ISAs – Application Guide ISA 200

ISA 200
OVERALL OBJECTIVES OF THE
INDEPENDENT AUDITOR
QUESTIONS

CONCEPT REVIEW QUESTIONS

Q.1 The auditor should plan and perform the audit with a certain attitude. Identify and describe this attitude with an example.
(ICAP, CFAP 06 Level – Summer 1998)

Q.2 Describe the level of assurance that the auditor provides in respect of:
(a) an audit engagement
(b) a review engagement
(c) agreed-upon procedure
(d) a compilation engagement
(ICAP, CFAP 06 Level – Summer 1998)

Q.3 A financial statement examined by an auditor may not be relied upon by the users if the independence of the auditor
seems to be impaired. Discuss the circumstances in which the independence of an auditor may be affected.
(ICAP, CFAP 06 Level – Summer 1982)

CONCEPT APPLICATION QUESTIONS

Q.1 An article has appeared in a non-financial Magazine, the extracts of which are as follows:

“A Company’s annual reports and accounts known as financial statements will include a certificate by the Company’s
Auditors who have been appointed by the directors. The certificate has to be signed before the directors approve the
accounts and it must be read out by the auditors at the extra-ordinary general meeting.
Before the commencement of work the auditors will normally prepare two other documents which are in the form of
letters to the shareholders. One is known as letter of weaknesses and deals with matters where audit evidence is weak
and the auditor has had to place reliance on verbal assurances given to him by management or directors. It would also
deal with the matters relating to improper appointment of auditors.
The other document is referred to as the engagement letter in which the auditors report any matters that came to light
during the audit which ought to be notified to the shareholders.”

Enumerate the errors in the above extract in a form of a letter addressed to the Editor of the magazine.
(ICAP, CFAP 06 Level – Winter 1990)

Q.2 You are auditor of Zed & Company Limited. Mr. A makes an investment in the shares of Zed & Company Limited and
immediately thereafter it goes into liquidation. Mr. A incurs loss on the investment and sues you as according to him he
relied on the accounts of Zed & Company Limited audited by you before making the investment.

Explain how would you defend yourself against the suit filed by Mr. A.
(ICAP, CFAP 06 Level – Winter 1994)

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 ISAs – Application Guide ISA 200

Q.3 You were the engagement partner on the audit of a commercial bank which has a network of more than 200 branches,
across the country. During a recent meeting, a member of the audit committee referred to an instance of irregularity in a
branch, whereby the Branch Manager had extended credit to a close relative without following the bank’s credit
disbursement procedures. The member criticized the auditors for their failure to highlight such instances.
Required:
As an engagement partner, write a letter to the audit committee explaining your point of view in detail with specific
references to the International Standards on Auditing, wherever applicable.
(ICAP, CFAP 06 Level – Winter 2008)

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 ISAs – Application Guide ISA 200

SUGGESTED SOLUTIONS

CONCEPT REVIEW QUESTIONS

Q.1 Attitude:
This attitude is professional skepticism.

Example:
If there is inconsistency between evidence obtained from different sources, auditor should get alert and perform
additional procedures to resolve this matter.

Q.2 (a) Reasonable Assurance

(b) Limited Assurance
(c) No assurance
(d) No assurance

Q.3 (a) If auditor is the shareholder of audit client.

(b) If auditor has family/personal relationship with management of audit client.
(c) If auditor is providing other services in addition to audit, review and tax.

CONCEPT APPLICATION QUESTIONS

Q.1
1. Financial statements do not include auditor’s report.
2. Auditor is not appointed by directors.
3. Audit report is issued after approval of financial statements and not before approval.
4. Audit report is read in AGM and not in EGM.
5. Letter of weakness is given at the end of the audit and not at start. Moreover, it contains weaknesses found in the
system of internal control not in audit evidence.
6. Auditor does not solely rely on verbal assurances given by management or TCWG.
7. Engagement Letter is not a report to shareholders on audit matters. It is a letter which, primarily, states scope of
engagement and both parties’ responsibilities.

Q.2 This situation is indicating that Mr. A is facing Expectation Gap about auditing profession. Auditor cannot be held liable for
loss on investment based on audited financial statements because:
 Audit is not a proof of management efficiency/effectiveness.
 Audit does not assure future viability of entity.

Q.3 Views expressed by the Audit Committee Member are incorrect. Auditor is not responsible to identify all such issues.

The given issue is a weakness in internal controls, and not a misstatement in financial statements.

Auditor is required to communicate weaknesses in internal control to TCWG only if:

 Auditor has identified them during the audit, and
 These are significant.

There is a possibility that auditor has not identified this issue, because he uses sampling. Further, management may not
have provided him complete information, and identification of related party relationships and transactions is particularly
difficult for auditor.

Even if such issue was identified, it may not have been significant in relation to overall financial statements.

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 Auditing – The Case Book ISA 315

ISA 315
RISK ASSESSMENT
CONCEPT APPLICATION QUESTIONS

Q.1 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 2018 2019 2018
ASSETS Equity & liabilities
Rs. in million Rs. in million
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 97 90 Warranty provision 9 16
hand
Inventories in 12 7
transit
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 contract price.

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(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.

Required:
Discuss the audit risks that exist in the above scenario and suggest the key audit procedures that you would perform to
address those risks. (22)
(ICAP, CFAP 06 Level – Winter 2019)

Q.2 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 far 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:
Discuss the audit risks that exist in the above scenario and suggest the key audit procedures that you would perform to
address those risks (24)
(ICAP, CFAP 06 Level – Summer 2019)

Q.4 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 they choose.

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(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)
(ICAP, CFAP 06 Level – Winter 2018)

Q.5 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
Rs. in million
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 5,550 7,810

2017 2016
Assets Rs. in million
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
Total 37,850 33,880

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 collective 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)
(ICAP, CFAP 06 Level – Winter 2017)

Suggested Solution:
Following are the risks in the given situation and the related procedures which may be undertaken:
(i)Litigations and claims:
Risk:
Even though the company has to pay Rs. 145 million in damages and Rs. 14 million in repairs, there is still a risk that our
audit team might not be aware of further damage claims filed against MAL.
 There is also a risk that further accidents may occur or further cases are filed against MAL after the balance
sheet date.

Procedures:
 Send confirmation requests to MAL’s legal advisors.
 Consider engaging own legal counsel for assessing the impact of the cases filed against the company.
 Inquire the management and MAL’s legal counsel about how the management would deal if any further damage
claims are filed against MAL.

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 Assess the potential impact of recognizing a charge or disclosing a contingent liability in the light of IAS 37.
 Assess whether a penalty may be imposed on MAL by any government authority.
 Verify current and subsequent legal expenses incurred by MAL for identification of any undisclosed damage
claim.
(ii)Impairment of plant and machinery
Risk:
 Sales of MAL has declined by 23% and is expected to remain under pressure in the future also, because of the
situation. Therefore, there is a risk that value in use of the plant and machinery may have been reduced.
Procedures:
 Review the working prepared by the client relating to value in use.
 Assess the reasonableness of assumptions taken by the management and discount rate used.
 Consider involving auditor’s expert and obtaining a report about the nature of fault in the production process
and whether the management’s claim, that it has been fixed can be relied upon.

(iii)Warranty provision
Risk:
 In the given scenario, the probability / size of warranty claims may exceed the initial estimate and therefore the
existing provision may not be adequate.
Procedures:
 Review warranty' claims / payments after the balance sheet date.
 Review any revised working which the client may have prepared.
 Consider the appropriateness of the MAL’s model and assumptions used in the light of current situation.
 Consider involving an expert to calculate the warranty provision to be included in the financial statements.
(iv)Write down of inventory to NRV:
Risk:
 There is a risk that the company might not be able to sell the affected cars or witness decline in its price,
therefore there is a risk that net realizable value of the inventory may be lower than its cost.
Procedures:
 Evaluate the cost of necessary changes required to be made in the current inventory of the cars, to bring them in
a saleable condition.
 Review and test the procedures in place for comparing NRV with cost for each item of inventory and assess
whether appropriate changes have been made in the light of current situation.

(iv) Refund liability:

Risk:
There is a risk that the customers might return back the cars or MAL may have to recall the sold cars.
Procedures:
 Obtain management’s assessment and projections of the number of cars which may be returned by the customer
or MAL may have to call them back and assess the adequacy of projections and assumptions used.

(vii)Receivable from supplier:

Risk:
 MAL cannot record a receivable from the supplier until it is virtually certain that the amount will received,
therefore, there is a significant risk that the receivable may need to be written off.
Procedures:
 Discuss with the client the basis on which it has decided to book the receivable.
 Obtain the legal advisor’s opinion on the matter and the notice issued to the supplier.
 Review correspondence with the supplier.
 Review the contract with the supplier for identification of any clause related to indemnification of damages
 Send confirmation request to the supplier with regard to the receivable balance.

(vii)Provision for doubtful installment sales receivable:

Risk:
 The sales for the year have decreased but the installments sales receivable has increased. It indicates that there
is a risk that more than usual number of installments may have become overdue and might not be recoverable.
Procedures:
 Check aging of installments receivable and identify any overdue installments.
 Obtain confirmation from major debtors.
 Assess the adequacy' of provision against overdue installments.
 Review the subsequent recovery of installment sales receivable.

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(viii) Separate revenue for free service:

Risk:
 Providing free service after a certain mileage is a separate performance obligation As it is provided to all
customers, it’s revenue should be recorded separately by appropriately bifurcating the revenue from sale of
cars. There is a risk that die revenue may have been included in the revenue from sale of motor vehicles.
Procedures:
 Identify the price at which such services are regularly provided to the customers to assess whether the
bifurcation has been made appropriately.
 Ensure that revenue from sale of cars has been appropriately recognized by excluding the amount pertaining to
provision of services which should have been recorded as a liability.

Q.6 Your firm has been appointed as the auditor of New Cement Limited (NCL), for the year ended 30 November 2016. NCL is
a listed company which owns one of the largest cement plants in the country. 60% of the company’s shares are owned by
the same family. The CEO, CFO and Director Operations belong to the family. Following are the extracts from the draft
financial statements:

Extracts from statement of financial position

Assets Rs. in million
Property, plant and equipment 21,115
Deferred tax 270
Trade debtors 4,700
Other current assets 2,753
Equity and liabilities
Share capital 6,500
Reserves (1,462)
Surplus on revaluation of fixed assets 2,000
Non-current liabilities 13,000
Current liabilities 8,800
Extracts from statement of comprehensive income
Turnover – net 17,210
Gross profit 1,417
Operating loss (164)
Other income 223
Finance cost (1,560)
Loss before taxation (1,501)

Other information:
(i) Sales have declined during the past two years because of lower exports, however, the decline in exports has been
partially offset by slightly higher local sales. The management is hopeful of a significant increase in local sales in the
coming years.
(ii) NCL’s debtors have increased by 25%. The debtors include an amount of Rs.330 million due from a government
owned entity. The amount became due on 30 June 2016. However, the amount has been rescheduled and is now
recoverable in 6 equal instalments over a period of three years.
(iii) On 1 November 2016, the management entered into a contract with a new supplier for supply of its main raw
material. The new supplier has offered 15% lower prices. The contract with the previous supplier has been terminated.
The audit team has also been informed that a senior member of purchase department was fired in September 2016.
(iv) NCL revalues its plant and machinery after every three years. The last revaluation was carried out in 2014.
(v) The internal audit department comprises of five staff members including Chief Internal Auditor, who is a Chartered
Accountant. The Chairman of the audit committee is an independent director. The internal audit department has carried
out number of assignments. The reports of the internal auditor include many good suggestions for improving the
efficiency of the operations; however, they do not contain any serious deficiencies/adverse comments in any area.
Required:
(a) Briefly evaluate the overall control environment of the company. (05)
(b) Based on the above information identify areas of risk for the audit and the planned audit approach. (15)
(Note: Detailed audit procedures are not required)
(ICAP, CFAP 06 Level – Winter 2016)

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Suggested Solution:
(a) Evaluation of control environment:
 The Internal Audit department is headed by a Chartered Accountant whereas the chairman of the audit committee is an
independent director. These two factors are positive and consequently are evident of strong control environment.
However, at the same time, it should also be kept in consideration that:
NCL is a family owned enterprise and family members of the company are actively involved in the management of the
company. This may lead to the possibility of management override of controls.
The commitment to competence of management may appear to be weak as the major positions in the company are
assigned to the family members instead of hiring professionals from the market.
 It seems that internal audit staff is under the influence of the family members as their reports contain no serious issues
or problems identified.
 Procurement policies and procedures appear to be weak as in the last month of the year a supplier was hired offering
15% less rates as compared to previous rates. The firing of senior member of the procurement department is an
indication in that direction.
Above discussed factors are indicating that NCL may lack effective and efficient internal controls, resulting in weak
control environment.
(b)
Risks Audit Approach
Use of going concern assumption Although the  Obtain the management assessment / future
company’s equity is positive, NCL’s current ratio is projections prepared justifying the use of
0.85, which is quite low with reference to acceptable going concern assumption as appropriate in
benchmarks; and debt equity ratio is 65:35 which is the financial statements of the company
very high and adverse and has incurred a loss of Rs.  Analyse the assumptions used therein. The
1.501 billion which has completely wiped off the underlying assumptions used by the
reserves of the company. management needs to be supported by solid
If the debt due from government is also classified in facts.
the non-current assets, it will further deteriorate  Ensure that proper disclosure is given in the
the current ratio. Further, if the debt due from financial statements of the material
government bears no interest then it would further uncertainty and the management’s
deteriorate the position. assessment.
If NCL’s performance follows the same track in the
coming year then NCL might face operating
difficulties resulting in a material uncertainty that
NCL might not be able to continue as a going
concern in the coming years.

Increase in receivable despite decrease in  Review the entity’s policy for provision of
turnover: doubtful debts.
Trade receivable might include slow moving or  Check aging of debtors and identify any slow
doubtful debts as these had increased by Rs. 610 moving and doubtful debts.
million excluding the effect of dues from  Obtain confirmation from major debtors and
Government entity, which is unusual due to check against ledger balances.
decrease in turnover. This might result in  Ensure proper disclosure and accounting of
overstated current assets and understated Government owned debts as per IFRS.
provisions / bad debts and losses thereof.
Dues from Government owned entity might not be
accounted for properly and may exclude the effect
of discounting.
Rescheduled loan from Government might be
classified in short term receivables.

Impairment in the value of plant and machinery:  Engage experts (management and auditor’s)
Due to decline in sales the value of plant and to revalue the property to identify any
machinery might be impaired which could result in impairment/decline in surplus on
overstatement of property, plant & equipment, revaluation.
understatement of impairment and overstatement  Review working for value in use, if necessary.
of profits.

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Risk of fraud: Operating results  Understand and evaluate NCL’s financial

NCL may be inclined to show better results to the reporting process and the controls over
financial institutions from which it has obtained journal entries and other adjustments and
financing. determine whether they have been
implemented.
 Perform substantive testing in all the areas
with low control reliance.
 Perform cut-off test to check that the
vouchers have been completely recorded.

Risk of fraud:  Test the appropriateness, authorization and

Management override of controls As it is a closely completeness of journal entries recorded in
held entity with majority shareholding owned by a the general ledger and other adjustments.
single family and with key positions occupied by  Use professional judgment to determine the
family members, there is always a risk of fraud due nature, timing and extent of journal entries
to management override of controls. testing and other adjustments and assess the
There is an increased risk of fraud as evident from completeness of the population subject to
the termination of employee in September 2016, testing
and working of internal audit department as it is
evident from their reports.
Risk of misstatement in opening balances:  Review prior year working papers of the
It is the first year audit and there is a possibility that previous auditor.
prior year opening balances are materially  Design audit procedures to provide evidence
misstated and are not correctly brought forward. relevant to opening balances.

Deferred Tax Asset:  Review the management’s future projection

Deferred tax asset can only be recognized to the of taxable profits and reasonableness of the
extent that the company expects that it would assumptions used.
generate sufficient profits to realize the benefit. In
the given scenario it seems difficult for the company
to generate sufficient taxable profits in the near
future to realize the deferred tax assets.

Examiners’ Comments:
This question contained extracts from the financial statements of a company and certain other information about some
aspects of the business. As discussed earlier, despite being a straight forward question, the overall response was quite poor.
The requirements were broken up into two parts. Comments on each part are given below:
(a)The requirement was to evaluate the overall control environment which includes both the positive and the negative
aspects. Most of the students identified that the entity was closely held but failed to cover the resulting risks. Further, most of
them failed to cover the positive aspects which include that internal audit department is headed by a chartered accountant
and chairman of the audit committee was an independent member of the Board.
(b)The requirement was to identify the areas of risk for the audit and the planned audit approach. The performance
remained poor because most of the students focused only on one or two areas and ignored the rest. Those who stressed on the
going concern aspect ignored some of the other issues such as risk as regards the opening balances, risk of fraud and
overstatement of deferred tax asset. On the other hand, some of the candidates ignored the going concern issue altogether.
Some of the students identified the risk that discount would not be accounted for, which was totally irrelevant as lower prices
by a new supplier does not mean that discount has been offered.

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Q.7 You are the engagement manager of Saleem Electronics Limited (SEL). SEL is engaged in manufacturing and selling of
electronic appliances including air conditioners, washing machines, refrigerators, electric lights and bulbs. The results of
analytical review carried out by your team, based on the draft financial statements, are summarised below:

Profit and loss account

31-12-2015 31-12- Increase/ Note
2014 (decrease) reference
---------- Rupees '000' ---------- %
Sales 85,661 78,793 6,868 9 Note (i)
Cost of sales (56,650) (51,029) 5,621 11 Note (ii)
Gross profit 29,011 27,764 1,247 4
Administration expenses (13,594) (14,841) (1,247) (8) Not material
Other operating income 11,000 13,000 (2,000) (15) Not material
Other expenses (24,095) (8,450) 15,645 185 Note (iii)
Interest expense (12,785) (10,716) 2,069 19 Not material
(Loss)/profit before taxation (10,463) 6,757 (17,220) (255)
Taxation (3,690) (1,880) 1,810 96 Note (iv)
(Loss)/profit after taxation (14,153) 4,877 (19,030) (390)
Balance sheet
31-12-2015 31-12- Increase/ Note
2014 (decrease) reference
---------- Rupees '000' ---------- %
Property, plant and equipment 190,903 195,003 (4,100) (2) Note (v)
Current assets:
Receivables 19,961 18,313 1,648 9 Note (vi)
Inventories 45,721 44,403 1,318 3 Note (vii)
Cash and bank 7,985 8,068 (83) (1) Not material
73,667 70,784
Total assets 264,570 265,787

Share capital 182,000 150,000 32,000 21 Note (viii)

Retained earnings (36,830) (22,677) (14,153) 62 See P&L
145,170 127,323
Long term liabilities:
Loan from related parties 48,192 80,000 (31,808) (40) Note (viii)
Deferred tax liabilities 14,806 12,398 2,408 19 Note (iv)
62,998 92,398
Current liabilities:
Provisions 8,567 9,253 (686) (7) Note (ix)
Creditors and accrued expenses 47,835 36,813 11,022 30 Note (x)
56,402 46,066
Equity and liabilities 264,570 265,787
Audit team’s notes/comments:
(i)The increase in revenue is due to increase in sale of air conditioners by Rs. 12.6 million because of introduction of
instalment sales, which are made at 10% above the normal price. The price is recovered in 12 equal monthly instalments.
(ii) The increase is in line with the increase in revenue.
(iii) Other expenses include a loss of Rs. 5 million on disposal of assets of services department. Remaining amount
represents cost of warranty.
(iv) The matter has been discussed with our tax team who would give its views shortly.
(v) The decrease is due to the disposal of assets of services department of air conditioner’s division. The services
department was outsourced last year.
(vi) The increase in receivables is in line with the increase in sales.
(vii) The inventory balance is in line with prior year.
(viii) The company has converted the loan from related party into equity and issued shares amounting to Rs. 32 million.
(ix) Last year’s provision includes provision for impairment in assets of services department. The remaining increase of
Rs. 1.3 million is immaterial.
(x) In December 2014 all the employee related expenses were paid before year end.

