order to
license might have been impaired and ensure that whether it is
management may not have been either appropriate as per IAS 36.
impaired or adequately impaired • Test whether mgt. assumptions
license (intangible asset) as per IAS 36. pertaining to future cash flows and
discount rate are reasonable.
• Where mgt. has appointed expert
for impairment testing then assess
competency, capability and
adequacy of mgt. expert and
evaluate the adequacy of expert
work
• May consider to appoint own
expert for impairment testing.
• Check the subsequent interim FS
including subsequent sales register
to ensure that cash flows used by
the management are reasonable
• Inspect the correspondence file
with licensor and licensor
agreement to assess the possibility
of the termination of license
• Inquire with the in-house legal
counsel to assess the possibility of
the termination of license
3) Translation of foreign HPL import raw material for • Obtain the foreign currency working
currency production of Azteca. Therefore from the management.
there’s a risk of misstatement in • Ensure that closing liability has
purchases and account payable been revalued and trace the same
because Mgt. may not translated to exchange gain or loss working.
foreign currency item using • Verify the rates used by the
management from the independent
appropriate rate or may not source
remeasured the payable at closing
• Ensure that purchases and liabilities
rate as per IAS21 are translated using appropriate
rate.
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4) Impairment of Inventory Unexpected side effects by product • Obtain an understanding of mgt

Azteca and product recall has process related to identifying,
significantly declined its sale. estimating recording impairment
Therefore, there’s a risk of for inventory and ensure that is
overstatement in valuation of consistent with the requirement of
inventory. Inventory may have IAS 02.
been impaired .Mgt. may not have
adequately recorded inventory at • Test that assumptions such as
lower of cost or NRV as per estimated selling price and selling
IAS02. cost of Azteca are reasonable
• Check subsequent status of the
product AZTECA
5) Impairment of PPE Decline in sales of Azteca • Obtain an understanding of mgt

indicates that Plant involved in its process related to identifying,
production would no longer be estimating recording impairment
capable to generate expected for PPE.
future cash flows, thereby its value • Access whether mgt. assumption
in use decreased. Therefore, regarding future cash flows of PPE,
there’s a risk of overstatement in use for Azteca production and
value of PPE because PPE may discount rate is reasonable or not.
have been impairment and no
impairment or adequate • Where mgt. has appointed expert
impairment may have been for impairment testing then assess
recorded by the management as competency, capability and
per IAS36. adequacy of mgt. expert and
evaluate the adequacy of expert
work
• May consider to appoint own
expert for impairment testing.
• Check the subsequent interim FS
including subsequent sales register
to ensure that cash flowsused by the
management are reasonable
6) Provision or contingent Notice issued on advice of Drug • Inquire from management
liability regulatory authority against HPL’s including in house legal Counsel to
flagship product Azteca, assess the outcome of the case.
therefore; there’s a risk of • b) Inspect Minutes of meeting of
understatement of Provision or TCWG to obtain the status, nature
non-disclosure of Contingent and outcome of the case
liability in FS of HPL. • c)Inspect Correspondence file
Management of HPL may not between HPL and Drug
recorded adequate provision Regulatory Authority to determine
despite of existence of probability whether any penalty had been
of outflow of resources as per imposed by the Regulator
IAS37 or doesn’t disclosed any • d)Send confirmation to the lawyer
contingent liability of HPL in order to know the
current status of case and
possibility of resource outflow.
• Evaluate the adequacy of
disclosure
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7) Understatement of Entity has launched aggressive • Perform procedures on

Marketing expense marketing campaign in May 2021 completeness of selling and
in order to boost its sale, however; marketing expense
selling & marketing expense in FS • Perform test of unrecorded liability
has only increased by 0.5% as be selecting samples from bank
compared to prior year. Therefore statement and trace it to the
there’s a risk of understatement in vouchers to ensure that it has been
the amount of expense recognized recorded
for the year • Perform cutoff testing on selling
and marketing expense to ensure
that all expenses up to the yearend
has been recorded by the
management
8)Penalty provision/ Due to side effect of the product there • Inquire with the in-house legal
Customer claim provision is a risk that customer may claim losses counsel to evaluate the claims /
and management may not record the losses filed by customer
provision adequately as per the • Inspect the correspondence file
requirement of IAS 37. with the customer to assess the
nature and amount of claims
• Inspect the MOM of TCWG to
further evaluate quantum of the
litigation and claims
• Send external confirmation to
lawyer to assess the outcome and
provision of the case
S.no Risk description IFRS

01 Provision for Refer risk 01 of Winter 2020
sales return
02 Impairment of
Intangible Asset
6.2 Cost model
If an intangible asset is accounted for using the cost model, after initial recognition, it is
carried in the statement of financial position at its cost (measured as described in
section 4) less any accumulated amortisation and any accumulated impairment losses.
[IAS 38:74]
6.3 Revaluation model
If the revaluation model is adopted, the intangible asset is carried at a revalued amount,
which is its fair value at the date of the revaluation less any subsequent accumulated
amortisation and any subsequent accumulated impairment losses. [IAS 38:75] The
revaluation model is described in section 7.
03 Translation of Refer risk 09 of summer 2018

foreign currency
Inventory
PPE
06 Provision or Refer risk 04 of winter 2017
contingent
liability
07 Customer claim Refer risk 04 of winter 2017
provision
Page 118
Q.3 You are the audit manager responsible for the audit of Kamran Limited (KL) for the year
ended 31 May 2021. On 1 October 2020, KL raised Rs. 400 million by issuing convertible
bonds (having par value of Rs. 100 each). The bonds are convertible to KL’s ordinary shares
in 5 years' time at the option of bond holders. The convertible bonds carry coupon rate of 5%
payable on 30 September each year.
KL’s total shareholders’ equity as at 31 May 2021 was Rs. 3,250 million.
Required:
(a) Specify the matters to be considered by the auditor while planning the audit of
convertible bonds. Also suggest the related audit procedures. (09)
(b) Discuss the reporting implication(s), assuming that KL believes that at least 30% of the
bonds would be converted to equity at the end of year 5 and have therefore recorded
Rs. 120 million as equity and the remaining amount as liability. (03)
Answer:
a.
STUDENT CORNER
As it involves significant estimated therefore we will apply ISA 540. Para 13 for planning
PLANNING
The following matters needs to be considered by the Auditor while planning the audit of convertible bonds:
• The requirement of AFRF i.e. IFRS 09 related to recognition and accounting and estimates
• Regulatory factors relevant to the entity’s accounting estimates, including, when applicable, regulatory
frameworks related to prudential supervision.
• The nature of the accounting estimates and related disclosures that the auditor expects to be included in the
entity’s financial statements, based on the auditor’s understanding as mentioned above
• The internal control that management has designed and implemented
PROCEDURES
IFRS BOX – Guidance for Students
Compound financial instruments
Some financial instruments – sometimes called compound instruments – have both a liability and an
equity component from the issuer's perspective. In that case, IAS 32 requires that the component parts
be accounted for and presented separately according to their substance based on the definitions of
liability and equity. The split is made at issuance and not revised for subsequent changes in market
interest rates, share prices, or other event that changes the likelihood that the conversion option will be
exercised. [IAS 32.29-30]
To illustrate, a convertible bond contains two components. One is a financial liability, namely the issuer's
contractual obligation to pay cash, and the other is an equity instrument, namely the holder's option to
convert into common shares. Another example is debt issued with detachable share purchase warrants.
When the initial carrying amount of a compound financial instrument is required to be allocated to its
equity and liability components, the equity component is assigned the residual amount after deducting
from the fair value of the instrument as a whole the amount separately determined for the liability
component. [IAS 32.32]
Page 119
Following procedures shall be performed:
• Inspect the Agreement to verify

