SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2018 EXAMINATIONS 1 of 7

AUDIT & ASSURANCE [S2] – STRATEGIC LEVEL-1

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Question No. 1
(a) (i) (1) Professional Judgment: 02
The application of relevant training, knowledge and experience, within the context
provided by auditing, accounting and ethical standards, in making informed decisions
about the courses of action that are appropriate in the circumstances of the audit
engagement.
(2) Professional Skepticism: 02
An attitude that includes a questioning mind, being alert to conditions which may
indicate possible misstatement due to error or fraud, and a critical assessment of audit
evidence.
(3) Reasonable Assurance: 02
In the context of an audit of financial statements, a high, but not absolute, level of
assurance.

(ii) Inherent Limitations of an Audit: [Any two (2)] 05

In an audit of financial statements an auditor cannot give an absolute assurance. He can
only give a reasonable assurance due to the inherent limitations of an audit. These inherent
limitations of an audit arise from:
The Nature of Financial Reporting:
The preparation of financial statements involves judgment by management in applying the
requirements of the entity’s applicable financial reporting framework. In addition many
financial statement items involve subjective decisions or assessments or degree of
uncertainty where estimates are required whereby there may be a range of acceptable
interpretations or judgments that may be made. Consequently, some financial statements
items are subject to an inherent level of variability which cannot be eliminated.
The Nature of Audit Procedures:
There are practical and legal limitations on the auditor’s ability to obtain audit evidence. For
example:
 There is possibility that management may not provide the complete information either
intentionally or unintentionally.
 Fraud may involve sophisticated and carefully organized schemes designed to
conceal it.
 An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor
is not given specific legal powers, such as the power of search, which may be necessary
for such an investigation.
The need for the audit to be conducted within a reasonable period of time and at a
reasonable cost:
There is an expectation that auditor will form an opinion on the financial statements within a
reasonable period and at a reasonable cost. Consequently it is necessary for the auditor to:
 Direct audit effort to areas most expected to contain risks of material misstatements with
correspondingly less efforts directed at other areas.
 Use testing and other means of examining populations for misstatements.
Because of the inherent limitations of an audit, there is an unavoidable risk that some
material misstatements of financial statements may not be detected, even though the audit
is properly planned and performed in accordance with ISAs.

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and
its Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be
liable to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2018 EXAMINATIONS 2 of 7
AUDIT & ASSURANCE [S2] – STRATEGIC LEVEL-1
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(b) Duties of an Auditor: 04
Under Section 249(1):
A company’s auditor shall conduct the audit and prepare his report in compliance with the
requirements of International Standards on Auditing as adopted by the Institute of Chartered
Accountants of Pakistan.
Under Section 249(2):
A company’s auditor must carry out such examination to enable him to form an opinion as to:
(a) Whether adequate accounting records have been kept by the company and returns adequate
for their audit have been received from branches not visited by him; and
(b) Whether the company’s financial statements are in agreement with the accounting records
and returns.

Question No. 2
(a) (i) Preconditions for an Audit: 02
Preconditions for an audit means the use by management of an acceptable reporting
framework in the preparation of the financial statements and the agreement of management
to the premise on which an audit is conducted.

(ii) Steps to be Performed to Assess the Preconditions for an Audit: 06

In order to establish whether the preconditions for an audit are present, the auditor should:
a) Determine whether the financial reporting framework to be applied in the preparation of
the financial statement is acceptable
b) Obtain the agreement of management that it acknowledges and understands its
responsibility:
(i) For the preparation of the financial statements in accordance with the applicable
financial reporting framework, including where relevant their fair presentation.
(ii) For such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatements,
whether due to fraud or error. And
(iii) To provide the auditor with
a. Access to all information of which management is aware that is relevant to
preparation of the financial statements such as records, documentation and
other matters:
b. Additional information that the auditor may request from management for
purpose of the audit; and
c. Unrestricted access to persons within the entity from whom the auditor
determines it necessary to obtain audit evidence.

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and
its Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be
liable to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2018 EXAMINATIONS 3 of 7
AUDIT & ASSURANCE [S2] – STRATEGIC LEVEL-1
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(b) (i) Nature and Purposes of Audit Documentation: 07
Audit documentation that meets the requirement of ISA 230 and the specific documentation
requirement of other relevant ISAs provides:
 Evidence of the auditor’s basis for a conclusion about the achievement of the overall
objective of the auditor; and
 Evidence that the audit was planned and performed in accordance with ISAs and
applicable legal and regulatory requirements.
Audit documentation serves a number of additional purposes, including the following:
(i) Assisting the engagement team to plan and perform the audit.
(ii) Assisting members of the engagement team responsible for supervision, to direct and
supervise the audit work and to discharge their review responsibilities.
(iii) Enabling the engagement team to be accountable for its work.
(iv) Retaining a record of matters of continuing significance to future audits.
(v) Enabling the conduct of quality control reviews and inspections.
(vi) Enabling the conduct of external inspections in accordance with applicable legal,
regulatory or other requirements.