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Auditing – The Case Book ISA 315

Required:
Comment on the analytical review performed by the audit team and specify which explanations in the analytical review
seem unreasonable and/or incomplete. (18)
(ICAP, CFAP 06 Level – Summer 2016)
Suggested Solution:
Sales:
The analysis of the audit team does not include any comments on the decrease of sales of other divisions.
It is mentioned in the comments that sale of air conditioners has increased due to the introduction of installment sales,
however the interest income on said installment sales has not been identified in the analytical review.
Due to interest income on installment sales, other income (if interest income is included in it) should have increased.
However, it has decreased by Rs. 2 million.
Cost of sales:
Although the variation in cost of sales is in line with the variation in sales, however if the sales are overstated due to
recognition of interest income in the sales revenue then consequently the cost of sales will not remain in line with the
variation in sales amount and needs to be investigated further.
If sales are increased due to higher prices as mentioned in the comments then cost of sales cannot remain in line with the
sales amount.
Administrative expenses:
Although the variation in administrative expenses is Rs. 1.2 million which is not material, however, data related to
administrative expenses is required to be disaggregated and analytical review should be prepared separately for each
individual expense to properly evaluate the impact of variations.
Other income:
No comments have been offered with regard to the composition of other income, i.e. what items constitute the other
income.
Other expenses:
A major constituent is the warranty expenses and reasons for significant variation in it have not been provided.
Interest expenses:
Although variation in interest expenses is not material, however, keeping in view the decrease in amount of loans from
related parties, interest expense should have decreased instead of increasing.
Taxation/ deferred tax liabilities:
Simply saying that the matter has been discussed with our tax team who would give their views shortly is not enough.
The explanation/ opinion of the audit team with respect to variation in tax figures should be incorporated in the
analytical review.
 Increase in deferred tax liability by Rs. 2.4 million despite the losses incurred by the company seems unreasonable.
Receivables:
The comment that increase in receivables is in line with the increase in sales is not correct. Though increase in both cases
is 9%, sales have increased due to introduction of installment sales and therefore the receivables should have increased in
much larger proportion.
Inventories:
The comment that increase of 3% in inventory balance is in line with prior year does not seem appropriate because the
revenues and cost of sales have increased by 9% and 11% respectively.
Property, plant and equipment:
The comment is incomplete as there is no mention of the addition to fixed assets during the year.
Provision of warranty:
The variation in warranty provision does not seem to be correct since warranty expenses amount to Rs. 19.10 million i.e.
have increased by 126% whereas the provision has increased by Rs. 1.3 million i.e. 18% only.
Creditors and accrued expenses:
Creditors and accrued expenses are required to be analysed further.

Examiners’ Comments:
This question contained comparative profit and loss account and balance sheet of a company along with the audit team’s
comments based on analytical review carried out. The candidates were required to review the comments and specify which
explanations seemed unreasonable or incomplete. The overall performance in this question was quite poor because of the
following:
1. Many students focused on identifying the risks from the comments provided in the question which was not required.
2. Few of the students went at quiet a length on describing what should be the materiality, what threshold should be used and
the purpose and form of overall analytical review etc. which was not required at all.
3. Very few students were able to identify the following issues/deficiencies in the comments prepared by the audit team:
 No comments were offered regarding the fact that the introduction of installment sales for the first time should
have been accompanied by an increase in interest income and receivables.

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 Auditing – The Case Book ISA 315

 The comment “increase of 3% in inventory balance is in line with prior year” was unreasonable because the
revenues and cost of sales have increased by 9% and 11% respectively.
 Comments as regards addition to fixed assets were missing.
 No comments have been offered on the fact that warrant expense for the year has increased by 126% whereas the
provision in the balance sheet has increased by 18% only.
 Further break-up and analysis was required in case of some items such as other income, administrative expenses,
creditors and accrued expenses.

Q.8 You are the audit manager of Diversified Products Limited (DPL), a listed company. Following are the extracts from the
draft financial statements for the year ended 30 September 2015.
Rs. in billion
Sales 95.0
Cost of sales 62.0
Total assets 150.0
Net equity 15.0
Creditors * 10.4
Debtors * 10.5
Deferred tax asset 1.2
*Debtors and creditors have normal credit terms of 40 days
The company is engaged in polyester, pharmaceutical and fertilizer businesses. Performance of each segment is discussed
below:
(i) Polyester Business (PB)
Major source of revenue is the export of polyester to European countries. PB has been incurring losses since last five
years. In 2014-15, PB incurred a loss of Rs. 600 million. During the pervious year, DPL had made a provision of Rs. 3.5
billion for impairment of existing plant.
The major reason for the losses is the non-availability of gas. Accordingly, DPL had started a project to convert its plant
from gas to coal. The original completion date of the project was 31 January 2015 but it has been extended by two years
due to delay in financing arrangements. A cost of Rs. 1.5 billion has been incurred on the project up to 30 September
2015.
(ii) Pharmaceutical Segment
The major source of revenue is the sale of medicines imported from Xanax International Plc (XIP). Segment profit for
2014-15 amounted to Rs. 200 million. DPL is currently negotiating with various suppliers to replace XIP because during
the past few years XIP has significantly increased the prices and has expressed its intention to increase it further at the
time of renewal of the contract, which is due in March 2016.
(iii) Fertilizer Business
The main source of income is the supply of fertilizers and pesticides. Segment profit for 2014-15 amounted to Rs. 700
million. Due to major floods in August 2015, the Government has requested the fertilizer manufacturers to reduce their
prices to support the farmers in the flood affected areas and as an incentive, it has guaranteed the regular supply of gas
for the fertilizer factory.

Required:
Discuss the audit risks based on the above situation. (12)
(ICAP, CFAP 06 Level – Winter 2015)

Suggested Solution:
(i)Fraud Risk Factors:
(a) Risk of fraud in revenue recognition:
There is a risk of overstatement of revenue as the management may be inclined to show better results or because it is
seeking financing for its Polyester Business.
(b) Management override of control:
Management is in a position to perpetrate fraud because of its ability to manipulate accounting records and prepare
fraudulent financial statements by overriding controls that otherwise appear to be operating effectively.
(ii) Going concern:
The company might face going concern issues due to following reasons:
 The overall profit is only Rs.300 million with a gross profit margin of around 35%. Even a marginal decline in profit
margin could bring significant losses.
 Profits would be under pressure in the coming years because of the following:
 Impact of floods, as the Gas supply in fertilizer business is subject to lowering of prices.
 Lower margins in pharmaceutical segment, which are not expected to improve as XIP intends to increase the prices
further.

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 Auditing – The Case Book ISA 315

 Company is already a highly leveraged company, obtaining more financing for new plant will also have a negative impact
on profitability of the company.
 Due to Flood, the fertilizer business of the company can be affected and situation may not improved as the supplies may
be affected in coming period.
 Delay in Obtaining funding for conversion of plant from gas to coal may deteriorate the situation.
 Creditors turnover days are 61 as against the normal credit term of 40 days which depicts that payment capacity of the
company has weakened.
(iii) Impairment of plant and machinery:
Because of the delay in completion of coal to gas commission project, the company may continue to incur losses. However,
the value of the capital work in progress as well as the existing plant and machinery relating to polyester business may
have been impaired. Although impairment was also recorded in 2014, however, since the completion of plant has been
delayed again by two years further impairment is possible.
(iv) Provision against value of stock:
Reduction in price of fertilizers as requested by the Government may adversely affect the prices of company’s products
and company may be required to book a provision against impairment of stock.
(v) Deferred tax assets:
Deferred tax asset can only be recognized to the extent that the company expects that it would generate sufficient profits
to realize the benefit. In the current scenario it seems difficult for the company to generate sufficient taxable profits in the
near future to realize the deferred tax assets.
(vi) Foreign Currency Risk:
As the company is engaged in export of polesyter and import of medicines, the company is exposed to significant foreign
currency exposures which are required to be properly managed.

Examiners’ Comments:
This question was designed to test the students’ ability to identify relevant audit risks under the given situation which is a
very important audit step during the planning phase. The overall response was average. Generally, the students were able to
specify the more apparent risks such as going concern, impairment of plant and machinery, failure to make adequate
provision against stock, recognition of deferred tax assets and foreign currency risks. However, majority of the students were
unable to mention the risks such as risk of fraud in revenue recognition and management over-ride of controls. Further, since
the requirement is to discuss the issue, it is important that in addition to the identification of risk, the students should also
specify why they consider a particular issue to be a risk. For example, while discussing the going concern issue, many
candidates gave just one or two insignificant reasons which did not seem enough for raising the going concern issue. Further,
a large number of candidates did not approach the question on a composite basis i.e. preferred to disintegrate the entity level
issues into divisions/segments resulting in duplication of response and deviation from the entity level audit risks.

Q.9 You are the manager responsible for the audit of Chaudhry Packaging Limited (CPL) a listed company, for the year ended
31 March 2015.
During the planning stage, the audit team has presented the following points for your consideration:
(i) During the year, after the death of previous chief executive, his son was appointed as the new chief executive.
(ii) Sales of the company declined significantly during the first 10 months on account of general economic downturn.
However, sales in the last month showed improvement and were 20% higher than the average sales of the previous
months.
(iii) Deferred tax recognised on losses amounted to Rs. 170 million.
(iv) Scrap sales showed significant increase during the year.
(v) CPL experienced significant turnover in its management team.
(vi) Initial test of controls reveal that list of approved suppliers is not maintained. The management is of the view that in
order to get the lowest quotes any supplier is allowed to quote prices and therefore a formal list of suppliers is not
prepared.

Required:
In light of the above facts identify the audit risks and the key audit steps to address them. (15)
(Note: While describing the key audit steps, the answer should be restricted to a maximum of 3 major points in case of
each risk)
(ICAP, CFAP 06 Level – Summer 2015)

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Auditing – The Case Book ISA 315

Suggested Solution:
Audit Risks Audit Steps
(i)  From listed company’s point of view, the  These would be ensured specially by
appointment of son of the previous Chief checking that there are no control
Executive, as a new Chief Executive is lapses, and controls have not been
indicative of a closely held entity, overridden by CEO in specific instances.
transparency of business might be in  Make inquiries about the changes in
doubts. control environment during the current
year and assess the latest situation.
 Ensure that legal requirements are
complied with respect to the
appointment/ remuneration of new
Chief Executive.
(ii)  Sales may be overstated as it has  Send confirmations to debtors.
suddenly increased during the last  Checking recoveries made subsequent
month of the year to the year end, analyzing and checking
subsequent sales return, comparing
them with last year and assessing their
reasonableness Checking cut-off

(iii)  Deferred tax asset can only be  The auditor would be required to
recognized to the extent that the review the management’s future
company expects that it would generate projection reasonableness of the
sufficient profits to realize the benefit. assumptions used and perform
There is a risk that the company might recalculation.
be recording deferred tax assets to
overstate profits.
(iv)  Increase in scrap sales may indicate the  The auditor would be required to assess the
following: reasons for increase in scrap sale by
 Abnormal losses and defected inventory performing the following:
 Inventory valuation issues  review the list of Scrap sales to establish
 Scrap sales may be used to transfer out its reasonableness.
funds from the company illegally.  Ensure proper procedure such as
 Impairment in value of plant and obtaining quotations/ auction has been
machinery. followed for scrap sales.
 check segregation of duties in the
processing of sales and dispatch
documents.
 Review the impairment testing done by
the client.

(v)  Significant turnover in management can  The auditor would be required to:
also result in significant risk. In case of  establish the reasons through inquiry;
high rotation the responsibilities cannot  review of exit interview of ex-employees
be fixed. There might be some unethical and;
practices/fraud going on in the  specially performing procedures on the
company. areas where there have been significant
turnover of employees.

(vi)  Frequently switching suppliers is not  Consider changing the audit strategy for
itself a problem, but it does not mean extensive substantive procedures on
that a list of approved suppliers cannot areas such as:
be maintained. If totally new suppliers  Inventory valuation
really are being used so frequently, then  Warranty issues
there might be issues with quality rather  Sales return subsequent to year end
than price.

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 Auditing – The Case Book ISA 315

Examiners’ Comments:
This question was designed to test the students’ ability to identify relevant audit risks under the given situation and explain
appropriate audit procedures there against. The overall response was average. Generally the students were able to specify
some of the risks but very few could provide complete answers. Some of the specific observations are mentioned below:
 A large number of students could not correctly assess the situation whereby the son of previous chief executive was
appointed as the new chief executive. Most of them talked about qualification and possible lack of competency.
Impact of the change on control environment of the company was rarely mentioned.
 With regard to non-existence of the list of approved suppliers, many candidates stressed upon the pricing issues
instead of discussing the issues pertaining to quality such as valuation of inventory, warranty issues, subsequent
returns etc.
 With regard to increase in scrap sales, majority of the candidates discussed the revenue side and totally ignored
issues such as possibility of abnormal losses/defects, inventory valuation and possibility of illegal transfer of
company’s assets etc.

Q.10 You are the auditor of Reliable Generators Limited (RGL) for the year ended 30 September 2014. RGL is primarily
engaged in the business of manufacturing and sale of generators. The generators are supplied all over the country
through a network of distributors.
On receipt of order from a distributor, the order is recorded electronically and transmitted to the factory. 100% payment
is received in advance. Following are the extracts from draft financial statements provided by the client:

Income statement for the year ended 30 September

2014 (Draft) 2013 (Audited)
------------ Rs. in ‘000’ ------------
Revenue 60,222 59,638
Purchases 42,676 40,848
Gross profit 21,249 19,681
Statement of financial position as at 30 September
2014 (Draft) 2013 (Audited)
------------ Rs. in ‘000’ ------------
Trade payables 1,653 1,895
Provision for warranty claims 1,265 1,193

Other related information is as follows:

(i) Effective 01 October 2013, in order to match its competitors, RGL has increased the warranty period from 3 to 5 years.
(ii) A discount of 20% was offered to address the issue of reduced demand witnessed in the 3rd quarter. As a result of the
discount, the situation improved significantly, during the 4th quarter.
(iii) In August 2014, serious defects were discovered in one of the major components. Consequently, significant quantity
of such components was returned to the supplier. However, the return was recorded in September 2014 on receipt of
supplier’s credit note.
(iv) Scanning of the suppliers’ ledger accounts revealed various payments for which no satisfactory reply was given by the
management. However, said amounts were recovered before the year end.
Required:
Identify and evaluate the audit risks in the above situation and how would you respond to these risks. (15)
(Note: Routine verification steps may not be mentioned)
(ICAP, CFAP 06 Level – Winter 2014)

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Auditing – The Case Book ISA 315

Suggested Solution:

Audit Risks Auditor’s response

(i) Revenue  Evaluate and test the system for recording
There is a risk that revenue is overstated due to: revenue
 Early recognition as customers pays in full  Inspect post year-end payments/credit notes
when placing an order. for significant amounts to ensure whether
 The increase in revenue by 1%, is although revenue is overstated or not.
immaterial, but requires attention due low  Review last minute adjustments and cut-offs
sales between in 3rd quarter and discount more carefully to ensure that revenue is not
allowed. overstated.
 The increase in gross profit margin from 33%  Review overall sales reconciliation for the
to 35% is also surprising in light of the 20% year (global) and carry out tests for
discount granted on sales between July and verification thereof.
September
(ii) Purchases and trade payables
 There is a risk of understatement as payables  Evaluate and test the system for recording
days have fallen from 17 to 14 days and the suppliers’ invoices and payments to suppliers
gross margin has increased  Reconcile payables balances in the purchase
 Fall in payables despite the increase in ledger with supplier statements or consider
purchase is something exceptional. direct confirmation where supplier
statements are not available
 On sample basis, match the inventory on
sample basis in the store with inventory
records in the accounts departments, any
difference found should be investigated.
(iii) Warranty provision
 There is a risk of understatement as the  Discuss with the client as regards lower than
provision as a percentage of revenue is the expected increase in provision and verify
same as the previous year. By the increase in reasons provided by the client with the
warranty period, the provision of 2% is related workings.
expected to be increased keeping in view the  Inspect board minutes for an indication of
quality issues and increased warranty claims. problems with any of the company’s products
 Compare the warranty provisions with those
of similar companies.
(iv) Impairment of stock:
 The stock in hand might have been impaired  Discuss with client about the possibility of
due to the fact that although the significant defected components being used in the
quantity of defected component is returned finished goods, or their presence in the
to the supplier, there is a possibility that closing inventory.
some defected parts might have been used in  If the client reply is affirmative, then ask the
finished products and some defected parts management to make impairment testing and
might have been remaining in the inventory. accordingly adjust the financial statements.

(v) Payment to suppliers  In case the above reflects the indication of

 The company’s money might have been used Fraud then consider changing the audit
by the employees for their personal strategy for extensive substantive
benefits/purposes or by the company itself procedures on all the areas.
not for the purpose of business.  Consider having discussion with those next in
 This might affect the audit opinion as under hierarchy to the people involved in this act
the Companies Ordinance, 1984 we are and if the most senior management is
required to give our opinion that all business involved then consider discussing with those
conducted during the year were in charged with governance.
accordance with the objects of the company.  Consider the implication on the audit
opinion.

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 Auditing – The Case Book ISA 315

(vi) Control Weaknesses:  The auditor may decide to place less reliance
The recording of purchase return after a time on controls, and undertake more substantive
lag of 1 month reflects the failure to reconcile testing.
payable balances with supplier and it may
result in excess payments to suppliers which
will result in financial loss to company or
may cause disputes with suppliers.

Examiners’ Comments:
Some of the information contained in the financial statements specially those regarding revenue, purchases, gross profit,
trade payables and provision for warranty claims was provided in the question. On the basis of the given information, the
students were asked to identify and evaluate the audit risks and how the auditor should respond to such risks.
This question was poorly answered and candidates displayed lack of analytical ability. In most cases, they missed out the fact
that the question required them to identify the “risks” involved rather than just giving comments on the financial
information. For example, they mentioned correctly that increase in gross profit is not in line with the decline in sales and
special discount allowed during the year; but could not assess as to what type of risk it posed and how it may be addressed.
Majority of the students missed an important risk i.e. the risk of misuse of company’s funds by making payments and showing
them as payment to suppliers and re-depositing them near the year-end.
Further, many among those who were able to identify the risks, failed to mention how such risks may be addressed. In this
regard, a lot of repetition was also observed. Some students mentioned routine verification steps which were not required.

Q.11 You are involved in the audit of Modern Furniture Limited (MFL), for the year ended 30 September 2014. The client has
provided you a draft profit and loss account which is as follows:

30-Sep-2014 30-Sep-2013
-------- Rs. in million --------
Sales 223.14 196.54
Cost of sales (151.74) (147.40)
Gross profit 71.40 49.14
Operating expenses (43.78) (31.52)
Profit before taxation and financial charge 27.62 17.62
Financial charge (3.82) (3.04)
Profit before taxation 23.80 14.58
Taxation (6.80) (4.96)
Profit after taxation 17.00 9.62

Certain other information obtained from the management is given below:

(i) MFL mainly sells its products through its own retail outlets and franchises. During the period under review, MFL had
established five new retail outlets in different cities. (ii) After a lapse of 18 months, MFL had increased the price of its
products by 12% effective 1 April 2014.
(iii) The raw material prices increased by 5% in October 2013.
(iv) Effect of annual increment in salaries was 8%.
(v) Salaries of non-manufacturing employees have increased from Rs. 22 million to Rs. 28.2 million. There were 120 such
employees on the payroll on 30 September 2014. 15 new employees were hired for new retail outlets whereas one
employee retired during the year.

