The Professionals’ Academy of Commerce

Pakistan’s Leading Accountancy Institute

Certificate in Accounting and Finance Stage Examinations
Mid-Term Examination Spring-2024 Dec 15, 2023
Sec: A (Sir. ANC) (Additional reading time - 15 minutes) 100 marks – 3 hours

Audit and Assurance

Q.1 You are the audit manager responsible for the audit of Wave Connect Limited (WCL) for the year ending 31
December 2022. WCL’s principal activity is to manufacture, distribute and provide servicing of smart phones,
tablets, accessories and allied products. In a recent audit planning meeting with the CFO, following information
has been provided to you:
i. Extracts of financial statement:
2022 2021 2020
---------------- Rs. in '000 ----------------
Trade receivables 873,370 419,572 361,974
Loan from parent company 1,650,000 1,650,000 1,950,000
Sales revenue 2,680,000 1,963,346 2,330,097
Interest expense (264,000) (245,000) (234,000)
Exchange loss - (7,084) (33,464)
ii. The increase in current year’s sales revenue is mainly due to a large order from the government for
procurement of 100,000 android tablets at Rs. 13,000 each, for conducting census throughout the
country. Another order of 100,000 android tablets is expected to be received in January 2023 which
would be required to be delivered within 30 days. Considering the tight delivery timeline, the
management has decided to manufacture the tablets in December 2022.
iii. During the year, a manufacturing plant malfunctioned several times and consequently several orders
were fulfilled by importing the smart phones from the parent company. This plant was purchased at the
commencement of operation in 2012.
iv. During the last two years, the staff turnover in the accounts department has been high due to job stress
and long working hours. Except the CFO and the Senior Cost Accountant, all three remaining
employees have not stayed with the company for more than two years. Temporary employees are often
hired in the department to ensure that the recording of daily transactions are kept up to date.
v. In May 2022, WCL has installed and commissioned fixed asset and human resource modules (of ERP)
but none of the modules has yet been integrated with the general ledger system.
vi. WCL is presently negotiating with its bank to renew the existing running finance facility which is being
expired on 15 December 2022.
Required:
• Identify and discuss the audit risks that exist in the above scenario. (16)

Q.2 Comment on each of the following situations with reference to the appointment of external auditors in
accordancewith the requirements of the Companies Act 2017.
i. XYZ & Co. Chartered Accountants (XYZ) has received an offer for the appointment as external auditor
of Frontier Limited (FL), which is involved in humanitarian efforts to support internally displaced
people in remote regions. One of its affiliated companies, Highland Ventures Limited (HVL), also
operates in this sector. Mr. Ahmed Rahman is the nominated director of HVL on behalf of the
government. He is the spouse of Zara, the managing partner of the firm. (03)
ii. ABC & Co. Chartered Accountants (ACCA) has received an offer for the appointment as external
auditor from Oasis Finance Limited (OFL), a financial institution specializing in a range of consumer
loan services. OFL has a subsidiary named Capital Credit Limited (CCL). Mr. Adam, a partner in
ACCA, holds an outstanding loan with CCL amounting to Rs. 5 million. This loan agreement was
executed three years ago in the regular course of business, and Mr. Adam has been faithfully repaying
 the loan as per the agreed terms. (03)
iii. PQR & Co. Chartered Accountants (PQRA) has received an offer for the appointment as external
auditor of Minerals United Limited (MUL), a company engaged in mineral extraction across various
regions in the country. Given the significant mineral potential, several corporations formed a consortium
a few years ago, and MUL is part of this alliance. Zephyr Resources Limited (ZRL), the parent
company of MUL, is also actively involved in mineral mining, along with another subsidiary, Alpine
Minerals Limited (AML). Mrs. Sarah, the wife of Mr. Abdul, who serves as a partner in PQRA, was
elected as a director of AML three months ago (03)

Q.3 Discuss the categories of threats that may be involved in each of the following independent situations and
advise the partners of the concerned firm with regard to the possible course of action that may be followed in
eachsituation:
i. Farah Limited (FL) is the assurance client of your firm. The taxation services were also provided to FL
including computation of tax provision as per taxation laws of the country for the year 2021. During the
audit, while reviewing provision for taxation, one of audit team member found that a significant error
was made in the form of allowing an inadmissible expense as admissible that resulted in significant
understatement of tax provision. (04)
ii. One of your assurance client, Tarinkot Limited (TL) deals in Enterprise Resource Planning (ERP)
system and off the shelf Mobile-Pay solutions for small to medium sized retailing companies. The
business is stagnant due to slow economic growth during past few years. Atta Noor who is CEO of TL
approached your firm with a proposal to sell his ERP/Mobile-Pay solution to other clients of your firm.
In return, your firm will get exclusive rights to implement and maintenance of these solutions. CEO
expects to double TL’s annual salesthrough this arrangement. (03)
iii. Kushk Herbal Limited (KHL) deals in the manufacturing of medicines based on latest research on
numerous herbs. It is one of your significant clients which yield 28% of your firm’s total revenue.
During the audit finalization, a disagreement has arisen with management over the valuation of major
plant of the company. The proposed valuation adjustment by auditor will result into material decline in
balance sheet footing, thus creating hindrance for securing fresh financing from bank. You are going to
modify the opinion with regard to this year audit. During the meeting with management, one of the
directors said “We do not agree with your observation and any modification in audit report may cause
appropriate legal action against you”. Further, such modification may also result into non-consideration
of your reappointment for the next year audit. (04)
Q.4
(a) Distinguished between absolute and reasonable assurance. Identify the type of assurance that is expected
in anaudit of the financial statement, clearly outlining the reasons to justify your point of view. (07)
(b) State the factors which may assist the auditor in assessing the reliability of audit evidence. (05)