(ii) If an auditor becomes aware of information concerning an instance of actual or suspected 05

non-compliance with laws and regulations, the auditor shall obtain:
 an understanding of the nature of the act and the circumstances in which it has occurred
and
 shall obtain further information to evaluate the possible effect on the financial statements.
If the auditor suspects there may be non-compliance, the auditor shall discuss the matter
with management and where appropriate with those charged with governance. If he is
unable to obtain sufficient information that supports that the entity is in compliance with laws
and regulations and if in the auditors judgement the effect of the suspected non-compliance
may be material to the financial statements he shall consider obtaining legal advice and
If sufficient information about suspected non-compliance can be obtained, the auditor shall
evaluate the effect of lack of sufficient appropriate audit evidence on the auditors’ opinion.
The audit shall also evaluate the implication of non-compliance in relation to other aspects
of the audit including the risk assessment and the reliability of management representations.

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and
its Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be
liable to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2018 EXAMINATIONS 4 of 7
AUDIT & ASSURANCE [S2] – STRATEGIC LEVEL-1
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Question No. 3
The prospective audit risks are as follows: 08
a) Overstatement of debtors:
Average period of outstanding debtors has reached to four months which is indicative of a risk of
inadequate provision.
b) Valuation of inventories:
The inventories turnover rate has decreased to 3 times per year from 5 times in 2016. It is indication
that inventories are piling whereby there is a risk of incorrect valuation and risk of obsolescence of
inventories.
c) Management override of controls and overstatement of revenue:
The income position has weakened and the company has suffered losses as the interest coverage
has moved below 1.0. In this situation management may try to override controls to overstate
revenues of understate expenses.
d) Going concern:
The management is experiencing a decline in profitability whereby the GP% is also declining.
e) Further the company has deteriorating current ratio and quick asset ratio:
These factors highlight that the company might be facing going concern issues for which auditor
might need to understand from management the plans to mitigate such risk.

Question No. 4
(a) The Entity and its Environment: 08
The auditor shall obtain an understanding of the following:
(a) Relevant industry, regulator, and other external factors including the applicable financial
reporting framework.
(b) The nature of the entity, including:
(i) Its operations;
(ii) Its ownership and governance structures;
(iii) The types of investments that the entity is making and plans to make, including
investments in special-purpose entities; and make, including investments in special-
purpose entities, and
(iv) the way that the entity is structured and how it is financed,
to enable the auditor to understand the classes of transactions, account balances, and
disclosures to be expected in the financial statement.
(c) The entity’s selection and application of accounting policies, including the reasons for
changes thereto. The auditor shall evaluate whether the entity’s accounting policies are
appropriate for its business and consistent with the applicable financial reporting framework
and accounting policies used in the relevant industry.
(d) The entity’s objectives and strategies, and those related business risks that may result in
risks of material misstatement.
(e) The measurement and review of the entity’s financial performance.

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and
its Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be
liable to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2018 EXAMINATIONS 5 of 7
AUDIT & ASSURANCE [S2] – STRATEGIC LEVEL-1
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(b) Audit Procedures to Identify Litigation and Claims: 05
The auditor shall design and perform audit procedures in order to identify litigation and claims
involving the entity which may give rise to a risk of material misstatement, including:
a) Inquiry of management and, where applicable, others within the entity, including in-house
legal counsel;
b) Reviewing minutes of meetings of those charged with governance and correspondence
between the entity and its external legal counsel;
c) Reviewing legal expense accounts; and
d) Seek direct communication with the entity's external legal counsel.

(c) (i) Initial Audit Engagement: 03

An engagement in which either:
 The financial statements for the prior period were not audited.
or
 The financial statements for the prior period were audited by a predecessor.

(ii) Predecessor Auditor: 03

The auditor from a different audit firm, who audited the financial statements of an entity in
the prior period and who has been replaced by the current auditor.