Required:
Evaluate the above financial data in the context of information provided by the management and specify the matters
requiring further explanations from the management. (10)
(ICAP, CFAP 06 Level – Winter 2014)

Suggested Solution:
Analysis of the information:
Sales:
As sales prices are increased by 12% w.e.f 01 April, 2014, hence the prices are increased effectively by 6%. Taking the
effect of 6% increment on last period sale will give an increased sale of Rs. 208.33 million, giving a difference of Rs. 14.81
million which can be attributed to the increase in quantity.

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 Auditing – The Case Book ISA 315

The said difference of 7.11% (223.14÷208.33) represents the increase in quantities sold. The client should be asked to
provide major reasons for such increase.
Cost of sales:
Increase in quantities sold by 7.11% plus 5% increase in prices of raw material means that cost of goods sold should have
been increased by approximately 12.11%. However, the actual increase is only 3%.
The above variation in cost of sales needs to be investigated further, i.e. why the cost of sales has not increased in line
with the increase in quantity and increase in raw material prices.
Operating expenses:
Increase in operating expenses is Rs. 12.26 million. If the effect of increase in salary i.e. Rs. 6.2 million is excluded,
remaining expenses have increased by Rs. 6.06 million i.e. 63.66%, which is quite significant. Reasons for such a
significant increase should be obtained.
Increase in salary expenses of non manufacturing employees:
Since number of staff is increased by 11.67% and increment is 8%, gives the expected increase of 19.67%, whereas
salaries have increased by 28% as compared to previous year.
This matter needs to be look into further specifically because new employees are hired in retail outlets which are usually
low salary staff.
Financial charges:
Increase in financial charges by 26% seems reasonable, as the company has opened new branches, which is supposed to
increase the borrowings of the company. Moreover, the amount is not material.
Taxation:
Current year taxation expense is approximately 28% of profit before taxation as compared to 34% of profit before
taxation of previous year. A reconciliation of this difference may be helpful.

Examiners’ Comments:
In this question, a summarized profit and loss account was given along with comparative figures and some related
information. The candidates were required to assess what further information and explanations they would require from the
client.
The response was however not upto the mark which was quite discouraging because all the students must have had
experience of handling such situations. Most of the responses were casual and unstructured. Most of the students computed
year on year variances but could not maintain the focus as to how these variances are to be corroborated and what inference
can be drawn in this respect. Still, the areas relating to sales, cost of sales, operating expenses were better probed but
comments in respect of financial charges and tax charge were quite inadequate. Only few could note that tax expense was
only 28% of profit before tax as compared to 34% in the previous year.
Some of the students passed strong judgments assessing fraud or mis-statements which should have been avoided as such
assessment is only possible after obtaining explanations from the client.

Q.12 You are the manager responsible for the audit of Health and Beauty Brands Limited (HBBL) for the year ended 31 March
2014. HBBL has been selling its products through its own retail outlets only. However, during the year under review,
HBBL had entered into an agreement for sale of its products at JDS, a chain of departmental stores.

Following information is available in respect of the above:

According to the agreement, JDS would make payments within 30 days of the sale to customers. Any unsold/expired
products would be returned to HBBL.
The stock sheets provided by JDS to HBBL revealed differences as compared to the balances appearing in the HBBL’s
inventory system. According to JDS these were due to posting errors in the system of JDS, and have been subsequently
corrected. HBBL’s management is of the view that such differences are not material as compared to sales made through
JDS.
There is a significant improvement in the operating results of HBBL. The management considers that the agreement with
JDS has played a major role in such improvement.
The confirmation sent to JDS was not received. Alternatively, the audit team had examined partial payment amounting to
65% of the outstanding balance upto 31 May 2014.

Required:
Discuss with reasons, what course of action you would adopt in the above situation and the possible impact thereof on the
audit report. (14)
(ICAP, CFAP 06 Level – Summer 2014)

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 Auditing – The Case Book ISA 315

Suggested Solution:
Significant improvements in profits reflects the risk that the revenue and profit in the 2014 financial statements may be
significantly overstated.
The following point are needed to be considered in relation to the given situation:
 HBBL’s arrangement with JDS is such that JDS facilitated sales to customers but does not purchase the inventory itself
and HBBL retains title to the product until it is sold to the final customer.
 HBBL may have knowingly or erroneously, recognize the Sales Revenue on dispatch of goods to JDS.
 Subsequent recovery of 65% upto 31 May 2014, is also not sufficient appropriate audit evidence of receivable balance
from JDS, because as per the agreement JDS is required to make the payments within 30 days of sale to customers.
 It is also indicative of the risk that sales/receivable balance is overstated.
 Although, the differences between stock sheets and balances were corrected subsequently, but it is indicative of a risk
that during the year there is a possibility of wrong posting in the system of JDS, which consequently will result in
overstatement/ understatement of sales and stock in trade
In response to the above we would need to carryout the following procedures:
(i) Obtain an understanding of when the sales are recorded in the system.
(ii) Enquire the reasons of 65% of subsequent recovery from JDS, and ask for confirmation from JDS.
(iii) Review global reconciliation of Sales, Receivable and stock at JDS.
(iv) Assess what type of mistakes were made in the stock posting system at JDS and review the reconciliations prepared
before making the corrections.
Implications on the Audit Report:
 After performing the above procedures if the auditor finds any error in the recording of sales or receivables, he should
ask the client to make appropriate adjustments, failing which the report may be modified i.e. qualified or adverse
depending upon the materiality of the amounts involved.
 If we are unable to obtain sufficient appropriate audit evidence, as regards the recording of sales or in relation to
receivable from JDS, it will be scope limitation and based on the materiality and pervasiveness of the matter, the auditor
may issue a qualified or disclaimer of opinion.

Examiners’ Comments:
This was a scenario based question where a Company HBBL had entered into an agreement for sale of its products at a chain
of departmental stores named JDS. Principal terms of agreement relating to transfer of risk and reward and credit
period/payment arrangement between the parties were given in the scenario. Certain issues relating to payment and
inventory reconciliation were also specified in the question. It was further stated that there was significant improvement in
operating results of HBBL. Candidates were required to discuss with reasons, what course of action the auditor should adopt
in the given situation and the possible impact thereof on the audit report.
The performance was average as most of the students discussed the apparent issues and the related audit steps but missed
some important steps like global reconciliation of sales, receivables and inventory related to JDS and possibility of scope
limitation on account of inability to obtain sufficient and appropriate audit evidence. Moreover, most of the students also
listed many irrelevant/inappropriate matters like provision against expired stock and disclosure of stock differences in the
financial statements.

Q.13 You have been appointed as a manager in the audit department of Sachal Sarmast & Company, which is a medium size
firm of chartered accountants. The audit of Consumer Products Limited has been assigned to you. This audit was
previously assigned to another manager who has resigned. The predecessor manager has identified a number of risks.
Two such risks alongwith their classification and related assertions are discussed in the working paper files.

The relevant extracts are as follows:

S.No. Risk factor Type of risk Related assertions
(i) Decentralized operating Inherent risk  Presentation and disclosures –
structure supported by occurrence and right and obligation and
different IT applications completeness
(ii) Financial crisis Significant risk  Accounts payable – rights and
obligations, valuation and completeness;
 Property and equipment – rights and
obligations;
 Accounts receivable – valuation;
 Inventory – valuation;
 Cash – valuation;
 Turnover – occurrence

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Auditing – The Case Book ISA 315

Required:
Do you agree with the above risk assessments? Discuss. (10)
(ICAP, CFAP 06 Level – Summer 2014)

Suggested Solution:
(i) Decentralized operating structure supported by different IT applications:
It is classified as inherent risk, which is not correct, because it does not indicate a susceptibility of an assertion about a
class of transactions or account balance or disclosures to misstatements.
Decentralized operating structure could potentially lead to misstatements in the financial statements due to the following:
 Unintentional mistakes due to variety of applications holding the information and the complexity involved.
 Potential frauds being committed by taking advantage of the complexities of the system.
Therefore it may be argued that this risk should be classified as a significant risk and in certain circumstances even a
fraud risk.
The noted assertions are correct, but the following should also be added:
 the occurrence, completeness, classification assertions for the class of transactions.
 The existence, rights and obligations and completeness assertions for year end account balances.
(ii) Financial Crisis
The classification of risk as a significant risk can be justified on its linkage with the recent economic development;
however it would be more appropriate to classify the factors of financial crisis into specific risks, depending upon:
 How the financial crisis will effect the client and how does it translate into a risk. This will vary depending on the
industry sector in which the client operates or how the financial crisis will impact certain portfolios/customers related to
client.
The linkage with related assertions is too vague, because almost assertions related to all areas have been included. The
auditor should reassess the relevance of the risks to link to the financial statement assertions and may need to reclassify
the Related assertions with respect to categories of risk.

Examiners’ Comments:
This was a scenario based question in which the candidates were required to comment on the risk assessment carried out by
an audit manager. This was a practical question and the overall response was very poor as discussed below:
(i) The risk factor identified in the question was “Decentralised operating structure supported by different IT applications”.
Almost 50% of the candidates agreed with the view that it was an inherent risk which was incorrect. Only 25% of the
candidates could identify correctly that it was a significant risk whereas most of the remaining students did not discuss this
aspect. The comments as regards assertions were reasonable, however some students tried to include all assertions that they
could think of. Such an approach had a negative impact on their performance evaluation.
(ii) The risk factor identified in the question was “Financial Crisis”. Generally, the students agreed with the classification
given in the question i.e. significant risk but the majority did not provide any justification thereof. Comments on the assertions
specified in the question were relatively better as quite a few students were able to distinguish between the relevant and the
irrelevant assertions in the given situation.

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 Auditing – The Case Book ISA 315

Q.14 You are the manager responsible for the annual audit of Tameer Limited (TL) for the year ending 31 December 2013. TL
is a listed company and is engaged in the business of construction, renting and selling of apartments and office buildings
to individuals, businesses and government departments.

Extracts from TL’s draft Profit and Loss Account are as follows:
2013 2012
(Upto Nov)
-------Rs. in million-------
Revenue 1,520 1,883
Operating expenses (1,165) (1,470)
Operating profit 355 413
Financial charges (190) (225)
Profit before tax 165 188

During the planning stage, the audit team has presented the following points for your consideration:
(i) On 31 January 2014 tenancy agreements of office buildings rented to municipal corporations in 15 small cities in the
province of Sindh, are expiring. The concerned departments have informed TL that they would not renew the agreements.
These properties are also held as security with the company’s bankers.
(ii) In August 2013, an apartment block which was completed and sold in 2009 was severely damaged in an earthquake.
The residents have filed a claim for damages against TL amounting to Rs. 400 million. The company denies any liability in
this regard. However, to maintain its goodwill TL has agreed to compensate the residents by making a payment of Rs. 100
million in four quarterly instalments and accordingly this amount has been provided in the accounts. The residents have
rejected the offer and filed a suit against the company.
(iii) During the year, construction equipment costing Rs. 300 million was acquired on lease. The lease rentals were
allocated to the contracts on the basis of time utilized. Lease rentals pertaining to idle time were charged to financial
expenses.
(iv) During the year TL sold a two storey office building to Ali Limited. According to the contract of sale, TL is entitled to
construct further offices on the third and fourth floors.

Required:
Identify the audit risks that exist in the above scenarios and describe the manner in which you would address those risks.
(18)
(ICAP, CFAP 06 Level – Winter 2013)

Suggested Solution:
Audit Risks:
The audit risks that exists in the given scenarios and the manner in which the auditor would have to deal with them are
discussed hereinafter:
(i) Expiry of tenancy agreements
 If the management of CL does not find any tenant after the expiry of rental agreements with the municipal corporation
there is a possibility that value of Investment Property may be impaired.
Manner in which the risk is to be addressed:
 The auditor should ask the management to make impairment testing of the Investment Property and make appropriate
provision, if required.
 The auditor would need to assess the assumptions used by the management in determining the fair value and whether
the management has considered the effect of expiry of tenancy agreements. If the assumptions applied are unreasonable
or does not include the effect of expiry of tenancy agreements, the auditor should discuss and resolve the matter with the
management .
 In case the auditor is not satisfied with the assumptions applied by the management or the effect of such assumptions on
the valuation he may consider hiring an expert.
(ii) Claim against destruction of apartment block
 The claim for damages against the company is indicative of contingent liabilities that may require provision or
disclosure in the financial statements and there is a risk that liabilities related to the alleged claim may not be recognized
appropriately in the financial statements.
Manner in which the risk is to be addressed:
 The petition filed by the residents and the basis of their claim would be reviewed.
 The information provided to the prospective buyers during the marketing campaign would be reviewed to assess
whether any claim was made by the company e.g. claim regarding the building being earthquake proof etc.
 Legal opinion would be obtained from the company’s lawyers.

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Auditing – The Case Book ISA 315

 A valuer may be consulted to assess the loss.

 If loss is probable and can be determined with reasonable accuracy management would be asked to make a provision,
otherwise a disclosure would be appropriate.
(iii) Construction equipment
The accounting treatment of allocation of lease rentals to financial expenses is not appropriate.
 There is a risk of wrong classification of lease that may affect the operating results and financial position of the
company.
Manner in which the risk is to be addressed:
 It appears that TL is treating the leasing equipment as an operating lease. The auditor should determine from the leasing
agreements whether the lease is a finance lease or operating lease.
 If the auditor considers that treatment of lease is incorrect, the auditor should ask the management to recognize the
lease appropriately.
 In case of operating lease, recognizing of lease rentals pertaining to idle time in financial charges is not appropriate. The
auditor should ask the management to charge the rentals to the overhead expenditures.
 If the lease is a finance lease, then the auditor should ask the management to recognize it accordingly.
(iv) Construction of three storey building
 There is a risk that value of right related to use of land for construction of 3rd and 4th floor is not valued and is not
recognized appropriately.
Manner in which the risk is to be addressed:
 The auditor would need to assess how this right has been valued in TL’s financial statements.
 The auditor would need to review the terms of the sale agreement relating to the first two floors and assess the extent of
rights available with the TL relating to the use of building i.e. construction of third and fourth floor. If required a legal
opinion may be obtained.
 If appropriate, the auditor may obtain a valuation report to assess the value of the rights available with the client
regarding the rights presently attached with the building.
 Based on the above information, the auditor would assess whether the accounting treatment (carrying value of land) is
appropriate.

Examiners’ Comments:
According to the scenario given in this question, a construction company was faced with four different situations and the
candidates were required to identify the audit risks and how the auditor would address those risks. The performance in each
case is discussed below:
(i)Rent agreements of 15 different properties were expiring subsequent to year end and were not being renewed. Majority of
the students jumped to the conclusion that this issue may result in failure of the company to continue as going concern. This
was not a valid argument because the company had many other ongoing projects and it had earned substantial profits
during the year under review. However, it did pose the risk of impairment in the value of properties which majority of the
students failed to identify.
(ii)A building constructed by the company had been seriously damaged in an earthquake and the residents had lodged a
substantial claim. The company denied any wrongdoing but as a gesture of goodwill, had offered to pay 25% of the claimed
amount.
The performance here was much better as the students were generally able to identify the risk of over or under statement of
liability and the need to seek lawyer’s opinion and the use of an expert for valuation of the loss. However, many candidates
emphasized on making appropriate provision without appreciating that a provision in excess of the amount already agreed
by the company would only be required if the loss is probable and can be determined with reasonable accuracy.
(iii)The company had obtained a construction equipment on lease and the lease rentals were being allocated to the contracts
on the basis of time utilized whereas rentals pertaining to idle time were being recorded as financial charges.
The candidates were generally able to identify the risk of misclassification of the lease and the need to verify whether the
treatment was correct. However, many candidates did not identify the error whereby the lease rentals pertaining to idle time
were being charged as financial expenses.
(iv)This was an interesting situation whereby the company had sold a two story building but retained the right to construct
the 3rd and the 4th floors. Majority of the candidates failed to identify the risk of incorrect valuation of the company’s right of
construction and sale of 3rd and the 4th floors. Majority of them discussed accounting of construction contracts which was
not relevant.

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 Auditing – The Case Book ISA 315

Q.15 You are the job incharge on the audit of Ghalib Petroleum Limited (GPL) for the year ending 30 June 2013. GPL is engaged
in the exploration and production of crude oil. The last year’s audit file contains the following information:

In 2005, GPL had entered into an agreement with the Government for exploration and production of oil for fifteen years.
The licence for exploration was granted at a fee of Rs. 600 million.

Under a separate agreement Mir Petroleum Limited (MPL), a 100% government owned entity, had guaranteed the
purchase of all crude oil to be produced by GPL for a period of ten years from the start of commercial production i.e. 2008.

The plant and equipment was imported in 2006 at a total cost of Rs. 6 billion which includes a decommissioning provision
of Rs. 500 million. The cost of the plant was financed by GPL’s parent company by way of a long-term foreign currency
loan.

During the current year’s planning stage, you have observed the following conditions:
(i) The problem of circular debts has become severe and as a result GPL as well as MPL have accumulated huge
receivables and payables.
(ii) An environmental control agency has filed a suit alleging that at the time of abandoning one of its oil wells, GPL has
failed to restore the site in accordance with the prescribed standards. The company believes that it has met all its
obligations and plans to contest the case strongly.
(iii) Due to law and order situation the Government has not been able to provide infrastructure facilities as were agreed
in the exploration agreement.
(iv) The management had budgeted a profit of Rs. 200 million for the current year but latest estimates suggest that the
profit would be somewhere between Rs. 100 to Rs. 120 million.

Required:
Identify and evaluate the audit risks in the above situation and specify the audit procedures that you would perform to
address those risks. (16)
(ICAP, CFAP 06 Level – Summer 2013)

Suggested Solution:
Audit risks:
(i) Impairment of assets:
 Values of license granted by the Government and the value of plant and machinery for exploration purposes may be
impaired due to the following:
 Government has not been able to provide the required infrastructure facilities due to which the exploration work might
be affected and GPL might not be able to obtain the expected benefits from the use of plant and machinery.
 Due to the problem of circular debt, MPL may not be able to purchase oil as agreed in the contract.
 Due to circular debt problem there is a possibility that amount of receivable from MPL may be impaired.
Actions to be taken to address the risk:
 Review the exploration contract with the Government to assess whether it contains appropriate clauses to address the
situation.
 Ask GPL to carry out the impairment testing of the value of license and check the working thereof.
 Review the agreement with MPL and check what remedy is available to GPL in case MPL fails to purchase oil from GPL.
 Ask GPL to calculate value in use, of the plant and machinery and check the working thereof.
 Discuss with GPL’s its relationship with MPL and what measures MPL is taking to resolve its liquidity issue and to
ensure that it continues to purchase oil and make regular payments.
 Review the measures that are being taken by the two companies and the Government to resolve the circular debt issue.
 Ensure that incase there is a doubt about the recoverability of the amount, appropriate provision is made in the financial
statements.
 If the measures taken above indicate an impairment, ensure appropriate adjustment in the financial statements.
(ii) Going Concern:
On account of MPL’s inability to purchase oil as agreed or to make payments there against GPL’s may face going concern
issues.
Actions to be taken to address the risk:
 Ask management to make its assessment of the entity’s ability to continue as a going concern, if already not performed
by the entity.
 Evaluating management’s plans for future actions in relation to its going concern assessment.
 Where the entity has prepared a cash flow forecast, the auditor shall:
 Evaluate the reliability of the underlying data used in preparation of the forecast.
 Determining whether there is adequate support for the assumptions used in preparation of the forecast.