o Cash flows
o Interest rates
o Tenure
• Inspect bank statement to verify proceeds
• Recalculate the future cash flows based on the interest rates and payment schedule as per the agreement
• Verify the interest rate used for discounting by comparing it with the market instruments
• Recalculate the F.V of the liability component and residual value of equity instruments
b.
Requirement of AS per IAS 32 – Equity shall be recognized based on the residual value
IFRS after recognizing the fb of liability component because this is the compound
financial instrument
FS Management has recognized the equity component based on its
expectation
Misstatement Therefore this is the misstatement on account of application of accounting
policy
Is it material The materiality based on Shareholders equity is Rs. 32.5 million (3,250
misstatement? *1%) and the amount of misstatement Is Rs. 120 million therefore this is the
material misstatement
Opinion Therefore auditor shall express qualified opinion
Page 120
Q.4 (a) You are the audit manager in a firm of chartered accountants responsible for the
statutory audit of Fazal Limited (FL) for the year ended 31 March 2021.
During the audit, your audit team was informed that on 1 January 2021, FL entered
into a sale and leaseback agreement with Arabian Leasing Company (ALC) for its head
office property situated at premier commercial hub. FL sold the property to ALC at fair
value with useful life of thirty years as assessed on the date of sale. Subsequently, ALC
leased back the property to FL for a period of ten years.
Required:
State the audit procedures which may be performed in respect of the above
transaction. (07)
Answer 04 – Sale and lease back transaction
Student Corner
Page 121
• Inspect the sale and lease back agreement to evaluate whether the performance obligation has been
satisfied and the control has been transferred.
• If the performance obligation is satisfied inspect the agreement to verify the following:
o Sale proceed
o Lease rentals
o Lease term
o Discount rate
• Recalculate the present value of future lease payment and right to use assets
• Inspect the expert report and also evaluate
o Competency, capability and independence
o Findings and conclusion are relevant and reasonable
o Assumptions are reasonable
o Source data is accurate and complete
• Recalculate the gain on disposal to ensure that gain on disposal is not recorded on those portion of assets
that has been retained.
• Right to use asset has been depreciated based on the lease term of the agreement.
• If the performance obligation is not satisfied – ensure that asset is not derecognized in the financial
statements and amount received has been classified as financial liability and is accounted for as per IFRS
09.
(b) Saleem & Company, Chartered Accountants is the statutory auditor of Duo Limited
(DL). The management of DL has prepared summary financial statements, which have
been derived from DL’s statutory financial statements for the year ended 31 December
2020. The management intends to make a statement that the summary financial
statements have been derived from the financial statements for which audit report was
issued by Saleem & Company on 25 February 2021.
Required:
Discuss whether DL can include such a statement in the summary financial
statements and the course of action that the firm should take in this regard. (06)
Answer 4b
Paragraph 26 – Auditors Association
DL can include such statement provided that
(a) The reference to the auditor is made in the context of the auditor’s report on the audited financial
statements; and
(b) The statement does not give the impression that the auditor has reported on the summary financial
statements.
If (a) or (b) are not met, the auditor shall request management to change the statement to meet them, or not to
refer to the auditor in the document.
Alternatively, the entity may engage the auditor to report on the summary financial statements and include the
related auditor’s report in the document.
If management does not change the statement, delete the reference to the auditor, or include an auditor’s
report on the summary financial statements in the document containing the summary financial statements, the
auditor shall advise management that the auditor disagrees with the reference to
the auditor, and the auditor shall determine and carry out other appropriate actions designed to prevent
management from inappropriately referring to the auditor.
Other appropriate actions the auditor may take when management does not take the requested action may
include informing the intended users and other known third-party users of the inappropriate reference to the
auditor. The auditor’s course of action depends on the auditor’s legal rights and obligations. Consequently, the
auditor may consider it appropriate to seek legal advic e.
Page 122
Q.5 Gama Pakistan Limited (GPL) is planning to expand its business by manufacturing
telecommunication accessories. For this purpose, GPL intends to obtain financing from a
bank for the planned expansion. To meet the bank’s requirement, GPL has prepared a five
years’ cash flow forecast based on management’s estimates. GPL has requested your firm to
review the forecast and furnish a report thereon.
Following information is available to you in respect of the forecast:

(i) GPL has secured agreement with two mobile phone manufacturers under which it
would be able to sell 30% of its production capacity. The mobile phone manufacturers
would pay to GPL after selling the accessories to the wholesalers.
(ii) The telecommunication accessories would be sold to mobile phone manufacturers
with one-year warranty.
(iii) During the first year, the supplies to the customers would be made through delivery
trucks; however, in order to reduce the delivery, cost to other cities, cargo train would
be used from second year of production. Negotiations with railway authorities are
underway.
(iv) Royalty would be paid to a foreign company for acquiring the right to manufacture
certain accessories.
(v) A significant reduction in the cash outflows on account of income tax has been
forecasted in the years 3, 4 and 5. The management has placed a comment in support
of this reduction that the taxation authorities have principally agreed to reduce tax rates
for companies manufacturing ‘telecommunication equipment and related accessories’
and the announcement of the reduction in tax rates will be made in the next budget.
Required:
Discuss the key examination procedures that your firm would perform in respect of the
above information. Also discuss the reporting implication(s), if any. (14)
ISAE 3400 – PROSPECTIVE FINANCIAL INFORMATION

