PROFESSIONAL’S ACADEMY OF COMMERCE

AUDIT TEST-3 SOLUTION

Chapter 2 & Chapter 13

Answer of Q-1 (04 Marks)

In order to establish whether the preconditions for an audit are present, I will:
(i) determine whether the FRF to be applied in the preparation of F/S is acceptable;
(ii) obtain the agreement of management that it acknowledges and understands its
responsibility:
• for the preparation of the F/S in accordance with the AFRF.
• for such internal control as management determines is necessary to enable
preparation of F/S that are free from material misstatement, whether due to fraud
or error.
• to provide us with all relevant and requested information and unrestricted access
to all personnel.

Answer of Q-2 (05 Marks)

Whenever auditor is asked by client to revise terms of engagement during audit, auditor shall
consider following factors before accepting change:
1. Whether there is a reasonable justification for the change.
2. Legal or Contractual implications of the change.
As we are unable to obtain audit evidence, it seems that this change in engagement is requested
to avoid qualified opinion by changing terms of engagement. Hence, there is no reasonable
justification to the change. So, we will not agree to change the terms of engagement.
In this situation, we should continue to perform the audit engagement as per original terms of
engagement. If management not permit auditor to perform original engagement, it will be similar
to scope limitation and we shall:
➢ Withdraw from engagement if possible and practicable. Express disclaimer of opinion if
withdrawal is not possible and practicable.
Answer of Q-3 (04 Marks)
Such factors should be included :
• The reputation and expertise of expert
• The resources available to the expert
• The professional and ethical standards applicable to expert.
• The information might be gained from prior association with the expert or from consulting
others.

Answer of Q-4 (06+06 Marks)

(a)
Self-interest threat, Self–review threat or Familiarity threat may be created.
Shayan previously being the manager finance was in a position to exert significant influence over
the preparation of the PL’s accounting records which would now be subject to his own review in
the capacity of audit manager. Furthermore, since Shayan has worked for three years in PL, he
may be influenced by his ex- subordinates. Considering these facts, the threat appears to be
significant.
If Shayan had previously worked in PL until 30 June 2019
Since he resigned during the period covering by the audit, the threat created would be so
significant that no safeguard could reduce the threat to an acceptable level. Consequently,
Shayan shall not be part of the audit team.
If Shayan had previously worked in PL until 30 June 2018
Threats would only be created if a decision made or work performed by Shayan in the prior
period, while employed at PL, is to be evaluated in the current period as part of the current audit
engagement. If Shayan is appointed as the engagement manager then the work performed by him
as a member of the audit team should be independently reviewed.

(b)
Threats
Close friendship of the audit manager with the managing director would cause a familiarity
threat, because the audit manager would be biased towards the managing director and would
sympathetic to his interest or too accepting of his work.
Safeguard
• Structure the audit manager’s responsibilities to reduce any potential influence over the
assurance engagement; or
 • Review the assurance work from a chartered accountant; or
• Remove the audit manager from the engagement.

Threats
• Offering of membership at reduced rate could cause a self-interest threat to the audit,
because the recipients may not want to lose their benefit, and therefore be biased in their
audit work or not seek adjustments where there are material issues in the financial
statements.
• An intimidation threat may also arise because the audit client may threaten to make such
offers public to degrade the firm’s reputation.
Safeguards
Auditors are not allowed to accept such benefits unless their value is trivial and inconsequential.
In this case, the value of a reduced membership of a high-end gym is unlikely to be trivial and
inconsequential to audit staff members and therefore the firm should reject this discounted offer
of MD.

Answer of Q-5 (03 Marks)

• Whether the interests of all parties, including third/related parties whose interests may be
affected, could be harmed if the client consents to the disclosure of information.
• Whether all the relevant information related to the related parties is known and
substantiated, to the extent it is practicable.
• Since the requirement of the committee involves reporting on the arm’s length price of
the transaction which generally involves unsubstantiated facts or unsubstantiated
conclusions, professional judgment shall be used in determining the type of disclosure to
be made, if any.

Answer of Q-6 (02 Marks)

A tendering process typically requires interested audit firms to provide a detailed written
proposal including an approximate fee estimate, based on estimated time and level of staff. A
presentation to the potential client may also be required.