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Auditing – The Case Book ISA 315

 Request written representations from management and where appropriate, those charged with governance, regarding
their plans for future action and feasibility of these plans.
(iii) Foreign Exchange Translation Risk:
The company is exposed to foreign exchange risk as a major part of the cost of plant was financed through foreign
currency loan from a parent company and the value of foreign currency loan may fluctuate due to fluctuation in the
exchange rates.
Actions to be taken to address the risk:
 The auditor should ensure that year-end balance is accurately reported keeping in view that the year-end balance may
differ depending upon whether the client has helped the risk or is maintaining an open position.
(iv) Undervaluation of liabilities:
The alleged suit against the company may be indicative of contingent liabilities that may require provision or disclosure
in the financial statements and there is a risk that liabilities related to the alleged suits may not be recognized
appropriately in the financial statements.
Actions to be taken to address the risk:
 Obtain opinion of the legal advisor.
 Ensure that proper disclosure or adjustment is made in the financial statements, in accordance with IFRS.
(v) Over/ Undervaluation of assets:
In case the undervaluation of liabilities (as discussed above) is probable it may be indicative of the fact that the
decommissioning provision in other case has also not been estimated correctly and the related plant and machinery may
be undervalued or overvalued.
Actions to be taken to address the risk:
 Review the suit filed by the environmental agency and what other actions GPL would need to take to become compliant.
 Review the prescribed standards related to the requirements of restoring the site.
 Ask the management to review the de-commissioning provision accordingly.
Review the steps taken by management for re-estimating the amount of decommissioning provision.
(vi) Overstatement of Results:
The latest estimates show that the company would fail to achieve the budgeted profit. Therefore, there is a possibility that
the management may be inclined to overstate or manipulate the results in order to show better position of the company
as compared to the budgeted profits.
Actions to be taken to address the risk:
 Increase the extent of substantive procedures because the above factor would increase the risk of material
misstatement.
 Review last minute adjustments and cut-offs more carefully to ensure that the accounts are not misstated.

Examiners’ Comments:
The situation given in this question pertained to a company engaged in oil exploration activities. The company was faced
with a difficult situation in which its profits were falling and its receivables and payables had increased significantly. Certain
other information was also given such as terms of licencing agreement with the government, governments guarantee for
purchase of entire production of the company, a suit filed against the company and general difficulties faced by the company
in the given business environment.
An average performance was witnessed as the students were able to identify some of the risks and actions required to be
taken by the auditor. However, very few students could identify all the major risks as the following were rarely mentioned:
• Foreign Exchange Translation Risk (due to long term foreign currency loan).
• Impairment of plant and machinery
• Under or over valuation of assets due to incorrect estimation of decommissioning costs.
• Over statement of profit, due to pressures on account of reduced earnings.
Many students seemed to have little understanding of the implications of the given information. For example, while discussing
that the company’s profits were significantly below the budget, many students started commenting on the management’s
ability to prepare the budgets and importance of assumptions used etc. instead of relating it to the risk of mis-statement in
Profit and Loss because of earning pressure on the management.

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 Auditing – The Case Book ISA 315

Q.16 You are the Audit Manager of Mustafa and Company, Chartered Accountants, responsible for the audit of Standard Home
Appliances Limited, a listed company.

Extracts from the company’s financial statements are presented below:

30-Sep-2012 30-Sep-2011
Income statement ----------Rs. in million---------
Revenue 1,190 1,174
Gross profit 509 537
Operating profit 242 227
Finance charges (77) (69)
Profit before tax 165 158

Statement of financial position

Property, plant and equipment 1,054 833
Intangible assets 140 100
Inventory 423 260
Trade receivables 417 250
Cash and bank balances 29 54
Total assets 2,063 1,497

Equity and liabilities

Share capital 1,000 1,000
Retained earnings 218 233
Long-term borrowings 277 50
Liabilities against assets subject to finance lease 180 -
Bank overdraft 185 52
Trade and other payables 203 162
Total equity and liabilities 2,063 1,497

During the year, the company has introduced various products based on latest technologies. These new products are
being manufactured on a new plant which has been acquired under a lease agreement for a period of four years. The plant
commenced operations on 01 January 2012. The useful life of the plant is 5 years.
Intangible assets represent cost of software installed and designs which have been acquired from a renowned
multinational company.

Required:
Identify and evaluate the audit risks in the above situation. (12)
(ICAP, CFAP 06 Level – Winter 2012)

Suggested Solution:
Audit Risks:
(i)Impairment of assets:
A meager increase in sales by Rs. 16 million i.e. 1.4% against a capital expenditure of approximately Rs. 200 million in
property, plant and equipment and in intangible assets, indicates that the new products have generated minimal sales or
the sales of existing products have declined.
The minimal increase may indicate the impairment of plant specifically bought for the manufacturing of new products or
impairment in the value of existing assets and of intangible assets including the software and designs which have been
acquired for new products.
(ii)Understatement of operating expenses:
Operating expenses have declined by 13.87%. This seems unrealistic because the company had introduced new products
and installed a new plant, which should have resulted in an increase in the operating expenses such as on advertisement
costs and other sales related costs incurred on launching of new product. Hence there is a risk of understatement of
expenses.
(iii)Finance charges:
The financial charges have increased by approximately 11.59% whereas the debt on the company has increased by 6.20
times. This seems unrealistic and there is a risk that some of these charges may have remained unrecorded.
(iv)Liquidity:
The company’s liquidity position has weakened which is normal i.e. on account of heavy expenditures on new
product/plant. However, the situation has worsened on account of a disproportionate increase in receivables and
inventories as compared to increase in sales.

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 Auditing – The Case Book ISA 315

MPCL is clearly relying on its overdraft to fund operating cash flows. Liquidity issues may arise in future, especially when
repayment of long term loan and lease payments becoming due.
(v)Current Assets:
Inventories and receivables both have increased. As compared to increase in sales amounting to Rs. 16 million the
receivables have increased by Rs. 167 million and inventory Rs. 163 million which is approximately 67% and 63%,
respectively. Therefore, there is a risk that inventories and receivables might be overstated. (Necessary provision may not
have been made)

Examiners’ Comments:
Extracts from financial statements were given alongwith information pertaining to acquisition of a new plant and intangible
assets (software installed). Students delved a lot on horizontal changes with little focus on vertical analysis. Most of them
were able to identify the apparent risks such as impairment in inventories and debtor, liquidity issues, understatement of
financial charges. However, they were found lacking as regards the following:
• While discussing the liquidity, most of the students were concerned about the concept of ‘going concern’. Although
the liquidity position of the company seemed to have worsened, yet, apparently there was no indication that it may
lead to a going concern issue.
• Most of the students were unable to identify the fact that operating expenses have declined as compared to the
previous year which was quite unusual in the given scenario, i.e. when the company had introduced new products.
• Most of the students pointed out the risk of impairment of plant and intangible assets but did not provide any
significant reason to support their point of view. In fact there was quite an imminent risk of impairment in the value
of plant because of the fact that the overall sales had increased by only Rs. 16 million i.e. 1.5% despite the fact that
several new products were being manufactured on the new plant.

Q.17 You have been appointed as the auditor of Tee Pharmaceuticals Limited (TPL) for the year ended 31 March 2012. An
extract from the draft financial statements is presented below:
Income statement 2012 2011
Rs. in million
Revenue 48,970 47,500
Finance charges 3,000 1,200
Profit after tax 70 600
Statement of financial position 2012 2011
Rs. in million
Intangible assets 7,000 3,000
Stocks 27,000 15,500
Trade receivables 13,800 11,500
Share capital (Rs.10 each) 20,000 20,000
Retained earnings 1,170 1,100
Long term loans 10,500 3,000
Short term loans 27,000 15,000

During the planning process, you have gathered the following information:

(i) TPL’s operations were highly successful until 2008. However, due to increased competition the profitability has
reduced significantly over the last four years. Consequently, the company has embarked upon an ambitious plan whereby
it has taken the following steps:
• Three new products have been introduced for which patent rights have been purchased. The new products were
introduced in the market in December 2011.
• A new plant has been acquired which is expected to reduce the cost of production significantly.
• The above measures have been financed through a bank loan against hypothecation of stocks and trade receivables.

(ii) TPL has had a dispute with a major distributor who alleges that products were delivered in damaged packets and the
quantities therein were short as compared to the numbers mentioned on the packets.

(iii) A franchisor has initiated a legal action against the company on grounds of infringements of patent rights.

(iv) TPL had entered into a one year agreement with a foreign supplier for supply of raw material. On 20 April 2012 the
government of the country in which the supplier is registered, has initiated legal proceedings against that supplier for
breach of quality standards.
Consequently, the government of the country in which TPL is operating has banned all imports from that supplier.

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Auditing – The Case Book ISA 315

Required:
Identify the audit risks that exist in the above scenario and the manner in which you would address those risks, during the
audit under the following headings:
(i) Raw materials (iii) Intangibles
(ii) Trade receivables (iv) Liquidity issues (19)
(ICAP, CFAP 06 Level – Summer 2012)

Suggested Solution:
(i)Raw Material:
Inventory of raw material may be overvalued and require provision for obsolescence because raw material acquired
from the foreign supplier may not be used in production due to breach of quality standard.
TPL may face shortage of raw material, if it is unable to find alternative supplier from which the raw material can be
obtained. The shortage of raw material may affect the operations of the company.
Actions to be taken to address the risk:
 Review the reasons and reports based on which the Foreign Government has acted against the concerned supplier;
Ask client to determine the net realizable value of the raw material keeping in view the risks identified above and review
the clients working.
 Discuss with management about extent of reliance on the foreign supplier and any alternative source of supplies.
If the extent of reliance on foreign supplier is significant and TPL is unable to find alternative supplier, assess the impact
thereof on TPL’s operations.
(ii)Trade Receivables:
An increase of about 20% in trade receivables and significant dispute with a customer over packaging and short delivery
issues indicate that some accounts receivable might not be recoverable.
An increase in Debtors Turnover days from 87 days to 101 days indicates the existence of slow moving and doubtful
debts, which may require provisioning.
Actions to be taken to address the risk:
Obtain age analysis from the management to identify any long outstanding debts.
Check subsequent recovery of debtors and obtain confirmation from major debtors.
Discuss with management about the reason for increase in debtors turnover days i.e. is it on account of lower collection
or on account of change in collection policy.
Consider adequacy of provisions.
(iii)Intangibles:
Legal case filed by the franchisor on account of alleged patent infringements indicates that the value of intangibles may
be impaired.
Valuation of inventory may be also be impaired on account of patent infringements
The legal case may lead to substantial fines and penalties.
Actions to be taken to address the risk:
Review the agreement of patent with the franchisor and assignment deed.
Obtain confirmation from the legal advisor relating to the possible outcome of the case filed by the franchisor.
Ask the client to calculate value in use, of the patents and check the working thereof.
Consider the opinion of legal advisor to assess the impact of patent violation on the valuation of finished goods.
(iv)Liquidity Issues:
Although TPL had successfully negotiated with the bank by obtaining long and short term loans, interest expense as a
percentage of profit has increased significantly. It could hamper the company’s ability to pay the finance charges and the
principal.
Short term loans were obtained by hypothecation of the stocks and receivables. A significant decline in the value of stock
in trade and trade receivables is probable as discussed in (i) and (ii) above. TPL’s bankers may ask the company to
provide further securities or to pay off the loan amount.
Actions to be taken to address the risk:
Review the steps taken by the management of the company to counter the liquidity problems faced by it.
Review the projections of the company to assess whether the company will be able to overcome the current liquidity
crisis.
If the steps taken by the management are not considered satisfactory consider the impact thereof on the company’s
ability to continue as a going concern.

Examiners’ Comments:
This question was set by the examiner to test the knowledge of the students about assessment of the audit risks in four areas
and how an auditor would address those risks. The students were generally able to mention the risks. However, many
students had the tendency to mention all the risks that are usually associated with these areas, instead of identifying only

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 Auditing – The Case Book ISA 315

those risks that were relevant to the given situation. Some of them identified the risk but did not relate it to the given
situation.
While explaining as to how the auditor may address the particular risks, many students tended to produce the entire audit
program. Some candidates wrote minor steps like, trace opening balances, agree balances with ledger and carry out stock
taking etc. which are not usually required to be mentioned at this level, unless they are significant on account of a very
specific situation.

Q.18 Your firm has recently been appointed as the statutory auditor of Chaudhry Limited (CL) for the year ending 31 December
2011. The previous auditors, from whom your firm has received professional clearance, did not wish to be re-appointed
as auditors.

CL is involved in the supply of imported consumer products. The company has its own retail outlets in all major cities. It
also supplies goods to large retailers most of whom are allowed 45 days credit.
Time required to import the goods is approximately two months. 50% of the amount is paid at the time of booking of
order and the remaining amount is paid at the time of receipt of goods. The goods are required to be insured by CL.

CL’s suppliers are mainly based in Middle East. Due to political disturbances, a major supplier has recently ceased its
operations.

All imported goods are initially placed in a warehouse in Karachi. Supplies are made against orders which are mostly
received over telephone by the sales department. The warehouse in-charge prepares a summary of all dispatches which is
approved by the sales manager, on a daily basis. Stock records are computerised. Physical stock taking is carried out on a
regular basis, at the warehouse as well as retail outlets. Therefore, a 100% physical count is not undertaken at the year-
end.

Day to day expenses of the retail outlets are paid out of cash receipts from customers. Balance cash is deposited into the
bank on a daily basis.

The management accounts show that the company has not been able to achieve the sales target for the current year
although the sales have increased by 12% as compared with the same period in 2010.

Stocks and trade debtors have significantly increased and the management attributes this to be on account of increase in
sales.

CL is planning to expand its business and intends to fund the expansion through a bank loan. CL’s existing bankers have
declined to increase the borrowing limits and therefore, the company has approached another banker for the loan. The
management has requested you to complete the audit by 15 February 2012 to enable it to submit the audited financial
statements to the new bankers.

Required:
Identify and evaluate the audit risks in the above situation and specify the audit procedures that you would perform to
address those risks. (22)
(ICAP, CFAP 06 Level – Winter 2011)

Suggested Solution:
Audit Risks
(i)Opening Balances:
There is a risk that opening balances may not have been brought forward correctly from the previous year’s financial
statements as this is the first year of audit.
This risk is compounded by the fact that the retiring auditor was not willing to be re-appointed.
Actions to be taken to address the risk:
We need to review the previous period’s accounting records and schedules to ensure that opening balances have been
correctly brought forward to the current period.
If the predecessor auditor permits, review his working papers to ensure the correctness of the opening balances.
Audit procedures performed in the current period may provide evidence relating to the correctness of opening balances.
We also need to consider the reasons on account of which the retiring auditor is not willing for re-appointment.
(ii)Foreign Currency Transactions:
As the imports of consumer goods will involve transactions in foreign currencies, there is a risk that gains or losses on
translation of foreign currencies are wrongly credited/ debited to purchases instead of charging to Profit and Loss
Account.

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Auditing – The Case Book ISA 315

Actions to be taken to address the risk:

Perform test of controls to ensure that any gains/ losses arising on the translation of foreign currency are correctly
recognized as per the requirements of International Financial Reporting Standards and appropriate exchange rates are
used in translation of foreign currency.
(iii)Overstatement/ Understatement of purchases/ stocks/ liabilities:
Since all goods are imported and 50% advance is paid at the time of ordering, the amount of purchases may be misstated
resulting in misstatement of stock as well as payables.
Actions to be taken to address the risk:
Check that purchases are recorded when all the risk and rewards of ownership are transferred to the company.
Ensure that the amount of deposit is properly reconciled with the pending orders and goods in transit.
(iv)Insurance in transit:
Goods in transit may not be adequately insured.
Actions to be taken to address the risk:
Review the insurance policies at year end and match them with the consignments in transit.
(v)Going Concern/Liquidity Issues:
The company’s existing bankers have declined to provide financing facilities to the company, which is indicative of a
weakening relationship and risk of non-fulfilment of covenants of borrowing.
One of the major suppliers of the company has ceased operations. If the company is unable to find a suitable
replacement, the company’s results and liquidity may suffer.
Actions to be taken to address the risk:
Discuss with management and assess the significance of the supplies from that particular supplier and the impact of
disruption in supplies on the company’s operations.
Discuss and review the related documentation to ascertain the reasons on account of which the company bankers had
declined to provide further financing facility to the company, and assess its impact on the company’s operations.
(vi)Overstatement of assets:
Increase in stock in trade and debtors may not be on account of increase in sales only. There may be other reasons, such
as obsolete stocks and uncollectible debtors.
Actions to be taken to address the risk:
Review the stock count procedures and the related documentation and assess whether adequate controls exist.
Ascertain the management’s system of identification of obsolete and slow moving stock and assess whether appropriate
controls exist.
Review age analysis of debtors to ensure that any long outstanding debt that requires provisioning is appropriately
identified and adjusted.
 Carry out substantive procedures (Confirmation, Aging Analysis etc.) based on your assessment of controls.
(vii)Misstatement of sales/ stock in trade:
Sales and stock in trade can be misreported/ misappropriated due to the fact that sales orders are taken over telephone
and in the absence of strong controls over the processing of orders, there is a risk that sales/stock in trade can be
misappropriated/ misreported through collusion among staff members.
Actions to be taken to address the risk:
Check whether summary of dispatches is confirmed with the list of orders by an independent person.
In the absence of proper segregation of duties between the approving and initializing authorities and other related
controls, we need to consider the impact thereof on the extent of substantive procedures.
(viii)Unrecorded cash sales/ Misappropriation of cash:
Cash sales can easily be misappropriated.
Teaming and lading is possible since day to day expenses are adjusted before the deposit of cash into bank.
Actions to be taken to address the risk:
Evaluate and test the controls over cash receipts, at the retail outlets.
Perform analytical review on profit margins to identify any unusual trends.
In case of weak controls, or unusual results of the analytical procedures the extent of substantive testing may be
enhanced.
(ix)Time schedule for audit:
Tight audit deadlines may restrict the:
Extent of procedures that may be carried out.
Time available for review of subsequent events.
Being a new client the restriction may represent a more serious threat.
Actions to be taken to address the risk:
Working papers should be independently reviewed by second partner, specially those related to judgmental and high risk
areas.

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 Auditing – The Case Book ISA 315

Examiners’ Comments:
The question required the students to identify the risks associated with the audit, in a given scenarios and specify the
necessary procedures, to address those risks. The performance of majority of the candidates was far below the expected level.
Most of them were able to identify the apparent risks only. The second requirement i.e. the audit procedures to address the
identified risks, was better managed.

Q.19 You are the audit manager responsible for the audit of Laila Pharmaceuticals Limited (LPL), a listed company, for the year
ended March 31, 2011. During your initial meeting with the chief executive officer and the chief financial officer of the
company the following issues have been brought to your attention:

(i) At the year end, the net assets of LPL have reduced to Rs. 270 million (2010: Rs. 310 million). A comparison of the draft
income statement with the declared results for the nine months ended December 31, 2010 is as follows:

Nine months ended Year ended March

December 31, 2010 31, 2011
-------------- Rupees in million ---------------
Revenue 500 530
Cost of sales (400) (477)
Gross profit 100 53
Operating expenses (70) (90)
Financial charges (15) (20)
Operating profit / (loss) 15 (57)
Gain on sale of property - 20
Net profit/(loss) before tax 15 (37)

(ii) On April 1, 2010 LPL had acquired 45% shareholdings in Sohni (Private) Limited (SPL). The spouse of a director of
LPL is a director in SPL.