• Inspect the relevant document to assess the plant production capacity
• Inspect the agreement with mobile phone manufactures to ensure the assumption that 30% sales to such
manufacture is reasonable
• Inquire with the management about the assumption used to calculate cash inflows from mobile phone
manufactures
• Compare the sale terms with industry norms
• Inspect the supplier agreement to ensure that assumption used in raw material cash outflow is reasonable
• Inspect the labour agreement to ensure that assumption used in labour cash out flow is reasonable
• Review the cash flow forecast to ensure that all overheads are included
• Inspect the terms of the agreement to ensure that assumption made for warranty claims is reasonable
• Inspect the correspondence file with the railway authority to ensure that assumption used in calculating
transport cost is reasonable
• Inspect the royalty agreement to verify rate of royalty to ensure that assumptions used for royalty payment is
reasonable
• Inspect the macro economic factors to ensure that exchange rate used in foreign royalty is reasonable
REPORTING IMPLICATIONS
When the auditor believes that one or more significant assumptions do not provide a reasonable basis for the
prospective financial information prepared on the basis of best-estimate the auditor should either express an adverse
opinion in the report on the prospective financial information, or withdraw from the engagement.
Page 123
Q.6 You are the audit manager at Salman, Pervez and Company, Chartered Accountants. You
are responsible for the audit of United Health Limited and its group financial statements
for the year ended 31 May 2021. Following information have been provided to you by the
audit team:
Profit before Total

Revenue
Name of company tax assets
------------- Rs. in million -------------
United Health Group (Consolidated) 75,000 11,000 69,000
United Health Limited 24,773 2,900 24,484
Quality Labs Limited 54,000 8,100 44,000
United Health Limited (UHL):

Due to COVID-19 pandemic, UHL has witnessed significant decline in sales. In order to
meet the sales target, UHL entered into five large contracts with its customers for supply
of its products. All these customers carried risks of either non-payments or delayed
payments.
In addition to the above, UHL also entered into a contract for supply of lab equipment.
UHL had agreed to a pricing model in which 80% of the contract amount will be received
as the regular price of the equipment and 20% will be received as performance bonus
subject to timely delivery of equipment. UHL has always been able to deliver all its
equipment within the agreed time. However, due to COVID-19 lockdown in the country
of import, UHL may not be able to receive the lab equipment on time and consequently
UHL may not be able to timely supply it to the customer.
Quality Labs Limited (QLL):

Up to last year, the group audit team made local site visit to the component auditor team
in Spain to review key audit working papers and attended closing meetings with local
management as Spain does not allow the cross border sharing of health data. However,
due to COVID-19, Spain has imposed a strict lockdown and has placed travel restrictions
which may continue for at least next 30 days.
Required:
(a) Critically evaluate the issues brought to your notice and advise the course of action.
(17)
(b) Discuss the reporting implications on the group financial statements due to the auditor’s
inability to obtain sufficient appropriate audit evidence regarding QLL’s financial
statements.
(07)
(THE
END)
Answer:
STUDENT CORNER
UHL – the answer is not from ISA 600 – 1st reason the issue is from the parent company on which the
audit firm is the group auditor. The answer is from IFRS 15
QLL – this question is from ISA 600 and auditor needs to send GRI
Page 124
IFRS BOX
Student Corner
EVALUATING THE ISSUE

A contract with customer will be within the scope of IFRS 15 if:
• It is probable that consideration to which entity is entitled to in exchange for the goods or services will
be collected
As the customer carries a risk of nonpayment therefore no revenue shall be recognized
As some customer carried a risk of delayed payment therefore it needs to assess whether the contract
includes
• Significant financing component
• Bad debt expense
COURSE OF ACTION
• Inquire with the management the reason for recognizing revenue
• Inspect the agreement to evaluate the terms of agreement
• Inspect the correspondence file with customers to evaluate whether customers are facing any
financial difficulties
• Inspect the subsequent receipts to assess the collectability from customers
• Inspect the audited financial statements of customers if any to evaluate the financial capacity of the
customer
• Check that discount rate and timing of cash is reasonable
• Check that assumptions used by the management to calculate provision for doubtful debt is
reasonable
UHL – Performance Bonus
STUDENT CORNER
Page 125
• As the company may not be able to timely deliver the equipment to customer therefore 20%
performance bonus shall not be recognized in the financial statements.
• Also auditor also needs to assess whether there is any penalty or termination clauses in the
agreement if the equipment’s are not delivered on time.
Course of Action
• Inspect the agreement to identify transaction price w.r.t performance bonus and the related terms and
condition
• Inquire with the management the reason if any such revenue had been recognized
• Perform the subsequent event procedure to assess the status of delivery of equipment
• Inspect the agreement to evaluate whether any penalty should be recognised in the financial
statement in case of failure to deliver the equipment on time.
QUALITY LABS LIMITED
ISSUE:
Due to restriction the auditor may not be able to obtain SAAE on significant component
Course of Action:
• Request management whether the reporting deadline can be changed
• Arrange conference calls with the component auditors
• Send Group Reporting Instructions to Component auditor that should include
o Significant risk
o Response to Significant risk
o Component materiality
o Identification of instances of non-compliances with laws and regulation
o List of uncorrected misstatement
o Indicators of possible management bias
o Any other significant matter
o Component auditors overall finding and conclusion
Reporting Implications
As QL assets are 63.7% of the group and its Profit before tax is 73.6% therefore it is the significant component
and if the auditor is unable to obtain SAAE on such component it will be considered as a scope limitation and
auditor shall express Disclaimer.
The auditor shall not include KAM section and other information section in the auditor’s report.
Page 126