Q.5 Your firm has been approached by a recently formed IT Company, Data Technology Limited (DTL), for
appointment as its statutory auditors. DTL is mainly owned by three foreign companies who are all registered
abroad in tax heaven countries. Your firm does not have any experience of auditing an IT company.
Required:
In the light of the Code of Ethics for Chartered Accountants, identify the threats to the fundamental principles
and discuss how your firm would evaluate these threats in the context of accepting the client and engagement.
Also briefly discuss the safeguards available to your firm to address the threats. (13)

Q.6
(a) Describe if an engagement letter can be used for future annual audits and what are the factors which require
revision of engagement letter? (04)
(b) Your firm has recently been appointed as the external auditor of Stem Limited. The engagement partner has
planned a meeting with the audit team to discuss the overall audit strategy and finalize the audit plan. List
the planning activities which you would need to discuss with the engagement partner regarding the issues
related to first year of audit engagement. (05)
(c) You are the training manager in a firm of chartered accountant, Prepare brief presentation for newly
inducted trainees,of the following:
(i) Control environment and its element (04)
(ii) Walk through tests and why these are performed (03)
 Q.7 You You are the manager responsible for the audit of a newly incorporated company, Trojan Limited (TL).
Following arethe extracts from the first draft financial statements of TL for the year ended 31 December 2019:

Since this is the first year of operation, the profit before tax was quite low. However, as per the management’s
projection,the profit before tax would grow exponentially over the next three years.
Your audit team has determined the materiality on the basis of profit before tax for the year ended 31 December
2019. Inview of the audit team profit before tax is the main performance indicator for TL’s board of directors.
Required:
Discuss the appropriateness of the benchmark used by your team in determining the materiality and suggest
thealternative(s) available to your team. (07)

Q.8 Your firm is the auditor of Monero Limited (ML). ML’s financial statements were issued on 28 February 2021.
However, after receiving a High Court judgement on 2 March 2021, ML’s management assesses its impact
andhas decided to revise its financial statements.
Required:
a) Discuss the documentation that is necessary to be included in the audit working file regarding the above
matter.
Note: Audit procedures are not required. (03)
b) The principle of confidentiality imposes an obligation on chartered accountants to refrain from disclosing
confidential information. State key exceptions to the above rule. (04)
Q.9
a) As part of your analytical procedures on the financial statements of Majority Limited (ML), a retailer, you note
an improvement in the current ratio. The financial controller explains that this is due to the factors listed below:
i. A restructuring of ML’s finances with short-term borrowings consolidated into a 10-year loan with
annual repayments.
ii. He sale of one of ML’s freehold stores to a developer for cash.
For each of the above factors, briefly explain whether it is a plausible explanation for the improvement in
the current ratio. (04)
b) Rayan, Rohan and Co. Chartered Accountants (RR) is the auditor of Qaboos Limited (QL), a private company.
The engagement partner on the audit of QL for the year ending 31 March 2022, Rayan, recently had a meeting
with the managing director of QL, Huzaifa. At the meeting Huzaifa raised a number of matters for discussion:
• QL’s tax accountant recently left the company, and a replacement has not yet been appointed. Given the
proximity of the audit, Huzaifa asked whether RR’s tax department would be willing to check QL’s draft
tax calculation for the year ended 31 March 2022 before it is audited.
• Huzaifa is very concerned about rumors that RR will be tendering for the audit of a key competitor of QL.
• Huzaifa has requested a 15% reduction in RR’s audit fee for the coming year ending 31 March 2023 due to
expected difficult economic conditions.
• Huzaifa has invited Rayan to his annual garden party at his house, to which QL’s key customers and
managerial staff are invited. The party will be held shortly after the auditor’s report is expected to be signed
in July 2022.
Required:
Using the information provided in the scenario, explain ethical matters RR should consider before deciding to
continuethe audit of QL. (05)
(THE END)