(iii) On May 1, 2010 LPL purchased new office premises from SPL for Rs. 40 million. In January 2011 these premises were
sold to Anarkali Limited (AL), an associated undertaking of LPL, for Rs. 60 million. Subsequent to the sale, LPL signed a
five years’ agreement with AL to acquire the office premises on a rent of Rs. 12 million per annum.

Required:
Assess the above matters and discuss how you would address the related implications during the course of the audit. (20)
(ICAP, CFAP 06 Level – Summer 2011)

Suggested Solution:
Following are the important matters that the auditor would have to deal with:
(a)Drastic reduction in sales:
Drastic reduction in sales indicates that the management may have misstated the operating results disclosed in the
financial statements for the nine months ended December 31, 2010.
The auditor should evaluate the situation and if a misstatement is confirmed, the auditor would need to reassess his initial
risk assessment and revise the audit procedures accordingly.
(b)Inability of the company to generate operating cash flows:
Following are the factors that may indicate the inability of the company to generate adequate cash flows from its
operations:
(i)Decline in net assets value by 13% because of net loss for the year;
(ii)Selling of property to the associated undertaking under sale and leaseback arrangement in order to generate cash
inflows.
The auditor would discuss the matter with the management and those charged with governance about their future course
of action regarding the cash flows issues. If the matter is not resolved or remains uncertain, the auditor should perform
the additional procedures to evaluate the appropriateness of going concern assumption.
(c)Sale and leaseback transaction:
This transaction raises the following issues:
(i)Whether it is an arm¡¦s length transaction, especially in view of the fact that it involves a related party.
(ii)Whether the accounting treatment is in accordance with IAS-17
The above issues are discussed hereunder:
(i)It seems that the transaction has not been entered in the ordinary course of business as it is evident that:
LPL earns 50% profit in a short period.
Annual rental amount represents 20% of the sale proceeds.

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 Auditing – The Case Book ISA 315

The auditor would need to assess whether any undue favour has been allowed to the associated company in order to book
profit or to resolve the immediate liquidity issue. If the answer is in the affirmative, the auditor would need to reassess his
initial risk assessment and consider revising the audit procedures accordingly.
(ii)In view of the given information it seems that LPL has recorded the transaction as an operating lease. If this is the case,
the decision to book the entire profit in the current year may have been justified. However, the auditor needs to assess
whether the sale proceeds represent the fair value of the premises, on the date of transaction. In case this is not true, the
auditor should advise the management to record the sale and profit, based on fair value and defer the remaining amount
and amortize it over the lease period .
In case, the auditor believe that the transaction should be recorded as a finance lease the entire difference of Rs. 20
million should be amortized over the lease period.
(d)Consolidation of Sohni (Private) Limited:
The auditor should be mindful of the fact that LPL may be exercising control over more than 50% of voting power in SL
through the spouse of the LPL¡¦s director.
The auditor should discuss the above possibility with the management. If it is established that the control exists either
through the spouse of the director or due to any other similar situation, he should advise the management to present
consolidated accounts.
(e)Impairment testing of Investments in Sohni (Private) Limited:
Purchase of 45% investment in Sohni (Pvt.) Ltd. where spouse of a director of LPL is also a director creates the doubt that
transaction had not been made in the ordinary course of business and its value may have been impaired.
The auditor should ask the management to perform test of impairment and make appropriate provision, if required.
(f)Investment in associated undertaking:
The auditor should also verify whether all the requirements of the Companies Ordinance, 1984 relating to investment in
associated undertaking have been complied with.
In this regard he should discuss the matter with the management and corroborate the discussion with the relevant
documents (e.g. minutes of the shareholder¡¦s meetings).

Examiners’ Comments:
In this question, a practical scenario was given. The students were required to identify the important issues that they as an
auditor, would need to consider and to elaborate as to how could they address these issues during the course of audit. The
performance was poor mainly on account of the following:
• Interim figures for the nine months were given alongwith the figures pertaining to the year-end. Many students
failed to read the question carefully. They produced the whole answer on the presumption that these were
comparative figures for two different years.
• Many students restricted their answers to issues pertaining to related party transactions. Other issues were ignored.
• The fact that the sale for the last quarter, as depicted by the information provided, was only 6% of the annual sales,
was seldom identified.
• Most of the students were able to pick the very obvious issues only. Very few candidates seemed to have the ability
to explore those issues which were not very apparent.

Q.20 You are planning the statutory audit of the financial statements of Mahiwal Limited (ML) for the year ending June 30,
2011. ML sells and distributes networking equipment and accessories to corporate and retail customers. Since January 1,
2009 ML has exclusive country-wide distribution rights of ‘Bisco’ and ‘Portel’, which are the leading international brands
of networking equipment.
Your review of the prior year’s working papers has disclosed that ML has expanded its operations significantly after
securing the distribution rights of ‘Bisco’ and ‘Portel’. By June 30, 2010 there had been a 60% increase in its customer
base whereas the number of its branches had increased from 3 to 10 and the number of employees had risen from 30 to
115. The latest available draft financial statements show that the sales of ‘Bisco’ and ‘Portel’ represent 90% of its total
sales.
During a recent meeting with the finance director, you have been informed as follows:
(i) ML has shifted its warehouse and customer service centre to larger premises in order to handle the increased
inventory level and the rising level of after sales warranty claims.
(ii) ML has witnessed a slight fall in sales of ‘Bisco’ and ‘Portel’ because of tough competition from other low priced
brands.
A review of the draft financial statements has also disclosed that ML had revalued a property in accordance with the
requirements of the International Financial Reporting Standards. The property was acquired many years ago to earn
rental income.
Required:
(a) Identify and evaluate the audit risks in the above situation. (12)
(b) Discuss an audit strategy to take into account the identified risks in the overall audit plan. (03)

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Auditing – The Case Book ISA 315

(c) Enumerate the key audit procedures to be conducted to assess the appropriateness of the revaluation of property and
the accounting treatment thereof. (08)
(ICAP, CFAP 06 Level – Summer 2011)

Suggested Solution:
(a)Audit Risks
(i)Excessive reliance on two products
Sales of Bisco and Portel constitute 90% of its turnover. If ML is not able to sell any of its product due to any reason (e.g.
withdrawn of distribution right, launching of new product by the competitor, etc), it would be difficult for ML to continue
as a going concern entity.
(ii)Rapid Growth
ML has experienced rapid growth over the period. This raises the following audit risks
Effectiveness of internal control
ML increased its customer base significantly, increased its branch network, taken on significantly more staff and moved
its warehouse and customer service centre to new premises. All these factors require appropriate changes in the control.
If control and systems have not grown with the company or internal control has been inadequate there is a significant risk
of errors and even fraud in the financial statements;
Cash flow considerations
Because of the rapid expansion ML may have been overtrading, creating a risk that it may not be able to generate enough
working capital to finance its operations.
The situation will be further deteriorated by the additional fixed costs that ML has committed while carrying out the
expansion.
(iii)Inventory
Obsolescence
Increase in rising level of after sales warranty claims may be on account of increased sales however it may also be
indicative of manufacturing fault in the quality of equipment. This may affect the value of inventory in-hand particularly if
the drop in sales experienced recently is indicative of the defect being publicized.
If the main products or products are ultimately found to be defective, it may result in following issues:
Impact on valuation of inventories
decline in sales which may result in accumulation of slow moving items
high level of sales returns
The risk of obsolescence will be considered ¡§High¡¨ if ML does not have recourse to the manufacturer in respect of
defective inventory.
(iv)Provision for Warranty Claim
There has been an increase in sales warranty claim which may require significant material provisions in the financial
statements.
(v)Valuation of Investment Property
Revaluation generally involves making estimates based on a number of assumptions. Because of this reason, there is the
chance that:
professional valuer/ management may not be sufficiently experienced to make the assumption.
assumptions may be manipulated by the Management to obtain the most favorable fair value in the financial statements
(b)Audit Strategy
(i) The auditor should not seek to place heavy reliance on controls, and instead undertake more substantive testing.
(ii)A major audit risk in the income statement is the cost of wages and salaries, particularly if controls have not been
strong. There has been a high number of new staff and if controls are weak, there is scope for errors and even fraud to
have been perpetrated.
(iii)Risk related to cash flows as discussed above may have raised the going concern issues. The auditors should carry out
extensive going concern procedures.

(c)Principal audit procedures - valuation of Investment property

(i)To ensure the reliability of Valuation report by the Valuer:
Assess the nature and complexity of the matter of valuation of the investment property.
Ensure the reliability of the information provided by the Expert from alternative sources of information.
Assess the nature, scope and objectives of the valuer¡¦s work.
Enquire whether the Management can exercise control or influence over the work of the valuer.
Enquire whether the valuer valuation work is subject to technical performance standards or other professional or
industry requirement.
(ii)To ensure the Competence, Capability and Objectivity of the valuer:
Enquire the professional certification of the valuer
Enquire whether he is a member of any professional body.
Enquire whether any professional or legal standard are applicable to them

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What assumptions and methods are used by the expert and are they generally accepted with that expert¡¦s field and
appropriate for financial reporting purposes.
The nature of internal and external information that the expert uses.
 Enquire whether he has any experience in the valuation of investment property and their recognition at fair value.
(iii)To determine the objectivity of the valuer so that the independence of the valuation can be judged:
Enquire whether valuer is related to the entity. (e.g., close family member of the director)
Enquire whether the valuer has any financial interest in the ML (e.g., shareholder)
Enquire whether the fee received by the valuer is reasonable and at market price?
(iv)To ensure that revaluation has been properly accounted for in the books and the financial statements
Ensure that revaluation has been done in accordance with the ML¡¦s accounting policy for recording the investment
property.
Ensure that the entire class of investment property should be revalued.
Ensure that gain or loss arises due to revaluation should be recognized in profit or loss for the year.
Ensure appropriate disclosures have been in accordance with IAS-40

Examiners’ Comments:
This question offered an opportunity to the students to secure good marks. Surprisingly, they failed to demonstrate their
practical knowledge and missed some of the very important issues. They should have noted that question had three parts and
all carried different weights; thus the answer should have been structured accordingly. In the first place they should have
identified the risk followed by its evaluation. This in turn, would have helped them to identify the strategy most suited in the
given scenario and the appropriate audit procedures that should be carried out.
It was surprising that most of the student could not identify significant risks arising due to excessive reliance on two products,
rapid growth, inventory obsolescence, increasing warranty claims and valuation of investment property. Likewise, the
component related to audit strategy was responded to by many in the form of an audit program which had no nexus with the
requirement of the question. The component related to valuation of property and accounting treatment thereof was also not
well attended as a significant number of candidates restricted their focus on qualification and competence of the valuer only
and missed other related aspects.

Q.21 You are the manager responsible for the statutory audit of Parrot Limited (PL), a listed company engaged in the business
of manufacture and sale of sports goods. It has three factories located at Karachi, Lahore and Sialkot.

Summarized statement of financial position as of September 30, 2010 (unaudited) and 2009 (audited) are as follows:
2010 2009
Rupees in million
Assets
Property, plant and equipment 1,960 2,130
Investment in a subsidiary 520 590
2,480 2,720
Stocks 720 510
Debtors 530 330
Other current assets 280 210
1,530 1,050
Total assets 4,010 3,770
Equity and liabilities
Paid-up capital 1,800 1,800
Accumulated losses (1,650) (1,350)
150 450
Long-term bank borrowings 2,350 2,310
Creditors and other payables 1,510 1,010
Total equity and li abilities 4,010 3,770

Following further information is available:

(i) PL acquired a subsidiary in 2005 which is engaged in the business of manufacture and export of sportswear. The
investment is recorded in PL’s financial statements under the equity method. The last dividend was paid by the subsidiary
in 2007.
(ii) During the physical count of stocks at Karachi on September 30, 2010 it has been observed that stocks worth Rs. 100
million is obsolete and would require a provision of 20% to 30% of the carrying value.
(iii) During the year, PL and its bank agreed to reschedule the loan on the following terms:
 Repayment date was extended from 3 years to 6 years.

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Auditing – The Case Book ISA 315

 Rate of interest was increased from 1-year KIBOR + 3% to 1-year KIBOR + 4%.
 PL shall be required to maintain a current ratio of 1:1. In the event of non-compliance of this requirement, the loan
would become immediately payable. However, on October 25, 2010, the bank agreed to waive this requirement.

Required:
(a) Identify the risks that may result in material misstatements in PL’s financial statements.
(b) Discuss the key areas on which you should place emphasis upon, to address the risks identified in (a) above.
(20)
(ICAP, CFAP 06 Level – Winter 2010)
Suggested Solution:
(a) Audit Risk (b) Key Areas on which emphasis to be placed
(i) Investment in subsidiary: As the The management should be asked to carry out impairment
carrying value of the subsidiary is testing by comparing recoverable amount of the subsidiary
declining, there is a risk that value with the carrying amount of investment.
of investment appearing in the The assumptions used in the impairment testing specially for
books may be impaired. determining the value-in-use needs to be analyzed for
reasonableness.
The management should also be asked to state the investment in subsidiary in its Fina
(ii) Debtors: There is a significant The ageing of the debtors needs to be carefully analyzed and
increase in the debtors. Therefore, long outstanding debtors needs to be inquired with the
there is a risk of material management.
misstatement in case the company Circularize confirmations to the debtors and evaluate the
fails to make appropriate provision response.
against doubtful debts. Check subsequent payments received from debtors.
Review the basis of provision against doubtful and assess its
reasonableness.
(iii) Stocks in trade: The valuation of The need to employ an independent valuer may be
stocks at its NRV creates a risk that considered.
the company may not be able to Check subsequent sale of obsolete stock in order to assess the
determine the degree of amount of provision required.
obsolescence on a reasonably Discuss the reasons of obsolescence of stock at Karachi and
accurate basis resulting in assess whether similar situation may be prevailing at other
misstatement. locations also.
Review movement in stocks of material items.
(iv) Bank borrowings: The bank has All current assets and current liabilities should be analyzed for
rescheduled the loans after their completeness.
imposing tough conditions. There is In case any adjustment is required which resultantly (e.g.
a likelihood that FL will not be able recording the stocks at NRV) reduce the current ratio from 1:
to comply with the term of 1, the loan should be classified as current liability.
borrowings related to current ratio Reviewing outstanding creditors and assess:
and loan may become payable  the company’s dependence on such creditor
immediately.  risk of litigation
(v) Going concern issue: The financial Ensure that management performs an assessment of the
position and erosion of significant entity’s ability to continue as a going concern.
equity creates the doubt that FL Evaluate management’s plans for future actions in relation to
may not be able to continue in its going concern assessment.
business for foreseeable future. If the entity has prepared a cash flow forecast, and analysis of
the forecast is a significant factor in considering the future
outcome of events or conditions in the evaluation of
management’s plans for future action:
 Evaluate the reliability of the underlying data generated
to prepare the forecast; and
 Determine whether there is adequate support for the
assumptions underlying the forecast.
Request written representations from management and,
where appropriate, those charged with governance, regarding
their plans for future action and feasibility of these plans.
Consider whether any additional facts or information have
become available since the date on which management made
its assessment.

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Examiners’ Comments:
(a) This part of the question was fairly well answered by majority of the students.
(b) Most of the students failed to clearly describe the key areas on which emphasis is required to be placed which included
impairment testing of subsidiary, analysis of current assets and current liabilities, need to employ a valuer for valuation of
stocks and evaluation of going concern assumption. At this stage of their career, such a response was really alarming.

Q.22 You are the manager in-charge on the annual audit of Decimal World Limited (DWL) for the year ended December 31,
2009. DWL is a leading manufacturer of electrical appliances. 35% of its shares are held by Binary Pakistan Limited (BPL).
However, with the help of some consenting shareholders, BPL has been able to nominate 5 out of 8 directors on the
Board.
During the planning phase of the audit you became aware of the following matters:
(a) A foreign investor has made a public offer to purchase 51% shares of DWL at a price of Rs. 13 per share. The share
price has ranged between Rs. 12 to Rs. 14 per share during the past six months.
(b) The company’s statement of financial position includes a deferred tax asset of Rs. 30 million on account of unutilised
tax losses which have accumulated during the loss making period 1999-2004. The management is of the view that future
taxable profits would be sufficient to utilise the available tax losses.
(c) DWL has established an e-commerce division to sell its products through internet. This new division is administered
centrally by the head office. This step has been quite successful as the online sales have risen to 20% of the total sales
during the year.
Required:
Identify and explain the audit risks which the auditor should consider while planning the audit of DWL. Also highlight the
key areas on which the auditor should place emphasis upon, to address the above risks. (12)
(ICAP, CFAP 06 Level – Summer 2010)

Suggested Solution:
(a)Audit risk: Pressure to maintain the earnings
(i)The management of DWL is under pressure to maintain the earnings of the company in order to keep the share price of
the company over Rs. 12.5 so that the offer of foreign investor will not attract the small investors.
(ii)The areas requiring the auditors attention are as follows:
revenues are recorded correctly as to amount and period.
inventories are properly valued and recorded in the correct period.
all expenses and provisions are recorded correctly as to amount and period.
(b)Audit risk: Recoverability of deferred tax assets
(i)Under IAS-12, deferred tax assets can only be recognized when it is probable that taxable profits will be available
against which the deductible temporary differences can be utilized. The company will therefore need to show that future
profits will be generated for the unutilized tax losses to be offset against. If this is not possible, the deferred tax asset
should be limited to the amount of profits that can be measured with reasonable certainty.
(ii)The main areas which require auditors attention are as follows:
The income tax provisions related to carry forward of tax losses and their adjustment against future profits.
Amount of future profits and reasonableness of such forecast.
(c)Audit risk: Issues relating to e-commerce sales
(i)Risk of non-compliance with taxation, legal and other regulatory issues
(ii)Risk of technological failure resulting in business interruption
(iii)Loss of transaction integrity
(iv)Risk of frauds by customers and employees
(v)Risk of application of improper accounting policies in respect of capitalization of costs such as website development,
translation of foreign currencies, allowances for returns, revenue recognition., etc.
(vi)The main areas which require auditors attention are as follows:
The effect of e-commerce model on the existing accounting policies
The adequacy of internal controls in place.
Process alignment. It refers to the way various IT systems are integrated with one another and thus operate, in effect, as
one system.
Key security issues and how the management intends to address them
Legal issues and opinion of the legal advisors.

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 Auditing – The Case Book ISA 315

Q.23 Mr. Ansari who represents ABC & Company, Chartered Accountants, is the manager responsible for the first year audit of
Stello Limited (SL) for the year ending December 31, 2009. Previously the financial statements were audited by a very
well reputed audit firm. ABC & Company has now been appointed as the auditors, in pursuance of SL’s policy according to
which the statutory auditors are to be rotated after every five years.
While reviewing the working papers at the planning stage, Mr. Ansari became aware of the following facts:

Background
The main business of the company is the operation of smelting plants that produce steel from iron ore. The company was
founded almost five years ago by a group of entrepreneurs. Its managing director is Mr. Sami who has vast experience of
working in reputed national and international companies. Since inception, the company has experienced exceptional
growth. To generate funds for some of its future plans, the management is considering to get the company listed before
December 2010. The management expects to raise Rs. 700 million by issuing 50 million ordinary shares at a premium of
Rs. 4 per share.