(i) Answer all SIX questions.
Q.1 Your firm has been appointed as the auditor of Harrier Limited (HL), a public unlisted
company, for the year ending 31 December 2021. HL is in the business of textile and allied
products. The previous year’s audit was performed by another firm of chartered accountants
who expressed an unmodified opinion.
HL has provided you its draft annual report which includes following graphical analysis
regarding the profitability of its business. The audited financial statements are made part of
this annual report which will be shared with all stakeholders.
Export sales represents sales of scuba diving suits mostly to various European countries. Total
assets used for the calculation of ratios relating to export sales include a manufacturing plant
acquired for producing scuba diving suits in October 2018 at a cost of Rs. 100 million and had
an expected useful life of 20 years. As at 30 September 2021, this plant is appearing in HL’s
book at Rs. 85 million.
On inquiry with the management regarding the decline of export sales, they informed that in
the third quarter of 2020, European Union withdrew the GSP + status of Pakistan. This
resulted in cancellation of all future orders from European countries. They further informed
that the plant remained idle several times in the current year due to lack of export orders as
there is a minimal demand of such products in Pakistan and some other Asian countries.
The profit before tax as per draft financial statements is Rs. 200 million.
Required:
(a) Critically evaluate the issue discussed above and advise the course of action that your
team should take. (08)
(b) Discuss all the possible reporting implications if:
(i) the management agrees to account for as per the applicable financial reporting
framework.
Page 127
(ii0 the management does not agree to account for as per the applicable financial reporting framework. (16)
STUDENT CORNER
One of the key to attempt this question is to PICK ISA-
GPS+ status lost in last year therefore impairment should be recorded in last year on which previous auditor express
unmodified opinion
EVALUATION
• European union withdraw the GSP+ status last year which result in the cancellation of order and therefore plant
remain idle several times in the current year. The plant carrying value as at December 31, 2020 is Rs 85 million
therefore no impairment has been recorded by the management which is a material misstatement as the amount
of misstatement represent 42.5% of PBT of current year. As the misstatement exist in the prior period financial
statements on which previous auditor has express unqualified opinion.
COURSE OF ACTION
Impairment of PPE
Obtain an understanding of management process related to identifying, estimating and recording impairments for plant
to determine whether it is appropriate in the circumstances and in accordance with the applicable financial reporting
framework i.e. IAS 36
Inquire with management about their plan to revive the plant – Inspect the correspondence file with new / potential
customer
Check / inspect that assumptions used by the management such as discount rate and future cash flows are reasonable
Obtain management expert report or consider involving auditor’s expert to corroborate and challenge management
assumptions
Perform subsequent event procedures such as subsequent interim FS to compare the projected result with the actual
result
Material Misstatement exist in prior period
Auditor shall request management and those charged with governance to amend the FS and request auditor to reissue
auditor’s report.
If the FS amended and auditors report reissued, then the auditor shall express unqualified opinion on the current period
only.
If the FS are not amended and consequently auditors report not reissued, then request management to appropriately
account for and disclosed as per IAS 08.
Possible reporting implications if the management agrees to account for as per the applicable financial
If management restate the prior period FS therefore clean opinion shall be expressed on the current period financial
statements however auditor may include EOMP
Page 128
Possible reporting implications IF the management does not agree to account for as per the applicable financial
If management refuse to restate the financial statement, then it is the material misstatement on account of application
of accounting policy and is relevant to the current period therefore auditor shall qualify / adverse the opinion and includes
corresponding figure in the basis for modified opinion.
If management record impairment in the current year then it will still be considered as a material misstatement on
account of application policy (IAS 08) therefore auditor shall qualify / adverse the opinion and includes corresponding
figure in the basis for modified opinion.
The auditor may include OMP with respect to first year of audit.
The financial statements of the Company for the year ended December 31, 2020 were audited by another auditor who
expressed an unmodified opinion on those statements on February 02, 2021.
Other information:
In circumstances when the auditor’s opinion is qualified, consideration need to be given that the related other information
may also be materially misstated for the same matter giving rise to the qualified opinion on the financial statements.
• If auditor concludes that material misstatement exist in other information the auditor shall request management and
TCWG to correct
• If the other information is not corrected the auditor shall report those misstatements in other information section or
Withdraw from an engagement or disclaim an opinion
Page 129
Q.2 Your firm has been appointed as the auditor of a recently launched innovative food business
venture by the name of Macaw Foods (Private) Limited (MPL). Extracts from draft financial
statements for the year ended 31 October 2021, provided by the management are as follows:
Rupees
Statement of profit & loss:
Joining fee – non refundable 12,500,000
Service charges 50,000,000
Profit on supply of ingredients 7,500,000
Statement of financial position:

Current assets:
Inventory 12,000,000
Cash and bank 10,000,000
Current liabilities:
Payable to restaurants (net of service
charges and profit on ingredients) 10,000,000
Equity:
Share capital 300,000,000
Following additional information is available regarding MPL:
Background
Marium and Mujtaba are the co-founders of MPL and are also involved in the entity’s
operational activities. They had approached a venture capital fund (the fund) for financing
the start up. The fund financed MPL in return of a 40% equity stake in the business. Being a
high risk investment for the fund, they have a superior right on MPL’s assets and payouts over
other stakeholders. Remaining amount was raised through a Rs. 100 million bank loan.
Operations
MPL has established large shared kitchens in the key localities of the city where MPL offers
restaurants to scale up and have immediate presence in that locality. If a restaurant brand
joins MPL, all it needs to do is to share its recipe with MPL’s team. On receiving the order,
MPL will be responsible for sourcing of ingredients, cooking with care to packaging and
delivering it to the customers. The restaurants thus save huge costs of setting up their own
infrastructure through partnership with MPL.
To partner with MPL, restaurants have to enter into a three-year contract under which they
are required to pay a non-refundable joining fee of Rs. 100,000 and a 30% service charge for
order delivered by MPL and 25% service charge for order delivered by any third party food
delivery company. In addition, restaurants are also charged for the cost of commonly used
ingredient on a standard rate communicated to all restaurants on the first day of the month.
However, specialized ingredients are required to be supplied by the restaurants themselves.
MPL purchases ingredients in bulk quantity and resultantly obtains huge discounts. MPL’s
management has presented profit on ingredients in its financial statements on a net basis as
they believe that they are acting as an agent for restaurants.
Invoicing
An electronic data interchange system has been set up which directly connects MPL with the
restaurants ordering system. Weekly invoices are also automatically shared with restaurants.
Restaurants which do not operate an online ordering system are catered manually. A separate
ledger is maintained for each restaurant in which all receipts and payments are recorded. Each
restaurant is invoiced weekly on the basis of their ledger balance. Being a recent start up, MPL
is a bit understaffed as there are only two accountants who are responsible for managing,
processing and recording all cash inflows, outflows and preparation of management reports.
Required:
to be performed in respect of identified risks. (23)
Page 130
S.no Audit risk Procedures