Question No. 5
(a) Tolerable Misstatement: 05
A monetary amount set by the auditor in respect of which the auditor seeks to obtain an
appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the
actual misstatement in the population.
Tolerable Rate of Deviation:
A rate of deviation from prescribed internal control procedures set by the auditor in respect of
which the auditor seeks to obtain an appropriate level of assurance that the rate of deviation set
by the auditor is not exceeded by the actual rate of deviation in the population.

(b) Factors to be considered in Evaluating the Results of Audit Sampling in given Scenarios: 08
(i) In test of control the objective of sampling is to obtain evidence as to the compliance of
controls. Error is defined as the deviation from control procedures and deviations are
expressed as rate of error. The tolerable error is expressed as a percentage of deviations
from prescribed controls that is acceptable. If the error rate is greater than the tolerable
error it means that the controls are not operating effectively and accordingly. The control
risk is assessed as high unless other alternate or mitigating controls are operating
effectively.

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and
its Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be
liable to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2018 EXAMINATIONS 6 of 7
AUDIT & ASSURANCE [S2] – STRATEGIC LEVEL-1
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(ii) Audit team is evaluating the results of substantive procedures. The objective of evaluation is
to determine whether the projected misstatement is greater than or near the materiality
level. In this case the auditors should project the identified misstatement to the entire
population which means that at entire population level an anticipated projected
misstatement of Rs.73,333 [10,000 / (10,000,000 x 12%) x 10,000,0000 x 88%].This should
be compared with the materiality levels. If projected error is greater than materiality level
additional procedures should be performed. Otherwise this should be taken to significant
unresolved differences schedule and evaluated along with other misstatements.

(c) Factors need to be Considered in Determining the Type of Work: 05

The group engagement team’s determination of the type of work to be performed on financial
information of a component and its involvement in the work of component auditor is affected by:
 The significance of the component
 The identified significant risks of material misstatements of the group financial statements
 The group engagement team’s evaluation of the design of group wide controls and
determination whether they have been implemented; and
 The group engagement teams understanding of the component auditor.
 The competence of the component auditor.

Question No. 6
(a) Difference between Emphasis of Matter Paragraph and Other Matter Paragraph: 05
An emphasis of matter paragraph is included in the auditor’s report that refers to a matter
appropriately disclosed in the financial statements that in the auditor’s judgement is of such
importance that it is fundamental to users understanding of the financial statement. Whereas
other matter paragraph is a paragraph included in the auditor’s report that refers to a matter other
than those presented or disclosed in the financial statements that in the auditor’s judgement is
relevant to users understanding of the audit, the auditor’s responsibilities or the auditor’s report.
The key difference is whether the relevant information is disclosed by the management in the
financial statements.

(b) Course of Action – Refusal by Management to Provide ‘Written Representations’: 05

If management does not provide one or more of the requested written representations, the auditor
shall:
 Discuss the matter with management including those charged with governance.
 Re-evaluate the integrity of management and evaluate the effect that this may have on the
reliability of representations (oral and written) and the audit evidence in general. and
 Take appropriate actions, including determining the possible effect on the opinion in the
auditor’s report.
 If the management does not provide written representation about fulfilling their responsibility for
preparation of the financial statements in accordance with applicable financial reporting
framework or about provision of all relevant information to auditors, the audit will disclaim the
opinion on the financial statements.

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and
its Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be
liable to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – WINTER 2018 EXAMINATIONS 7 of 7
AUDIT & ASSURANCE [S2] – STRATEGIC LEVEL-1
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Question No. 7
Audit Procedures to be followed by the Auditors of Rabbani Associates: 10
In the given situation, Rabbani Associates’ auditors should carry out the following:
a) Should inquire whether the management has changed its assessment of the entity’s ability to
continue as a going concern.
b) If on account of the above inquiry or on account of auditor’s own assessment of the situation if the
auditor concludes that the condition cast significant doubts about the entity’s ability to continue as a
going concern, he should
(i) Inquire the management about its future plans, feasibility of these plans and whether
management believes the outcome of such plans will improve the situation.
(ii) Consider the adequacy of the disclosure of such matters in the financial information.
c) The auditor should consider whether the note given by the management adequately discloses the
uncertainty as regards the entity’s ability to continue as a going concern.
d) If the auditor assess that the note is adequate, then the auditor should give an emphasis of matter
paragraph in the review report.
If adequate disclosure is not made in the interim financial information, the auditor should express a
qualified or adverse opinion, as appropriate. The report should include specific reference to the fact that
there is such a material uncertainty.

THE END

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and
its Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be
liable to attend or receive any comments, observations or critiques related to the suggested answers.