Management Policies
The company has developed a sound system of Corporate Governance. Most of the executive heads are experienced
professionals. The company believes in employing a satisfied workforce. In addition to competitive market based salaries,
it also offers performance based bonuses at all levels, including the senior management.

System of Accounting and Controls

The review of working papers indicates that the company has developed a sound accounting and reporting system. The
company has recently installed a state of the art accounting software. However, as regards the system of disposal of scrap,
the concerned engagement team member had made the following observations:
 The sale and disposal of scrap is managed by Mr. Sultan who is an Assistant Manager and reports to the Senior Manager
Marketing.
 The scrap generated is collected by a local merchant on a daily basis. The rate is negotiated by Mr. Sultan once every
three months.
 Only Mr. Sultan is authorised to sign the gate pass but quite often, in his absence, it is signed by the delivery clerk.

Operating Results and Projections

The compound annual growth in company’s earnings over the last three years has exceeded 20% per annum and the
projected earnings growth for the year ending December 31, 2009 is in excess of 35%. The growth is mainly on account of
profitable contracts which the company has secured with two local manufacturers.
Some of the important events that have taken place during the current year are as follows:

Acquisition of Neptune Enterprise

On July 1, 2009 Stello Limited acquired 80% shares of Neptune Limited, a company based in Argentina. This company
manufactures steel products that are sold in its local markets. The purchase was financed by means of a foreign currency
loan. The loan is repayable in five equal annual installments, commencing on July 1, 2010. The financial year-end of
Neptune Limited is June 30.

Major Capital Expenditure

The company has increased the production capacity of one of its plant. Land was acquired for the purpose from a
company in which a friend of Mr. Sami is the majority shareholder. Plant and machinery was supplied by Big
Manufacturer (Pvt.) Ltd. (BMPL). Although a lower quote was received from another supplier, the Board decided in favour
of BMPL as it had a long standing business relationship with Stello whereas the other supplier was considered to be too
inexperienced.

Required:
(a) Evaluate the above situation and briefly discuss the key risk areas that Mr. Ansari should consider while planning the
audit. (19)
(b) List three key audit procedures which the auditors may like to undertake, in the above circumstances, in respect of
each of the following:
(i) Foreign currency loan
(ii) Capital expenditure (06)
(ICAP, CFAP 06 Level – Winter 2009)

Suggested Solution:
(a)Key Risk Areas
(i)Since it is the first year of audit there is a risk of misstatement of opening balances. The auditor will also have to make
arrangements for communication with the predecessor auditor.

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 Auditing – The Case Book ISA 315

(ii)To generate funds to support exceptional growth, the management is planning to get the company listed and wants to
issue shares on premium. This aspect might create risk that assets and profits figures could be manipulated as the
company has to fulfill the conditions of SECP according to which ( besides other conditions) company shall have
profitable operational records of at least one year and full justification for premium need to be disclosed in the
prospectus.
(iii)Company offers performance based bonuses at all levels, including the senior management. This aspect might create
risk that revenue/ profits figures could be manipulated to show the desired performance by the management.
(iv)The company has recently installed a state of the art accounting software. New system could lead to errors in reports /
statement derived from it.
(v)lack of segregation of duties in the scrap sales process.
(vi)Significant sales of the company are to few major customers with whom the company seems to have close
relationship. There is a risk of manipulation in revenue, since the close relationship with the customers might lead to
fraudulent connivance.
(vii)Accounting and taxation implications of the acquisition of the foreign subsidiary, complexity of which may cause
misstatement due to error .
These include:
Consolidation as per Companies Ordinance, 1984.
Different year-end of the Argentinean subsidiary.
Foreign currency translation
Non-compliance with (IAS 21)
Impairment of Goodwill.
(viii) The purchase of a foreign subsidiary was financed by means of a foreign currency loan. Related implications are.
 Initial recognition as per IAS 39.
 Prevailing exchange rate application for conversion
(ix)Land was acquired from a company in which a friend of Mr. Sami is the majority shareholder. Hence, there is a risk
that this relationship may have resulted in a non arms length transaction.
(x)Risk of inappropriate valuation of land.
(b)Foreign Currency Loan
Check the conversion of the foreign currency loan into presentation currency.
Obtain direct confirmation from the lender.
Review the foreign currency agreement to ensure that the loan has been appropriately disclosed in the financial
statements.
Review compliance with foreign exchange regulation/registration with SBP.
Capital Expenditure
 Assess the value of land and plant and machinery using available resources/data or consider hiring an expert.
Review the necessary documentation including minutes of meetings of the directors, to assess that each of them is an
arm’s length transaction.
Check title deeds and other related documents.
Check physical existences
Check whether feasibility of the plant has been made.

Q.24 You are involved as a senior in auditing the financial statements of Blue Limited (BL), a listed company, for the year ended
December 31, 2008. While reviewing draft financial statements you have noted that BL has material investments in two
local private limited companies and a joint venture company operating in the UAE. You have identified the following risk
indicators:
 the investee companies have different year end than the investor company;
 one of the investee is a foreign operation;
 significant transactions between the investee and investor companies;
 poor operating results and financial condition of one of the investee company;
 the investor has guaranteed the debts of one of the investee company;
 one of the investee’s financial statements are audited by another firm.
Required:
In view of the above Risk Indicators, identify the possible implications that might be of significance to the audit team in
assessing the risk of misstatements affecting the investments made by the company. (09)
(ICAP, CFAP 06 Level – Summer 2009)

Suggested Solution:

Risk Indicator Significance/ possible Implication

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 Auditing – The Case Book ISA 315

(i) The investee companies have Failure to account for or disclose significant transactions
different year end than the occurring between the investees’ and investor’s year end.
investor company;
(ii) One of the investee is a  due to Foreign currency fluctuations, translations may not
foreign operations; have been done accurately
 potential expropriation of assets
 potential lack of reliable information regarding the
investee’s operations
 different basis of accounting
(iii) Significant transactions  improper elimination of intercompany profits, (in case of
between the investees and consolidation)
investor companies;  increased risk of inadequate disclosure of related-party
transactions
 Risk of non arms length transactions
(iv) Poor operating results and Uncertainty regarding the realizibility of investment in such
financial condition of one of company.
the investee company;
(v) The investor has guaranteed  Inadequate disclosure of guarantees.
the debts of one of the  Failure to disclose or provide for any liability that may
investee company; have been due under the guarantee agreement.
(vi) The investees’ financial Misstatement due to the audit team’s reliance on these financial
statements are audited by statements and failure of the other auditor to follow the
another firm. appropriate standards.

Q.25 Sea view Limited is a manufacturing company. Behroze & Co., Chartered Accountants are their auditors. The audit of
financial statements of the Company for the year ended November 30, 2008 is in progress. Sami, the senior in charge on
the audit has received the first draft of the financial statements from Kamil, the CFO of the Company. The abridged
financial information of the Company for the year ended November 30, 2008 is as follows:
2007 2008
Rs. in ‘000’
Property, plant and equipment 2,325 1,210
Intangible assets 100 50
Inventories 650 460
Trade debts 210 80
Sales 4,300 6,700
Cost of sales 3,800 5,100
Gross Profit 600 1,600

Sami had a meeting with the CFO of the Company which revealed the following matters:
(i) The Company’s sales have suffered on account of depressed economic conditions in the country;
(ii) The Company has introduced a new product ‘Cherry’ during the year in place of ‘Merry’ and incurred substantial cost
in the acquisition of property, plant and equipment; and
(iii) This year’s physical verification of stocks had not been carried out on November 30 on the plea that the relevant staff
was on leave. The stock check will now be carried out on December 15, 2008.

Required:
Given the above data and circumstances, identify the following:
(a) the risks that may result in material misstatements in the financial statements; and
(b) the implications of the risks identified along with audit procedures that would be most suitable to mitigate those risks.
(15)
(ICAP, CFAP 06 Level – Winter 2008)

Suggested Solution:
The following are the risks that may result in material misstatement in the financial statements and the procedures that
may be performed to mitigate those risks:

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Auditing – The Case Book ISA 315

Risk Implication Audit procedures to

mitigate risks
(i) Overstatement of sales / Sales Although, the sales have decreased Noting of last document as
cut off may not be proper. from Rs. 6,700 million in 2007 to on 30 June 2008 such as
Rs. 4,300 million in 2008, resulting invoices, gate passes,
in a net decrease of Rs. 2,400 delivery challans etc.
million, still there is a significant Sales cut off procedures
risk that even this sales may have should be performed.
been overstated because, the
Company was facing earning
pressure and physical inventory
observation has been delayed by
15 days. (correlate with point iv)
(ii) Revenue expenses may have During the year, PPE has almost Detailed test of transaction
been capitalized. doubled to Rs. 2,325 million. should be performed on
There is a significant risk that additions of PPE. This may
revenue expenses may have been include vouching and
capitalized with the cost of PPE for verification of source
new product “Cherry”. documents and physical
verification of PPE
acquired during the year.
Impairment of items of With the introduction of new Identify items of PPE
property, plant and equipment product, impairment of PPE items acquired for “merry” in
that belong to the old product may prior years from Fixed
not have been provided for. Asset Register, ascertain
their carrying values and
assesses the amount of
unrecorded impairment
loss if any.
(iii) Existence/ validity of trade Trade debts have more than Circularization of
receivable. doubled in spite of the decrease in independent confirmation
sales. There is a risk that these requests to the debtors.
receivables may have been
overstated as of the balance sheet
date. The sales relating to next
year may have been recorded in
the year under audit.
Indication of doubtful / In spite of lower sales, trade Analysis of Debtors aging
uncollectable accounts. receivables have increased schedule, Company’s credit
significantly by Rs. 130 million. policy and provision for
There might be old outstanding doubtful debts.
debts. Scrutinize the amount of
sales recorded in the last
week to identify undue
increase if any.
(iv) Understatement of inventory / This year, the management has At the time of stock take,
Inventory cut off may not be requested to carry out physical roll back working should
proper/Inventory valuation verification of inventories 15 days be prepared and verified
may not be correct. after the balance sheet date. and cross matched with
There is a risk of understatement the cut off documents to
of inventory and overstatement of ensure that inventory
sales as the Company might have movements are recorded
tried to recognize sales of in correct accounting
subsequent period in the period period.
under audit. Cut off procedures should
be performed.
NRV of the old product
“Merry” need to be
considered.

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 Auditing – The Case Book ISA 315

(v) Impairment of intangible assets The Company has abandoned the Detailed verification of
product “merry”. The intangible intangible assets to
assets might include unamortized identify those costs from
cost of intangibles related to which future economic
“merry” which should have been benefits are no more
charged off. expected to flow to the
Company.

Q.26 Sukoon Limited is engaged in manufacturing and sale of office equipments. It has appointed you in place of XYZ &
Company for the audit of financial statements for the year ended June 30, 2007.

During the audit you noted the following:

° An employee of the company, responsible for after-sales-services, misappropriated cash which he recovered from the
customers without raising proper invoices. The amounts were small and much below the materiality level.
° During the last year (ended on June 30, 2006), the middle management in connivance with lower staff booked a sale of
material amount which actually pertained to the current year. The higher management has issued warning letters to the
concerned employees but is reluctant to take any further action as the company has not suffered any losses. XYZ &
Company has given an unmodified report on the previous year’s financial statements.

Required:
Describe how each of the above situations will impact the following:
(i) Assessment of risk and audit procedures; (03)
(ii) Communication with management and with those charged with governance. (04)
(ICAP, CFAP 06 Level – Winter 2007)

Examiners’ Comments:
This question was aimed to test the knowledge of the students as regards the impact of instances of fraud and error which
come to the knowledge of the auditor, on assessment of risk and audit procedures and its eventual reporting to the
management and to those charged with governance. Many students poorly approached this question and instead of
discussing the matters identified above they wasted their time in stating detailed substantive procedures to overcome the
situation. Barring few exceptions, students did not distinguish clearly as to what was the appropriate forum to communicate
the matter.

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Q.27 You are planning the audit of Marhaba Limited for the year ended June 30, 2005. The principal activity of the company is
the sale of bricks and paving products to building companies and the general public. All products are purchased from
three major manufacturers in the country. Two years ago, the company diversified into the manufacture and sale of
fiberglass chimney stacks which are also sold to building companies and its sales have grown steadily and now amount to
10% of total turnover.
You have been provided with the following information from the financial statements of Marhaba Limited in respect of
the years ended June 30, 2004 and 2005:
Extracts from the profit and loss account
2005 2004
Rs. in ‘000’
Revenue 24,863 22,659
Cost of sales (21,334) (20,045)
Gross profit 3,529 2,614
Operating expenses (3,220) (2,469)
Operating profit 309 145
Financial charges (114) (27)
Profit on ordinary activities before taxation 195 118
Extracts from the balance sheet
Fixed assets – tangible 384 429
Current assets
Stocks 1,760 1,899
Trade debts 6,101 5,092
Prepayments and accrued income 26 23
Cash at bank and in hand 2 4
7,889 7,018
Total assets 8,273 7,447

Less: Current liabilities

Bank overdraft 2,464 1,702
Trade creditors 3,816 3,926
Other creditors 316 305
Accruals and deferred income 216 217
6,812 6,150
Net Current Assets 1,461 1,297

Long term liabilities (93) (97)

Net Assets 1,368 1,200

Required: -
(a) Explain the usefulness of analytical review procedures in planning an audit. (03)
(b) Prepare planning notes on matters which you wish to discuss, in respect of the information above, at the audit
planning meeting with the Finance Director of Marhaba Limited. Your notes should refer to analytical procedures and
other general procedures where relevant. (09)
(ICAP, CFAP 06 Level – Winter 2005)

Examiners’ Comments:
A practical case with extracts from the financial statements were given for testing skills of analytical review at planning
stage. Majority showed their reasonable expertise in analyzing the figures and preparing planning notes for discussion with
the client.

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 Auditing – The Case Book ISA 402

ISA 402
USING A SERVICE ORGANIZATION
QUESTIONS

Q.1 Your audit client Mars Pakistan Limited (MPL), is a multinational company. At the group level, a decision has been taken
whereby the payroll function of all group companies has been outsourced to a payroll processing firm PayPro situated in
London.

According to the terms of the contract, after processing, the payroll is sent to MPL for authorisation. PayPro shares type 1
report with all of its clients on an annual basis. Due to resource constraints for this engagement, it might not be possible
for you to visit PayPro for testing their controls.
Required:
Evaluate the above situation and explain how would you test the operating effectiveness of controls over payroll applied
by PayPro?
(ICAP, CFAP 06 Level – Summer 2017)
Suggested Solution:
• As the payroll is sent to MPL for authorization, therefore it implies that a high degree of interaction exist between
PayPro and MPL.
• In these circumstances MPL can easily implement effective controls over those transactions.
• Accordingly, there is no limitation of scope because of our inability to visit PayPro.
• We would test controls implemented by MPL for the authorization of payroll and related data.
• However, there is still a need to evaluate the controls applied by PayPro.
• A type 1 report will not be helpful in evaluation of controls at PayPro. Though, it includes the service auditor’s
opinion on the description of the service organisation’s system, control objectives and related controls and the
suitability of the design of the controls to achieve the specified control objectives, it does not provide any evidence of
the operating effectiveness of the relevant controls.
• Since PayPro only provides type 1 report therefore, we may contact PayPro, through MPL, to request that type 2
report should also be provided. Further, we may also decide not to rely on the auditor giving the type 2 report. In that
case, we may appoint another auditor to perform procedures at PayPro i.e to test the operating effectiveness of those
controls.

Examiners’ Comments:
Common errors:
1. Controls as mentioned in the question were stated, such as, payroll is sent to MPL for authorization, PayPro shares type 1
report, etc., without any further comments, whereas, the requirement was to specify the procedures to assess the effectiveness
of the controls.
2. It was suggested that there was scope limitation and that the assignment should not be accepted.
3. General statements were produced such as when a control would be considered to be operating effectively i.e. when it is
expected to control misstatements, importance of controls in the given situation, assess whether controls employed by MPL
are relevant (it was actually the question as to how to do it), etc.

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 Auditing – The Case Book ISA 402

Q.2 The following situation has arisen at an audit client of your firm. The year-end is 30 September 2015.
Certain management functions of the audit client had been outsourced. Most of the outsourced functions are performed at
the service organisations’ premises. (07)
Required:
Evaluate the above situations and briefly explain the steps that the auditor would be required to carry out in the above
situation.
(Impact on audit report is not required)
(ICAP, CFAP 06 Level – Winter 2015)

Suggested Solution:
Since the client uses the services of a service organization, in such a situation, the auditor would perform the following
steps:
(1) Obtain an understanding of the nature and significance of the services provided by the service organization and their
effect on the client’s internal controls relevant to the audit, which would provide the basis of identification and
assessment of risks of material misstatement; and
(2) Obtaining knowledge relating to competencies, capabilities and qualifications possessed by personnel in Service
organizations.
(3) In case the auditor is unable to obtain understanding from the client, the auditor shall obtain that understanding from
one or more of the following procedures:
 Obtain a type 1 or type 2 report, if available;
 Contact the service organization, through the client, to obtain specific information;
 Visit the service organization and perform procedures that will provide the necessary information about the relevant
controls at the service organization; or
 Using another auditor to perform procedures that will provide the necessary information about the relevant controls at
the service organization.

Examiners’ Comments:
(ii)This sub-part pertained to a situation whereby certain management functions had been outsourced and were being
performed at the service provider’s premises. The candidates who had good grasp over the concept of service organization
were able to give a structured and precise answer which yielded them good marks. However, a number of candidates
responded by identifying the possible risks rather than specifying the auditors response to the associated risks.

Q.3 Reliance Investment Limited, an investment company, placed its funds during the year in developed stock exchanges such
as New York and London stock exchanges through fund manager, SC Bank. The SC Bank is responsible to invest the funds
of the company in profitable securities. It is expected to generate income of at least 10 percent of the amount invested and
report to the company on monthly basis.

The Security Services Bank (SS Bank) based in New York has been appointed as the trustee of this fund management
scheme. The SS Bank is responsible to keep investment securities and cash in its custody and act at the instructions of the
SC Bank. SS Bank also maintains the securities and cash position, carries out valuation, maintains related records and
reports to the company on monthly basis.

The chief accountant of the company receives the reports from both banks, updates the investment position and records
the returns on investments in the books of account. Additionally, the chief accountant also receives report from the
auditor of SS Bank on the design and effectiveness of internal control of the bank.

The investment portfolio as at 30 June 2005 is Rs.21,500 million which represents 60 percent of the total assets of the
company and return on investment for the year ended 30 June 2005 is Rs. 1,200 million.

You are the auditor of Reliance Investment Limited. Describe your responsibilities and work that you will perform in
order to place reliance on internal control reports of the auditor of SS Bank. (08)
(ICAP, CFAP 06 Level – Winter 2005)
Examiners’ Comments:
This question was framed from ISA 402 ‘Audit Consideration Relating to Entities Using Service Organization’. Except for few,
candidates were not able to write with specific reference to the relevant ISA and mostly relied on their knowledge about
using the work of an expert or internal auditor securing some marks on areas of common nature. Generally, the performance
was poor, as discussed above.