1. Since the fund has preferential rights over
payouts and preferential rights on liquidation, • Obtain the agreement with venture to determine
therefore there is a risk that management may its terms.
not have classified and account for it as a
preference shares • Ascertain through the terms whether it is
redeemable, non-redeemable or convertible to
ordinary shares.
• Inspect the bank statement to ensure that amount

recognized as preference share has been
received
• Evaluate the adequacy of disclosure
2. The Company has obtained loan from bank

and fixed payout to the preference • Inspect loan agreement to identify covenants
shareholder – there is a risk that covenant
may be breached and management may not • Perform covenant testing
have classified loan non-current liability to
current liability • Check that classification is accurately made and
adequate disclosure is made in the financial
statements
3. To partner with MPL, restaurants have to

enter into a three-year contract under which • Inspect the agreement to assess the terms and
they are required to pay a non-refundable condition such as performance obligation and
joining fee of Rs. 100,000. Therefore there is amount of joining fees
a risk that performance obligation may be
satisfied over the time and management may • Evaluate the accounting policy and ensure that it
have recognized revenue at point of time is consistent with the requirement of IFRS 15
4. MPL purchases ingredients in bulk quantity

and resultantly obtains huge discounts. MPL’s • Inquiry with the management and Inspect the
management has presented profit on agreement to evaluate the terms and condition
ingredients in its financial statements on a net such as whether company has inventory risk,
basis as they believe that they are acting as credit risk and has discretion in establishing price
an agent for restaurants. Therefore there is a Read the terms of the agreement with the
risk that company may be acting as a principal management to determine whether MPL controls
and should recognized the amount on gross the inventory.
basis
• Ensure that inventory has been recorded
accurately at gross amount by inspecting supplier
invoices.
5 Company used EDI system therefore there is • Perform GITC over data files and program
a risk that transaction may not be processed changes
completely and accurately • Check logs to identify any unauthorized changes
Or un authorized changes in data files or • Perform CAAT to reperform application control
programing that management has established such as check
digit, limit check, range check, sequence check
and etc.
• Perform Control over transmission such as
encryption techniques
P
Paaggee 113311
06 The management has presented net payables

in the balance sheet, therefore there is a risk • Read the agreement to determine whether MPL
that a receivable balance of a restaurant may has a legally enforceable right to set-off the
have been off-set with payable of another. recognized amount.
• Inquire with the management to assess whether
management has intention to offset receivable
and payable
• Obtain the schedule of receivable and payable
and ensure that correct accounting is being made
07 The Company has obtained loan from bank

and required to pay fixed return to venture. • Understand and evaluate MPL’s financial
Therefore, there is a risk of fraud as reporting process and the controls over journal
management may have an incentive / entries and other adjustments.
pressure to commit FFR by MOC
• Review accounting estimates for
MPL may be under pressure to achieve the consistency/reasonableness/biasness.
results as required by the venture capital fund
and the bank. Therefore, there is a risk of • Evaluate business rationale for significant
fraudulent financial reporting. transaction outside the normal course of
Due to under staffing there may not be business.
effective segregation of duties, which may be.
In this business there is a very high cash • Evaluate the selection and application of
turnover which may be susceptible to theft. accounting policies by the entity, particularly those
related to subjective measurements.
08 The restaurants who are not linked with MPL’s • Obtain sales register and match the balance with
EDI, their transactions are recorded manually. the GL
Due to the complexity of the system and the • Inspect supporting documents such as GDN and
understaffing there is a risk that the recording sales invoice to ensure the accuracy of amount
of such transactions may be misstated. • Select samples from GRN and ensure that sales
has been recorded.
09 As the system runs weekly invoices therefore • Obtain GDN register for the year ended December
there is a risk of early cutoff as some invoices 31, 2021
may not be recorded • Select last GDN and thereafter and ensure that
revenue has been recorded for the said GDN in
the correct accounting period
10 Since MPL holds the recipes of various • Inquire with the in house legal counsel to identify
restaurants, there is a risk that if any recipe is any such instances
leaked the restaurant may initiate litigation • Inspect the correspondence file with customer to
against MPL. identify the nature and amount of such claims
• Circulate confirmation to MPL legal advisor.
11 As the inventory in food business is of highly • Understand and evaluate the management
perishable nature, therefore there is a risk that process to identify obsolete, impaired inventory
inventory may have been impaired and no and to estimate the provision to determine
impairment or adequate impairment may have whether it is appropriate in the circumstances
been recorded by the management as per IAS and in accordance with the IAS 02
02
• Obtain inventory ageing to identify old obsolete
inventory
• Ensure that management assumptions are

reasonable
P
Paaggee 113321
S.n Risk IFRS requirement

o Descripti
on
01 Preferenc 2 Principles of liability/equity classification
e shares A financial instrument or its component parts should be classified upon initial recognition as a
financial liability or an equity instrument according to the substance of the contractual
arrangement, rather than its legal form, and the definitions of a financial liability and an equity
instrument. [IAS 32:15 & 18] For some financial instruments, although their legal form may be
equity, the substance of the arrangements is that they are liabilities. A preference share, for
example, may display either equity or liability characteristics depending on the substance of the
rights attached to it.
02 Covenant When a condition of a long-term loan arrangement is breached on or before the end of the
breach reporting period with the effect that the liability becomes payable on demand, the liability is
classified as current. This is so, even if the lender has agreed, after the reporting period and before
authorisation of the financial statements for issue, not to demand payment as a consequence of
the breach. The liability is classified as current because, at the end of the reporting period, the
entity does not have the right to defer settlement for at least 12 months after that date. [IAS 1:74]
03 Revenue 6.3.6.2 Recognition of upfront fees upon entering into a contract

Recogniti 6.3.6.2-1
on Recognition of upfront fees received upon entering into a contract Under IFRS 15, the timing of
recognition of revenue is not based on cash receipt or payment schedules. Instead, an entity
recognises revenue when (or as) it satisfies a performance obligation by transferring control of a
promised good or service to a customer.
When consideration is received by an entity before the related performance obligation is satisfied,
the advance payment should not be recognised as revenue until that obligation is satisfied.
Instead, the entity should recognise the consideration received as a contract liability (i.e. deferred
revenue) in its statement of financial position and evaluate such payment for the potential
existence of a significant financing component
Example 6.3.6.2
Non-refundable upfront fee[IFRS 15:IE272 - IE274, Example 53]
An entity enters into a contract with a customer for one year of transaction processing services.
The entity’s contracts have standard terms that are the same for all customers. The contract
requires the customer to pay an upfront fee to set up the customer on the entity’s systems and
processes. The fee is a nominal amount and is non-refundable. The customer can renew the
contract each year without paying an additional fee.
The entity’s setup activities do not transfer a good or service to the customer and, therefore, do
not give rise to a performance obligation.
The entity concludes that the renewal option does not provide a material right to the customer that
it would not receive without entering into that contract (see [IFRS 15:B40]). The upfront fee is, in
effect, an advance payment for the future transaction processing services. Consequently, the
entity determines the transaction price, which includes the non-refundable upfront fee, and
recognises revenue for the transaction.
6.3.6.2-2
Upfront fees received upon entering into a contract – club membership fees – example an entity
operates a fitness club. The key terms of its contractual arrangements with customers are as
follows.
• Customers are required to pay a joining fee of CU100 upon entering into the contract.
• Each contract has a term of one year. During the contractual period, customers are required to
pay a monthly fee of CU100 (irrespective of their usage of the club during that month).
• The joining fee is not refundable, even if the customer never uses the club during the one-year
contract period.
In the circumstances under consideration, customers pay the joining fee and monthly fees to use
the facilities provided by the fitness club. The performance obligation is therefore to provide fitness
club facilities for customers’ use and the joining fee is part of the consideration paid by customers
to use the facilities in the future. No performance obligation has been satisfied when the fee is
received and, therefore, no revenue should be recognised at that time.
Instead, the joining fee should be recognised as a contract liability. Such consideration would be
included in the transaction price and recognised as revenue when (or as) the associated
performance obligation(s) are satisfied.
Page 133
04 Principal 3.6 Principal versus agent considerations

vs agent 3.6.1 Determining the nature of the entity’s promise
When another party is involved in providing goods or services to a customer, the entity should
determine whether the nature of its promise is a performance obligation to provide the specified
goods or services itself (i.e. it is acting as a principal) or to arrange for those goods or services to
be provided by the other party (i.e. it is acting as an agent). An entity should determine whether it
is a principal or an agent for each specified good or service promised to the customer. A specified
good or service is a distinct good or service (or a distinct bundle of goods or services) provided to
the customer (see 6.3). If a contract with a customer includes more than one specified good or
service, an entity could be a principal for some specified goods or services and an agent for others.
[IFRS 15:B34]Assessing whether an entity is acting as a principal or as an agent requires
judgement in some circumstances, and different conclusions can significantly affect the amount
and timing of revenue recognised. An entity should determine the nature of its promise for the
purposes of applying IFRS 15:B34 by: [IFRS 15:B34A]
• identifying the specified goods or services to be provided to the customer (which,

for example, could be a right to a good or service to be provided by another party;
and
assessing whether it controls (see 9.1.2) each specified good or service before that good or
service.
3.6.2 Entity as a principal

An entity is a principal if it controls the specified good or service before that good or service is
transferred to a customer. However, if the entity obtains legal title to a specified good only
momentarily before legal title is transferred to a customer, that does not necessarily mean the
entity had control of that specified good. [IFRS 15:B35]
• is transferred to the customer.
Indicators that an entity controls the specified good or service before it is transferred to the
customer (and is, therefore, a principal) include the following (the list is not exhaustive): [IFRS
15:B37]
a. the entity is primarily responsible for fulfilling the promise to provide the specified
good or service. This will typically include having responsibility for the acceptability
of the specified good or service (e.g. primary responsibility for the good or service
meeting the customer’s specifications). If the entity is primarily responsible for
fulfilling the promise to provide the specified good or service, this may indicate that
the other party involved in providing the specified good or service is acting on the
entity’s behalf;
b. the entity has inventory risk before the specified good or service is transferred to a
customer, or after transfer of control to the customer (e.g. if the customer has a right
of return). For example, if the entity obtains, or commits itself to obtain, the specified
good or service before obtaining a contract with a customer, this may indicate that
the entity has the ability to direct the use of, and obtain substantially all of the
remaining benefits from, the good or service before it is transferred to the customer;
and
c. the entity has discretion in establishing the price for the specified good or service.
Establishing the price that the customer pays for the specified good or service may
indicate that the entity has the ability to direct the use of that good or service and
obtain substantially all of the remaining benefits. However, in certain circumstances
an agent may have discretion in establishing prices. For example, an agent may
have some flexibility in setting prices in order to generate additional revenue from its
own service of arranging for goods or services to be provided by other parties to
customers.
Page 134
05 EDI
system
06 offsetting
07 MOC Refer risk 03 of December 2019and question 07 of summer 2018

08 Error in
recording
09 Revenue
recognitio
n cutoff
10 Breach of
confidenti
al
informatio
n
11 Inventory Refer winter 2017 risk
impairme
nt
Page 135
Q.3 Tortoise Publishing (Pvt.) Limited (TPL) is a publisher of children books which is part of
curriculum for major schools in Pakistan. TPL is planning to expand its business and diversif y
into Educational Technology Business. For this purpose, TPL is considering to acquire a
business namely Swan Technology Enterprise (STE). TPL has requested your firm to carr y
out a due diligence for acquisition of STE.
After initial discussion for the due diligence exercise, your team has brought the following
matters to your attention:
(i) In 2018, STE was formed as a partnership concern by two software graduates, Saleem
and Sabir. Initially, they had designed and developed the application for schools which
included Student Management System and Learning Management System. Thi s
application manages all the data related to curriculum learning material, billing to
students, student educational records and tracking of assignments given to students .
Due to shortage of funds, they were not able to market its application properly an d
were able to sell the application to few schools only.
In early 2019, Saleem and Sabir had secured significant funds from an investor t o
finance the growth and expansion. Thereafter, a marketing team was recruited at
attractive packages to market the application and an administrative team was also s et
up to look after the accounts and other administrative tasks. However, the marketing
team has not been able to penetrate into the market as expected.
(ii) TPL believes that since it has good connection with many schools due to its publishing
business, they can not only market the application in a more aggressive way but can
also exploit synergies by using TPL’s marketing, finance and administrative teams.
TPL also has a plan to market this application to schools situated in under developed
countries.
Required:
Identify and explain any six matters which you may consider in your due diligence review.
Also recommend any three additional information that you may need in respect of each
matter identified by you. (15)
Page 136
Page 137
Q.4 Your firm is the external auditor of Antilope Limited (AL) for the year ended 30
September 2021. AL is in the fishing business and it operates various fishingtrawlers.
On 1 November 2020, a new fishing license worth Rs. 10 million was given to AL by the
government at a nominal amount of Rs. 100,000 for a period of four years in consideration of
the following conditions:
(i) AL should help Fisheries Department in protecting the endangered marine species.
(ii) AL should not hunt and catch any of the endangered marine species.
(iii) AL should educate other fishermen in adopting the practices which would help in
preservation of the endangered marine species.
On receipt of license, AL recorded it at its fair value of Rs. 10 million.
Your audit team has performed various audit procedures and obtained management
representation to ascertain that the conditions for grant of the license have been met. After
completing audit field work, you have provided an initialled draft audit report.
After issuance of initialled audit report, a media report has surfaced which indicates that some
employees of AL are involved in selling the endangered marine species, caught by AL’s
trawlers, in the fish market.
Required:
Evaluate the above matters and discuss your firm’s course of action. Also briefly mention
the related reporting implications. (17)
Answer 04
Student Corner- The question was easy but the most difficult thing was to pick the standard. In this question ISA
250 is applicable.
After issuance of initialled audit report, a media report has surfaced which indicates that some employees of AL are
involved in selling the endangered marine species, caught by AL’s trawlers, in the fish market therefore company may
have non complied with environmental laws and regulations. Therefore, auditor shall perform following audit procedures
Possible effect Course of Action Reporting Implications
Going concern issue due to fishing Going concern assessment at least Going concern assumption
license termination for the period of 12 months appropriate but material
Cash flow and P&L Forecast uncertainty exist.
Assumptions are reasonable Adequately disclosed –
Correspondence with environmental MURTGC + Unmodified
regulator opinion
not adequately disclosed –
Qualified or adverse opinion
Reversal of Govt Grant and asset Inspect the agreement to assess the If management reverse govt
and recognition of financial liability conditions grant and asset – unqualified
Obtain audit evidence that condition opinion
has been breached If management do not reverse
Ensure that any income recognized – qualified or adverse opinion
up to year end had been reversed
along with the DE recognition of asset
Penalty by Regulator Inspect the laws and regulation to If management
assess the amount of penalty recognized adequate
provision – unqualified opinion
Page 138
Inspect the correspondence file with If management do not