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 ISAs – Application Guide ISA 510

ISA 510
INITIAL AUDIT ENGAGEMENTS—
OPENING BALANCES
QUESTIONS

CONCEPT REVIEW QUESTIONS

Q.1 List the audit procedures you would adopt with respect to the verification of opening balance when the financial
statements are audited for the first time or the prior year financial statements were audited by another auditor.
(ICAP, CFAP 06 Level – Winter 1992)

Q.2 (a) What constitutes “Opening Balance”? (02)

(b) Can current year audit procedure supplement the audit evidence relating to appropriateness of the Opening Balances.
If so, give specific situations. (06)
(ICAP, CFAP 06 Level – Winter 1991)

CONCEPT APPLICATION QUESTIONS

Q.1 Your audit firm has been appointed as auditor of Lucrative Industries Limited (LIL) a listed company for the year ended
31 March 2015.
Following information is available:
2015 2014
Rs. in ‘000
Profit after taxation 815 130
Intangible assets 350 362
Required:
Enumerate audit procedures to be performed on opening balance of the intangible assets. (07)
(ICAP, CFAP 06 Level – Summer 2015)

Q.2 ABC and Company, Chartered Accountants, have been appointed as the auditor of Neptune Limited (NL). During the audit
it has been revealed that:
The previous auditor’s working papers are available; however, they are not of required standards.
Required:
Discuss the overall audit approach and related audit procedures to address the above issues. Also state the possible
implications on the audit report. (08)
(ICAP, CFAP 06 Level – Winter 2014)

Q.3 Your firm has been appointed as the auditor of Jugnu Limited (JL), which is a manufacturer of consumer products. The
auditor’s report on the preceding year’s financial statements was unmodified. The draft financial statements for the year
ended April 30, 2011 disclose a profit before taxation of Rs. 75 million (2010: Rs. 155 million) and total assets of Rs. 2,100
million (2010: Rs. 1,910 million).
Required:
Describe the principal audit procedures to be carried out for verifying the opening balances of the financial statements of
Jugnu Limited for the year ended April 30, 2011. (04)
(ICAP, CFAP 06 Level – Summer 2011)

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 ISAs – Application Guide ISA 510

Q.4 Your firm has been appointed as the auditors of Antarctica Limited for the year ended June 30, 2008. The Company was
incorporated in the year 2000. Since then, its financial statements have been prepared in accordance with the approved
accounting standards as applicable in Pakistan and have been audited by a highly reputable professional auditing firm.
Since the previous auditors had never expressed a modified audit opinion, the audit team feels that there is no risk in
respect of comparatives and accordingly did not perform any work in this respect.
Required:
Describe the auditor’s responsibility as regards the verification of opening balances and the steps that may be needed in
the above situation. (10)
(ICAP, CFAP 06 Level – Winter 2008)

Q.5 Ahmad & Co. Chartered Accountants have been appointed as auditors of Noon Limited for the first time. Prior years’
financial statements have been audited by an affiliated firm.
As audit in-charge of the company, you noticed that last year’s audit report had been qualified by the previous auditors on
the following matters:
- Disagreement on capitalization of borrowing costs amounting to Rs. 15 million.
- Inadequacy of records maintained for recording sales, causing non-identification of related party transactions.
You are planning to carry out certain specific procedures in respect of opening balances. Your team members consider
these procedures unnecessary as previous years’ audits were done by your affiliated firm. They feel that, this audit should
not be considered as an initial audit engagement.
You are required to brief your audit team on the following:
(a) Reasons for considering this audit an initial audit engagement and the evidence you will obtain from applying
procedures on opening balances. (04)
(b) Audit approach in respect of matters that caused modification of last year’s audit report. (06)
(ICAP, CFAP 06 Level – Winter 2006)

Q.6 (a) Your firm has recently won a new audit of a large manufacturing company.
However, you noted that prior period’s financial statements had not been audited. You are of the view that for current
assets and liabilities and noncurrent assets and liabilities, you could obtain some audit evidence as part of the current
period’s audit procedures.
As an audit manager, explain your point of view in detail, for the benefit of your staff. (06)

(b) As a result of audit of the manufacturing company mentioned above, you were unable to obtain sufficient appropriate
audit evidence on the opening balance of inventory. You were, however able to obtain sufficient appropriate evidence
with regard to the closing balance of the inventory. You are required to draft your opinion, including the qualification, if
any. Do not write the whole report but just draft the qualification, if any and opinion paragraph. (05)
(ICAP, CFAP 06 Level – Summer 2003)

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 ISAs – Application Guide ISA 510

SUGGESTED SOLUTIONS

CONCEPT APPLICATION QUESTIONS

Q.1 Procedures to consider when auditing intangible assets at the beginning of the period include:
 obtain schedule of intangible assets summarizing the amounts of (and the nature of changes in) the assets and related
amortization for a reasonable period.
 determine the basis on which the additions to and reductions in intangible assets have been recorded by tracing them to
the underlying documents.
 identify major items and check them with related supports and verify the dates on which these were recorded.
 Review the predecessor auditor’s working papers.
 check accumulated amortization to ensure that amortization has been provided over the years as per company’s policy.
 check whether any impairment testing was performed last year, and if the answer is in the affirmative, then check the
basis/ assumptions and the calculations and evaluate the competency and capacity of the valuer.
 review the write offs and impairment recorded in the current year to ensure that these do not reflect situation created
in previous year.

Examiners’ Comments:
This part was also not attempted well and most of the candidates wasted time in writing general procedures relating to
verification of opening balances instead of identifying the specific procedures for verification of opening balance of intangible
assets.

Q.2 In view of the fact that prior year’s working papers are not of required standards, these cannot be used to verify opening
balances. Therefore we should:
 Evaluate whether audit procedures designed for the current period provide evidence relevant to opening balances; or
 Perform specific audit procedures to obtain evidence regarding opening balances. The procedures that can be used by
auditor in obtaining audit evidence with respect to opening balances are:
 Accounts receivable/payable: The collection (payment) of opening accounts receivable (accounts payable) during the
current period will provide some audit evidence of their existence, rights and obligations, completeness and valuation at
the beginning of the period.
 Inventories: The current period’s audit procedures on the closing inventory balance provide little audit evidence
regarding inventory on hand at the beginning of the period. Therefore, additional audit procedures may be necessary,
and one or more of the following may provide sufficient appropriate audit evidence:
 Reconciling the current year closing inventory quantities with the opening inventory quantities.
 Performing audit procedures on the valuation of the opening inventory items.
 Performing audit procedures on gross profit and cutoff.
 Property, plant and equipment, investments and long-term debt: Audit evidence may be obtained by examining the
accounting records and other information underlying the opening balances.
 Other items such as reserves and share capital and movement during the year can be verified through Form A filed with
SECP.
The auditor may also be able to obtain some audit evidence regarding opening balance through confirmation with third
parties, for example, long-term debt and investments. Implications on Audit Report:
After performing above procedures:
 If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening balances, the auditor shall
express a qualified opinion or disclaim an opinion on the financial statements, as appropriate.
 If the auditor concludes that the opening balances contain a misstatement that materially affects the current period’s
financial statements, then the auditor will ask the management to make appropriate adjustment and in case of
disagreement the auditor shall express a qualified opinion or an adverse opinion as appropriate.

Examiners’ Comments:
In this question the candidates were required to discuss the overall audit approach, the audit procedures and the possible
implication on the audit report in a situation where the previous audit was undertaken by another auditor and the audit
working papers were not of the required standard.
Most of the students were able to identify the key issue of verification of opening balances and discussed the overall audit
approach reasonably well. As regards audit procedures, many students discussed accounts receivable and cash and bank
balances only. Other areas were mostly ignored. Moreover, implications on the audit report were also ignored by the

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 ISAs – Application Guide ISA 510

majority. Further, many students went a step backward and tried to explain the client acceptance procedures without
realizing that according to the given scenario the audit had already been accepted.

Q.3 The following audit procedures should be carried out on opening balances:
(i)Determine whether the prior year¡¦s closing balances have been correctly brought forward to the current period or,
where appropriate have been restated.
(ii)Review accounting policies applied in the previous year and the current year to ensure consistency and
appropriateness of the policies applied.
(iii)If working papers of previous auditors are available, review them to obtain evidence regarding the opening balances.
(iv)If working papers are not available, carry out appropriate audit procedures regarding the opening balances.
(v)Evaluate whether the audit procedures performed in the current year provide evidence relevant to the opening
balances.
(vi)Perform additional procedures as are appropriate in the circumstances, if the above procedures provide audit
evidence that the opening balance contain material misstatement that could materially affect the current period¡¦s
financial statements.
(vii)If it is concluded that such misstatement exists in the current period¡¦s financial statements, the auditor shall
communicate the misstatements with the appropriate level of management and those charged with governance and
consider their impact on the audit report, if any.

Examiners’ Comments:
(a) This part of the question relating to verification of opening balances carried easy marks and was well attempted probably
because the steps were readily available in the Auditing Standards.

Q.4 Auditor’s Responsibility

I do not agree with the understanding of the audit team.
The auditor should obtain sufficient appropriate audit evidence that:
(i) The opening balances do not contain misstatements that materially affect the current period’s financial statements;
(ii) The prior period’s closing balances have been correctly brought forward to the current period or, when appropriate,
have been restated; and
(iii) Appropriate accounting policies are consistently applied or changes in accounting policies have been properly
accounted for and adequately presented and disclosed.
Steps needed to be performed by auditor
When the prior period’s financial statements were audited by another auditor, the current auditor may be able to obtain
sufficient appropriate audit evidence regarding opening balances by reviewing the predecessor auditor’s working papers.
In these circumstances, the current auditor would also consider the professional competence and independence of the
predecessor auditors.
When the auditor is not satisfied by above step, the auditor will need to perform other audit procedures such as:
(i) Current assets and liabilities
Some audit evidence can ordinarily be obtained as part of the current period’s audit procedures.
For example:
 the collection (payment) of opening accounts receivable (accounts payable) during the current period will
provide some audit evidence of their existence, rights and obligations, completeness and valuation at the
beginning of the period.
 Observing a current physical inventory taking and reconciling it back to the opening inventory items.
 Performing audit procedures on the valuation of the opening inventory items.
(ii) Non-current assets and liabilities
 In respect of fixed assets, investments and long-term debt etc., the auditor will ordinarily examine the
accounting records and other information underlying the opening balances.
 In certain cases, the auditor may be able to obtain confirmation of opening balances with third parties, for
example, for long-term debt and investments. In other cases, the auditor may need to carry out additional audit
procedures.
A combination of the above audit procedures may provide sufficient appropriate audit evidence.

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 ISAs – Application Guide ISA 510

Q.5
Examiners’ Comments:
(a)The students demonstrated reasonable understanding of initial audit engagement and audit evidence required to be
obtained by applying procedures on opening balances.
(b)This part of the question was based on auditor’s responsibility in respect of comparative figures, which have been qualified
by the previous auditor. In such case, the new auditor has to deal with two types of matters i.e. those which have been
resolved at the time of issuance of current years audit report and those matters which have not been so resolved. Many
students wrote procedures for verification of borrowing costs and related party transactions instead of discussing auditor’s
approach on resolved and unresolved matters pertaining to the previous year.

Q.6
Examiners’ Comments:
The first part of the question was straight forward and most of the candidates were able to score easy marks.
In the second part candidates were required to draft a qualification in a situation in which the opening inventory was not
verifiable while closing inventory was adequately verified. Almost 99% of the candidates were unable to correctly draft the
qualification and appreciate the fact that in this situation, balance sheet would have an unqualified opinion while profit and
loss account, cash flow and the statement of changes in equity would need to be qualified. As a result they lost marks in this
question.

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ISA 520
ANALYTICAL PROCEDURES
QUESTIONS

CONCEPT REVIEW QUESTIONS

Q.1 (a) Why is there a need for the auditor to consider testing controls over the preparation of information used in applying
analytical procedures? (02)
(b) What course of action the auditor takes when analytical procedures identify significant fluctuations or relationship
that are inconsistent with other relevant information or that deviate from predicted amounts? (03)
(ICAP, CFAP 06 Level – Winter 1999)

Q.2 What are Analytical Procedures? Explain and identify their use by the auditor. (04)
(ICAP, CFAP 06 Level – Winter 1997)

CONCEPT APPLICATION QUESTIONS

Q.1 While auditing the profit and loss account of a company, you observe that the gross profit on turnover for the current year
has fallen from 25% to 20%. The net profit has also fallen correspondently. Give possible causes for the decline. (08)
(ICAP, CFAP 06 Level – Winter 1994)

Q.2 The trading profit of a manufacturing concern in the current year has fallen although the sales were well on the same level
with those on the preceding year. You have been appointed to investigate into the reasons for this fall in trading profit.
State what line of procedure will your investigation take?
(ICAP, CFAP 06 Level – Summer 1996)

Q.3 During the audit of financial statements of a manufacturing company you find that gross profit percentages has shown a
significant increase as compared to previous year. The Managing Director of the company has requested you to carry out
an investigation to ascertain the possible cause of increases and indicate various steps you intend to carry out as an
auditor to verify its correctness.
(ICAP, CFAP 06 Level – Winter 1991)

Q.4 At an audit client, XYZ Ltd, you analyze the gross margin for this particular product line and identify and increase of 20
percent over the previous year. You discuss this with management who told you that the purchase of several new
machines resulting in significant labour efficiencies was responsible for the increase in the gross margin.

Required
Would the fact that new equipment is included on the schedule of fixed assets, in itself, corroborate management’s
explanation of the increase in the gross margin of this particular product line? Why or why not?
(ICAP, CFAP 06 Level – Winter 1996)

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Q.5 Sea view Limited is a manufacturing company. Behroze & Co., Chartered Accountants are their auditors. The audit of
financial statements of the Company for the year ended November 30, 2008 is in progress. Sami, the senior in charge on
the audit has received the first draft of the financial statements from Kamil, the CFO of the Company. The abridged
financial information of the Company for the year ended November 30, 2008 is as follows:
2008 2007
Rs. in ‘000’
Property, plant and equipment 2,325 1,210
Intangible assets 100 50
Inventories 650 460
Trade debts 210 80
Sales 4,300 6,700
Cost of sales 3,800 5,100
Gross Profit 500 1,600

Sami had a meeting with the CFO of the Company which revealed the following matters:
(i) The Company’s sales have suffered on account of depressed economic conditions in the country;
(ii) The Company has introduced a new product ‘Cherry’ during the year in place of ‘Merry’ and incurred substantial
cost in the acquisition of property, plant and equipment; and
(iii) This year’s physical verification of stocks had not been carried out on November 30 on the plea that the relevant
staff was on leave. The stock check will now be carried out on December 15, 2008.
Required:
Given the above data and circumstances, identify the risks that may result in material misstatements in the financial
statements. (07)
(ICAP, CFAP 06 Level – Winter 2008)

Q.6 You are responsible for planning the audit of payroll as part of the external audit of Geese Ltd (Geese) for the year ended
31 December 2012. You have been provided with the following information:
Year ended 31 December
2012 2011
(draft) (audited)

Employees’ total gross pay (£’000) 2,189 2,175

Average number of employees in year 85 91
Company-wide pay rise (effective 1 January) 2% 3.50%
Profit before tax (£’000) 1,088 1,081

Using analytical procedures, identify factors which may indicate a risk of misstatement in the payroll of Geese for the year
ended 31 December 2012. (04 marks)
(Institute of Chartered Accountants in England and Wales, Professional Level – 2013 March)

Q.7 Albatross Ltd had 100 employees last year with total wages of $840,000, and 100 employees this year with a wage bill of
$950,000, an increase of 13%. The annual pay rise was 6%.
Required:
Suggest reasons other than error or fraud which could account for the greater-than-expected increase.

Q.8 Total payroll for the year ending 31 December 20X3 was $1,220,000. At this time Murray Co had 34 employees.

Total payroll for the year ending 31 December 20X4 included in the draft financial statements of Murray Co is $1,312,000.
Murray Co now has 37 employees.

All employees received a 5% pay rise from 01 April 20X4.

Required:
Create an expectation of what total payroll will be for year ending 31 December 20X4.

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Q.9 Your firm is the external auditor of Brave Ltd (Brave) which maintains public parks, under a contract with the owner of
each park. The audit plan in respect of the external audit of Brave, for the year ended 30 June 2013, requires the use of
substantive analytical procedures to estimate revenue. You have been asked to perform these procedures using the
following information:
• Prices on all contracts in place on 1 July 2012 increased by 5% on that date and amounts are invoiced at the end of
each month.
• The same contracts remained in place for the year ended 30 June 2013 compared with the prior year except for
one new contract which commenced on 1 January 2013, providing services of £150,000 per month, and an existing
contract, worth £90,000 per month when it expired on 31 March 2013.
• Prior year audited revenue was £7,560,000 and revenue recorded by Brave for the year ended 30 June 2013 is
£8,668,000.

Requirements
(i) Calculate the expected revenue, for the year ended 30 June 2013, as required by the audit plan for Brave. Your
answer should clearly show each step in your calculation.
(ii) State the audit evidence you would obtain to test the reliability of the data used at each step of your calculation.
(iii) Explain the actions you would take based on the result of your analytical procedures. (10 marks)
(Institute of Chartered Accountants in England and Wales, Professional Level – 2013 September)

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SUGGESTED SOLUTIONS

CONCEPT REVIEW QUESTIONS

Solutions not available.

CONCEPT APPLICATION QUESTIONS

Q.1 Solutions not available.

Q.2 Solutions not available.

Q.3 Solutions not available.

Q.4 Solutions not available.

Q.5
Areas at Risk Explanation
36% Decrease in sales (2,400/6,700) indicates inventory may have become obsolete and
NRV of inventory may be lower than its cost.
Valuation of inventory
Also, unusual increase in inventory indicate the existence of slow moving or obsolete
inventory,
Impairment of Decrease in sales also indicates value in use of manufacturing asset may have decreased
Machinery which is an indication of impairment.
Occurrence of 26% decrease in Cost of sales is not proportionate to 36% decrease in sales, which indicates
Purchases overstatement purchases.
Unusual increase in debtors indicates the existence of slow moving and doubtful debts, which
Valuation of debtors may require provision.
It also indicates that company has poor credit controls.
Classification of There is substantial increase in PPE in current year, which indicates risk that some of fixed
Machinery assets may have been incorrectly capitalized or classified.
Existence and
Stock-taking is not done on balance sheet date; therefore it is difficult to determine correct
Completeness of
amount of inventory at balance sheet date
Inventory
Risk of Going Concern Failure of major product indicates doubts on company’s ability to continue as going concern.

A.6
No. of employees Average Wage Rate No. of Months Expected Payroll
A B C (A * B * C)
85 2.0316 (W-1) 12 2,072

W-1:
Average Pay Rate last year 1.9918
(2,175/91)/12
Average Pay Rate this year (after increment) 2.0316
(1.992*1.02)

As difference between expected and recorded expense 117 (= 2,189 – 2,072) is greater than materiality level determined
using rule of thumb 54.4 (1,088 * 5%), there is a risk that recorded payroll expenses is materially overstated.

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A.7 The justifiable reason for the remaining increase in payroll would be “Overtime” worked, and Bonuses.

A.8
No. of employees Average Wage Rate No. of Months Expected Payroll
A B C (A * B * C)
37 2,990.0 (W-1) 3 331,890
37 3,139.5 (W-2) 9 1,045,454
1,377,344

W-1: Average Pay Rate last year (1,220,000/34)/12 = 2,990.0

W-1: Average Pay Rate after increment (2,990*1.05) = 3,139.5

A.9 (i)
Audited Revenue of prior year 7,560,000
Add: Effect of increase in price (7,560,000 * 5%) 378,000
Add: Effect of new contract (150,000 * 6) 900,000
Less: Effect of expired contract (90,000 * 3) (270,000)
Expected Revenue for the current year 8,568,000

(ii)
1. For Audited Revenue of prior year, agree with prior year working papers/audited financial statements.
2. For increase in prices, agree to board minutes and invoices.
3. For new contract, agree price of contract and start date with original contract.
4. For expired contract, agree price of contract and end date with original contract.