regulator to determine whether any recognized adequate
penalty has been imposed provision qualified or adverse
opinion
• The auditor shall discuss with appropriate level of management including TCWG in order to obtain additional
audit evidence unless prohibited by laws and regulation
supports that the entity is in compliance with environmental laws and regulations and, in the auditor’s judgment,
the effect of the suspected non-compliance may be material to the financial statements, the auditor shall
consider the need to obtain legal advice. If the auditor is unable to obtain SAAE then it will be considered as a
scope limitation – Auditor may withdraw or disclaim an opinion.
appropriate action
• The management had already provided written representation and the evidence that auditor obtain is
inconsistent with such written representation therefore it creates doubts over the reliability of written
representation therefore auditor shall perform following procedures
o Perform procedures to resolve the matters such as;
▪ Perform other audit procedures (whether risk assessment remain appropriate and if not revise
the risk assessment and determine N,T and E of FAP); and
o If matter is not resolved, the auditor shall reconsider the assessment of the competence, integrity,
ethical values or diligence of management, or of its commitment to or enforcement of these, and shall
determine the effect that this may have on the reliability of representations and audit evidence in general
by performing the following procedures:
▪ The auditor shall evaluate the implications of the above noncompliance with environmental
laws and regulations in relation to other aspects of the audit, particularly the reliability of
management representations, recognizing that an instance of fraud is unlikely to be an isolated
occurrence.
▪ As the auditor identifies a misstatement, whether material or not, and the auditor has reason to
believe that it is or may be the result of fraud and that management (in particular, senior
management) is involved, the auditor shall reevaluate the assessment of the risks of material
misstatement due to fraud and its resulting impact on the nature, timing and extent of audit
procedures to respond to the assessed risks.
▪ The auditor shall also consider the reliability of audit evidence previously obtained
Page 139
Q.5 You are the quality assurance manager in Asghar & Company, Chartered Accountants.
Following matter has been brought to your attention:
Your firm has deputed two staff members to perform the following tasks in Badger (Private)
Limited (BPL):
▪ Raising purchase orders.
▪ Raising customer orders.
▪ Calculating depreciation on fixed assets.
▪ Posting transactions coded by the client to the general ledger.
On 15 November 2021, BPL has appointed your firm as external auditor for the year ending
30 June 2022. Your firm informed BPL that they will not be able to continue the above
mentioned services from the date of appointment as it would affect firm’s independence and
objectivity. BPL accepted your firm’s point of view. However, BPL’s management has
requested your firm to assist them in shortlisting the candidates for the roles which your firm’s
personnel were performing.
Required:
Discuss the categories of threats involved in the above situation and advise the possible
course of action that may be followed. (14)
Accounting and Book Keeping Service – Becomes an AUDIT CLIENT

BPL becomes an audit client during or after the period covered by the financial statements on which the firm will express
an opinion, the firm shall determine whether any threats to independence are created by:
(a) Financial or business relationships with the audit client during or after the period covered by the financial
statements but before accepting the audit engagement; or
(b) Previous services provided to the audit client by the firm or a network firm.
As the firm is providing accounting and book keeping services to an audit client may create self-review threat.
The firm is Raising purchase orders and Raising customer orders which are management
responsibility therefore such services cannot be provided by the audit firm
Calculating depreciation on fixed assets. Posting transactions coded by the client to the
general ledger. These services are of routine or mechanical nature.
A firm or a network firm shall not provide to an audit client that is not a public interest entity accounting and bookkeeping
services including preparing financial statements on which the firm will express an opinion or financial information which
forms the basis of such financial statements, unless:
(a) The services are of a routine or mechanical nature; and
Threats to independence are created if a non-assurance service was provided to an audit client during, or after the
period covered by the financial statements, but before the audit team begins to perform the audit, and the service would
not be permitted during the engagement period.
Examples of actions that might be safeguards to address a self-review threat created when providing accounting and
bookkeeping services of a routine and mechanical nature to an audit client include:
Using professionals who are not audit team members to perform the service.
Having an appropriate reviewer who was not involved in providing the service review the audit work or service
performed.
Engaging another firm outside of the network to evaluate the results of the non-assurance service or having another
firm outside of the network re-perform the non-assurance service to the extent necessary to enable the other firm to
take responsibility for the service.
• Not giving the loaned personnel audit responsibility for any function or activity that the personnel performed during
the loaned personnel assignment might address a self-review threat.
Page 140
RECRUITEMENT SERVICE
Providing recruiting services to an audit client might create a self-interest, familiarity or intimidation threat.
Providing the following services does not usually create a threat as long as personnel of the firm or network firm does
not assume a management responsibility:
• Reviewing the professional qualifications of a number of applicants and providing advice on their suitability for the
position.
• Interviewing candidates and advising on a candidate’s competence for financial accounting, administrative or control
positions.
When a firm or network firm provides recruiting services to an audit client, the firm shall be satisfied that:
(a) The client assigns the responsibility to make all management decisions with respect to hiring the candidate for the
position to a competent employee, preferably within senior management; and
(b) The client makes all management decisions with respect to the hiring process, including:
• Determining the suitability of prospective candidates and selecting suitable candidates for the position.
• Determining employment terms and negotiating details, such as salary, hours and other compensation.
Recruiting Services that are Prohibited

When providing recruiting services to an audit client, the firm or the network firm shall not act as a negotiator on the
client’s behalf.
A firm or a network firm shall not provide a recruiting service to an audit client if the service relates to:
(a) Searching for or seeking out candidates; or
(b) Undertaking reference checks of prospective candidates, with respect to the following positions:
(i) A director or officer of the entity; or
(ii) A member of senior management in a position to exert significant influence over the preparation of the client’s
accounting records or the financial statements on which the firm will express an opinion.
An example of an action that might be a safeguard to address such a self-interest, familiarity or intimidation threat is
using professionals who are not audit team members to perform the service.
Page 141
Q.6 You are planning the audit of Jackal Power Limited (JPL) for the year ending
31 December 2021. JPL owns and operates an electricity generation power plant of 1500
MW. JPL sells all the electricity produced to a government entity National Power
Distribution Limited (NPDL). There have been continuous delays in clearing the invoices
raised to NPDL. This has resulted in significant increase in trade receivables.
JPL’s management has informed you that on 21 August 2021, all the electricity producers
have signed a Memorandum of Understanding (MoU) with the Government of Pakistan
(GoP) under which:
(i) the GoP has provided its guarantee for all invoices pertaining to year 2013 and
onwards; and
(ii) a payment of 30% will be made on 31 December 2021 and the remaining
70% payment would be made over a period of 3 years;
(iii) late payment surcharge will be charged on KIBOR basis which was earlier charged at
an annual rate of 15%.
Required:
Discuss the audit procedures which need to be performed by the audit firm in order to
obtain sufficient and appropriate audit evidence for receivables from NPDL. (07)
(THE END)
Answer:
• Inspect the MOU to verify the following terms and conditions:

o Guarantee provided by GOP
o Payment plan
o LPS will be charger on KIBOR basis
o Invoices pertaining to 2013 and onwards
• Inspect the minutes of the meeting of TCWG to obtain an understanding of MOU with GOP
• Ensure that account receivable has been properly classified into current and non-current assets based on the
revised plan
• Trade receivable includes significant financing component therefore ensure that discount rate used by the
management is reasonable
• Understand and evaluate the management process to identify long outstanding receivable and to estimate the
allowance for doubtful debt to determine whether it is appropriate in the circumstances and in accordance with the
applicable financial reporting framework.i.e. IFRS 09
• Obtain management working on allowance for doubtful debt and check whether assumption such as model used,
PD and LGD used by the management is reasonable
• -Obtain debtors aging analysis and change in debtor days to identify long outstanding receivable
• Inspect subsequent bank statement to assess the recoverability of receivable
• Inspect the correspondence file with GoP whether any payment has been received as part of MoU
• Assess the adequacy of disclosure.
Page 142

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CERTIFICATE FINANCE & ACCOUNTING PROFESSIONAL 06

COMPILED BY: SIR MUHAMMAD IBRAHIM, ACA

ABOUT THE AUTHOR

• Oil and Gas Sector

He is also associated with Deloitte London and Deloitte Qatar.

Question Description Page no

Question Description Page No.

Certified Finance and Accounting Professional Stage Examination

The Institute of 7 December 2017

Audit, Assurance and Related Services

Revenue from sales of motor vehicles 54,000 70,000

Property, plant and equipment 6,600 4,510

Winter 2017 – Suggested Answer – Mehmood Auto Limited

-perform subsequent event procedures

-Obtain debtors aging analysis and change

-Check subsequent receipts to obtain

- Obtain inventory ageing to identify old

-Inspect subsequent sales to identify

Risk Revenue 6.1.1 Identification of performance obligations – general

a. a good or service (or a bundle of goods or services) that is 'distinct' (see

8.1 Allocation of the transaction price to the performance obligations – general

Assessing whether a warranty is a separate performance obligation. As discussed by the

If a warranty, or a part of a warranty, is a service-type warranty, it is accounted for as a

Risk More than 1 6.1.1 Identification of performance obligations – general

c. a good or service (or a bundle of goods or services) that is 'distinct' (see

8.1 Allocation of the transaction price to the performance obligations – general

• an entity has a present obligation (legal or constructive) as a result of a

3.2 Contingent liabilities

A contingent liability is defined as: [IAS 37:10]

o it is not probable that an outflow of resources embodying

Recognition 3 Definition of a financial asset

i. to receive cash or another financial asset from another

3.3 Contingent assets

Risk Impairment 3.3.1 Measurement of net realisable value

Risk Impairment 4.2 Indications of impairment

• evidence is available of obsolescence or physical damage of the asset;

• for an investment in a subsidiary, joint venture or associate, the investor

o the carrying amount of the investment in the separate financial

6.1 Measurement of recoverable amount – general

7.1 Fair value and costs of disposal – definitions

7.2 Costs of disposal to be deducted

• identification of cash-generating units (see 8.2); If the recoverable amount

Management course of Therefore management should disclose such events or circumstances

(i) Kamran Limited (KL) is in the business of manufacturing generators. On 1

KL recognised goodwill amounting to Rs. 45 million on acquisition of HL,

• Inspect the purchase agreement to check the:

3.2 Changes in accounting policies

An accounting policy can be changed only if the change: [IAS 8:14]

• is required by an IFRS Standard; or

4 Measuring assets (and disposal groups) held for sale

A self-interest or intimidation threat might be created if there is a close business relationship

Certified Finance and Accounting Professional Stage Examination

The Institute of 7 June 2018

Audit, Assurance and Related Services

The following information is also available:

(i) Impairment of plant and machinery of wearable sports sensors

(ii) Overstatement of revenue / understatement of expenses:

(iii) Segment reporting:

(v) Provision for staff termination

(vi) Onerous contract

▪ Obtain and understanding of management’s process and policies relating to

▪ Evaluate whether management’s methods and assumptions are reasonable by

▪ Using the appropriate data, assumptions, and methodology, recompute the

(viii) Development cost