(iii)
Expected Revenue 8,568,000
Actual Revenue 8,668,000
Difference (in amount) 100,000

As difference between expected and recorded revenue (100,000) is greater than materiality level determined using rule
of thumb 86,680 (8,668,000 * 1%), there is a risk that recorded revenue is materially overstated.
1. Auditor shall inquire of management, and shall evaluate those responses by taking into account:
 auditor’s understanding of entity and its environment and
 other audit evidence obtained during audit:
2. If no adequate explanation is given by management, auditor shall perform other audit procedures (e.g. tests of
details).

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ISA 530
AUDIT SAMPLING
QUESTIONS

CONCEPT REVIEW QUESTIONS

Q.1 (i) Define:

(a) Audit sampling (02)
(b) Stratification. (02)

(ii) Discuss factors which must be considered at the time of designing an audit sample. (08)
(iii) How would you evaluate audit sample results? (04)
(ICAP, CFAP 06 Level – Summer 1992)

Q.2 Sampling is essential in the audit of financial statements. In determining the sample size the auditor should consider
whether sampling risk is reduced to an acceptably low level. Describe the factors which influence the sample size for:
(i) a test of control
(ii)a substantive test (05)
(ICAP, CFAP 06 Level – Summer 2002)

Q.3 Discuss ‘sampling risk’ and ‘tolerable misstatement’ and correlation between ‘tolerable misstatement’ and ‘sample size’
during the process of an audit.
(ICAP, CFAP 06 Level – Winter 2001)

Q.4 Define Tolerable rate of deviation and explain the stage or stages of audit in which it is used. (03)
(ICAP, CFAP 06 Level – Winter 1997)

Q.5 When designing audit procedures, the auditor sometimes selects specific items from the population for testing instead of
using audit sampling techniques.
Required:
(a) What factors does an auditor take into account while using specific selections? (03)
(b) What audit risk emerges in such selection and how is it dealt with by the auditor? (02)
(ICAP, CFAP 06 Level – Winter 2007)

Q.6 Define following terms relating to Sampling:

(i) Tolerable misstatement
(ii) Stratification
(iii) Sampling risk
(iv) Projection of deviations
(v) Sampling Unit.
(ICAP, CFAP 06 Level – Summer 1990)

Q.7 You have recently joined a medium size chartered accountants firm as their audit manager. While reviewing the firm’s
audit methodology you have observed that the firm follows a standard set of audit work programs. These work programs
have been used by the firm for the last many years and rely extensively on traditional judgment sampling. You are of the

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opinion that by following the statistical sampling techniques, you would be able to carry out a more effective and efficient
audit.
Required:
Briefly narrate the advantages and disadvantages of judgmental and statistical sampling. (07)
(ICAP, CFAP 06 Level – Summer 2008)

CONCEPT APPLICATION QUESTIONS

Q.1 Following is a set of situations that may or may not involve sampling.

(a) An auditor is examining loan receivables at a local bank. The population of loans contains two strata. One stratum is
composed of 40 loans that are each greater than Rs.1 million. The second stratum contains 300 loans that are less
than Rs.1 million. The auditor has decided to test all loans greater than Rs.1 million and 20 loans less than Rs.1
million.
(b) Assume the same facts as in (a) above, except that the auditor decides to apply analytical procedures to the second
stratum of loans.
(c) An auditor has haphazardly selected 20 sales invoices to be examined for proper pricing of the goods purchased by
the customer.
(d) The prepaid insurance account is made up of four policies that total Rs. 30,000. The auditor has decided that this
account is immaterial and decides that no policies will be examined.
(e) Perform a walkthrough of purchase transactions by selecting one purchase and following it through all processing
steps from the initial purchase order to recording in the general ledger.
(f) Select a sample of purchase vouchers and ensure they are supported by receiving documents.
(g) Select a sample of items from the inventory in hand and checked they are valued at correct amount.
(h) Select a sample of long-term debt agreements and ensure they have been approved in the board of directors
minutes.
(i) Evaluate the control environment by inquiring of personnel as to the existence of a code of conduct.

Required:
Indicate which situations involve audit sampling. If sampling is involved, also indicate whether it relates to Tests of
Details or Tests of Controls.

Q.2 An auditor wishes to ensure that purchases in the income statement are not materially overstated. What is the most
appropriate population from which to extract a sample of purchases for testing? (01)
(Institute of Chartered Accountants in England and Wales, Professional Level – June 2006)

Q.3 (a) An auditor selects purchases for the first two weeks and the last two weeks of a year as part of checking cut-off
procedures. Is this sampling? Is it effective?
(b) A company issued share capital during the year. Can an auditor use sampling to verify the transactions?
(c) Why is it said that the sample results regarding tests of controls do not have to be projected to the entire population?

Q.4 You are given the following information and results of the sampling performed on the area of Repair Expenses during an
audit.
Population Sample Misstatements
Number Amounts Basis Number Amounts Amounts
Category 1 30 2,500,000 All items 30 2,500,000 15,000
Category 2 320 4,500,000 Random 40 525,000 500

350 7,000,000 70 3,025,000 15,500

Required:
1. Calculate projected misstatement for the population.
2. Evaluate the result and recommend audit procedures to be performed, if tolerable misstatement is Rs. 22,000.
3. Evaluate the result and recommend audit procedures to be performed, if tolerable misstatement is Rs. 18,000.

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Q.5 In performing test of details on inventory, the auditor decided to perform sampling. He selected all items on randomly
selected two pages from the client’s 90-page inventory listing. The sampling resulted in selection of items amounting Rs.
1,000,000 whereas total book value of population was Rs. 100,000,000. Auditor found a total of Rs. 100,000
overstatements in the sample.

Since the senior indicated that the amount of performance materiality in the inventory account was Rs. 2,000,000, the
auditor concluded that the recorded inventory value was materially correct.

Evaluate the auditor’s sampling plan and the manner in which the results were evaluated.

Q.6 John and Mia are CGA students working at the same accounting firm. They are assisting in an external audit of GG
Company’s December 31, 2008 financial statements. John started work on January 23, 2009 and chose 50 vendors from
the currently recorded accounts payable in a random sample, and found the following 3 errors:

Recorded Value Correct Value

$ 1,500 $ 1,050
$ 925 $ 1,925
$ 1,850 $ 1,800

John added up the errors and concluded that the company’s accounts payable were $500 overstated. Mia reviewed John’s
working papers and advised John that he had made several sampling errors.
Required:
State whether or not you agree with Mia and explain your answer. Give 3 reasons to support your answer.
(CGA – Canada, June 2009)

Q.7 You are a senior member of the audit engagement team, auditing the financial statements of XYZ Company Limited. Your
job in charge is on leave and now you have to independently plan the most appropriate methods of sampling for various
accounts / areas and to identify the areas where sampling need not be applied.
You are well aware of the fact that sampling is the key to an effective and efficient audit and for all practical purposes
without adequate application of sampling techniques an audit can either become inefficient because of utilization of more
time and wastage of efforts on insignificant matters, or on the contrary, it may become ineffective as the results of audit
work may not be termed adequate.

With this perspective in mind, for each of the following, identify an appropriate method of sampling or describe as to
whether sampling would not be appropriate and some other approach needs to be applied:
(i) Substantive testing for long term loans from commercial banks (Population size: 5 loans / Rs. 250 million). (02)
(ii) Compliance testing for revenue cycle – goods dispatch function (Population size: 100,000 dispatches / Rs. 550
million); (02)
(iii) Substantive testing for payroll expenses (Population size: 102 employees / Rs. 85 million); and (02)
(iv) Substantive testing for additions to fixed assets (Population size: 100 items / Rs. 70 million); (02)
(ICAP, CFAP 06 Level – Summer 2005)

Q.8 An auditor wants to test debtors for existence. Following is the party-wise detail of debtors.
Customer Balance
A 11,000
B 4,500
C 26,000
D 7,000
E 35,000
F 18,650
G 21,500
H 1,350
Total 125,000

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Auditor wants to send confirmation letter to four debtors. His objective is to draw conclusion about entire population
while still focusing on large value items, therefore, he has decided to use monetary unit sampling so that every sampling
unit has equal chance of selection.

Following are other parameters:

Sample Size =4
Sampling interval = Rs. 30,000

Required:
(a) Which of the above parties will be selected suing the above table.
(b) Which of the above parties will be selected if table is arranged in descending order (i.e. first H, then G, and so on….).

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SUGGESTED SOLUTIONS

CONCEPT REVIEW QUESTIONS

Q.1
Q.2
Examiners’ Comments:
(b) were very general like discussion on control risk, materiality and tolerable error but very few candidates were able to
point out the actual relation of assessment of control risk, tolerable error, allowable risk of over reliance, expected error and
the population with the sample size and extent of audit procedures.

Q.3
Q.4
Q.5
Examiners’ Comments:
Most of the students were able to identify the factors which the auditor, considers while using specific selection. The factors
include, auditors understanding of the entity, the assessed risk and characteristics of the population to be tested.
However, some of the students kept on discussing the materiality issues and how the decision to select high value items may
improve the efficiency of the audit.
(b) In this part the students were generally able to identify that specific selection is subject to non-sampling risk and that the
auditor has to obtain evidence regarding the rest of the population, as in case of specific selection, the results cannot be
projected to the entire population.

Q.6
Q.7
Examiners’ Comments:
This was an easy question and most of the students were able to list down the advantages and disadvantages of Statistical
Sampling and Judgmental Sampling.

CONCEPT APPLICATION QUESTIONS

A.1 (a) In first strata, sampling is not involved. In second strata, sampling is involved, which relates to tests of details.
(b) In this case, sampling is also not involved in second strata now.
(c) Sampling is involved, which relates to tests of controls.
(d) Sampling is not involved.
(e) Sampling is not involved. This relates to specific item selection to obtain understanding of entity.
(f) Sampling is involved which relates to Tests of Details.
(g) Sampling is involved which relates to Tests of Details.
(h) Sampling is involved which relates to Tests of Controls.
(i) Sampling is not involved.

A.2 Recorded amounts in purchases account.

A.3 (a) No. This is not sampling because sample does not represent whole population. This is effective to test cut-off assertion.
(b) Auditor should not use Sampling in share capital because transactions in share capital are usually small number of
large values.
(c) Because Projected deviation rate is always the same as Sample deviation rate.

A. 4 1. Projected Misstatement = 15,000 + (500/525,000 * 4,500,000) = Rs. 19,286.

2. As the projected misstatement is less than the tolerable misstatement, hence it can be concluded that population is not
materially misstated. No further work necessary.

3. As the projected misstatement is greater than the tolerable misstatement, hence, sampling has not provided a
reasonable basis for conclusion.

Auditor should perform following procedures in such case:

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 Request management to investigate identified misstatement to identify further misstatements (in such case
auditor will corroborate whether misstatements remain) or
 Revise nature, timing and extent of further audit procedures (e.g. auditor may increase sample size, or modify
substantive procedures).

A. 5 (1) In auditing most of the assets and liabilities (e.g. Property, Plant and Equipment, Inventory, Debtors, Creditors), it is
always considered efficient and effective to stratify the population. Then high value items are selected separately and a
sample is selected from the rest of population. This has not been done here.

(2) Sample selection method used is Block Selection. This method does not give a sample which is representative of
population.

(3) Auditor did not project the misstatement before conclusion. Projected misstatement is 10,000,000
(100,000/1,000,000 * 100,000,000) which is much greater than Tolerable misstatement i.e. Rs. 2,000,000.

(4) Conclusion reached is incorrect. As in this case, sampling does not provide a reasonable basis for conclusion about
population.

(5) Auditor did not propose adjustment for identified misstatement. (though amount identified is immaterial, however, it
is always better to propose adjustments for identified misstatements).

A. 6 I agree with Mia. John has made following errors:

 Population was not appropriate (sample should be selected from vendors as at December 31, 2008 and not from
current vendors).
 Sample misstatement is $500 understatement and not overstatement.
 John did not project the misstatement on the population.

Q.7 (i) Sampling is not appropriate. Population consists of small number of large value items, so 100% examination should be
made.
(ii) Sampling is appropriate because population is large. Further, 100% testing is not appropriate on tests of controls.
(iii) In auditing payroll, sampling is not an appropriate technique. In this area, usually Analytical Procedures are
performed instead of Tests of Details.
(iv) Sampling is not appropriate. Auditor should use specific item selection i.e. selecting high value items from this
population to cover a large portion.

Examiners’ Comments:
There were four cases given in the question. The examinees were required to evaluate them and identify an appropriate
method of sampling or describe as to whether sampling would not be appropriate and some other approach needs to be
applied in each cases separately. Generally, candidates gave proper answers in each case.

Q.8 (a)
Customer Balance Cumulative Balance Selected
A 11,000 11,000 No
B 4,500 15,500 No
C 26,000 41,500 Yes
D 7,000 48,500 No
E 35,000 83,500 Yes
F 18,650 102,150 Yes
G 21,500 123,650 Yes
H 1,350 125,000 No

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(b)
Customer Balance Cumulative Balance Selected
H 1,350 1,350 No
G 21,500 22,850 No
F 18,650 41,500 Yes
E 35,000 76,500 Yes
D 7,000 83,500 No
C 26,000 109,500 Yes
B 4,500 114,000 No
A 11,000 125,000 Yes

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ISA 550
RELATED PARTIES
QUESTIONS

CONCEPT REVIEW QUESTIONS

Q.1 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)
(ICAP, CFAP 06 Level – Winter 2018)

Q.2 Mr. Burhan is working as audit manager in a firm of Chartered Accountants. The audit teams have brought the following
matters to his attention:
During the audit of Moon Limited, it has been noted that 40% sales are made to an associated company on credit. The
management claims that the prices charged by the company to the associated company are set in accordance with the
prevailing market.
Required:
Explain how the audit teams should deal with the above situation. (06)
(ICAP, CFAP 06 Level – Summer 2016)

Q.3 ABC and Company, Chartered Accountants, have been appointed as the auditor of Neptune Limited (NL). During the audit
it has been revealed that NL’s operation involves significant and frequent transactions with related parties.
Required:
Discuss the overall audit approach and related audit procedures to address the above issues. Also state the possible
implications on the audit report. (09)
(ICAP, CFAP 06 Level – Winter 2014)

Q.4 Diversified Businesses Limited is a listed company engaged in the business of manufacturing paints, pharma and
chemicals. During the planning stage of an audit, the auditor has found that the company has advanced a significant
amount of Rs. 2.5 billion to a related party, for construction of an office tower. In the notes to the financial statements, it
has been stated that transactions with related parties were carried out on arm’s length basis.
Required:
Evaluate and discuss how the auditor should deal with the above situations. (08)
(ICAP, CFAP 06 Level – Summer 2014)

Q.5 In the audit of Silver Limited you have been provided with a list of related parties alongwith the transactions made with
them. Upon comparison of this list with that of the previous year, you are surprised that the number of related parties and
values of such transactions have reduced significantly.
Required:
How would you obtain sufficient appropriate audit evidence in respect of the completeness of the information pertaining
to related parties? (09)
(ICAP, CFAP 06 Level – Winter 2007)

Q.6 At planning stage of the audit of a new client, you, as an audit manager had a meeting with the CEO and CFO of the
company. Various matters such as company’s performance, profitability, turnover of staff, import of plant and machinery
during the year, inventory turnover, collection from debtors, payment of creditors, investment in marketable securities
etc were discussed. As a result of the discussion you were able to assess that a significant portion of the company’s
business is conducted with parties which are closely linked with the company.

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As the audit manager you are now required to explain the following to the members of the audit team:
(a) Procedure as to how completeness of related party transaction could be verified. (04)
(b) Examination of identified related party transactions (04)
(ICAP, CFAP 06 Level – Summer 2006)

Q.9 Can an audit be expected to detect all Related Party Transactions? Explain. (03)
(ICAP, CFAP 06 Level – Winter 1997)

Q.10 What is a related party and a related transactions? (04)

(ICAP, CFAP 06 Level – Winter 1991)

CONCEPT APPLICATION QUESTIONS

Q.1 As the audit partner responsible for the audit of Mubashar Limited (ML), you have recently issued an audit report on ML’s
annual financial statements.
The audit senior involved in the audit of another client Salman Limited (SL) has informed you that SL’s records indicate
that it has made purchases worth Rs. 37 million from ML. Since the same audit senior was also involved in the audit of ML
he knows that SL and ML are associated companies and ML had not disclosed any related party transactions in its
financial statements. This fact has also been confirmed from the working papers of both the companies. Payments against
these purchases were made in the name of ML by way of crossed cheques.
Required:
Discuss the factors that you will consider with reference to above and specify the action that you would take in this
regard. (20)
(ICAP, CFAP 06 Level – Winter 2011)

Q.2 You are the audit manager responsible for the audit of Mechanic Engineering Limited, (MEL) which provides mechanical
parts to different industries. The draft financial statements for the year ended 30 September 2016 show profit before
taxation of Rs.150 million (2015: Rs.200 million) and total assets of Rs.1.2 billion (2015: Rs.1.1 billion).

During the year, MEL has sold one of its buildings to Natasha (Private) Limited (NPL) at a loss of Rs.20 million. The
building was purchased at a cost of Rs.80 million seven years ago and was depreciated @ 5% per annum on straight line
basis. The minutes of the meeting of the Board of Directors at which the sale was approved indicate that a director of MEL
holds 20% shares in NPL. However, the minutes also indicate that he did not vote on the transaction due to conflict of
interest.
Required:
Evaluate the above situation and determine the course of action in respect of the above situation. (09)
(Reporting implications are not required)
(ICAP, CFAP 06 Level – Winter 2016)

Q.3 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 December
2019.

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:

A receivable balance of Rs. 6 million with a 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.

Required:
Evaluate the above matters and discuss your firm’s course of action along with implications on the audit report, if any.
(06*)
(ICAP, CFAP 06 Level – Winter 2019)

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SUGGESTED SOLUTIONS

CONCEPT REVIEW QUESTIONS

Q.1
Q.2
The terms of the transactions with the associated company need to be obtained and compared with market terms.
If the price charged to the related party is not the market price seek justification from the management and document it
appropriately.
If credit terms are not comparable with those prevailing in the market, the transaction with the related party may be
construed as a financing transaction. In such case, ensure that approval of shareholders through special resolution in
accordance with Section 208 of the Companies Ordinance, 1984 has been obtained.
If the entity is unable to produce relevant approval of the shareholders in respect of loan, it will constitute a non-
compliance with laws and regulations.
The auditor shall consider the need to obtain legal advice.
The auditor shall also evaluate the implications of non-compliance in relation to other aspects of the audit, including the
auditor’s risk assessment and the nature, timing and extent of audit procedures.
Ensure that transactions with associated company are approved and authorized by the board of directors.
 If the transaction with associated company lacks logical business rationale then reassess the management integrity.
Check whether the transaction has been disclosed as required under IAS 24 and 4th schedule of CO-1984.

Examiners’ Comments:
This question contained three independent situations and in each case the candidates were required to explain how the audit
team should deal with it. The performance was quite poor. The most notable issue in this question was that the question
required the students to answer on the approach to be taken but a significant number of candidates put their major stress on
the reporting aspect. Comments on each situation are given below:
(c)According to the situation, 40% of the total sales of a company were made to an associated company on credit. The
overall performance was below average as the responses in most of the cases were restricted to the issue of sales price and its
comparison with market prices. The credit terms and its related implications were seldom discussed. Moreover, most of the
students did not understand as to what the auditor should do if the price charged is different from those prevailing in the
market and many of them simply suggested that the report should be qualified.

Q.3 Significant related party transactions:

(i) The auditor shall inquire of the management and others within the entity, and perform other risk assessment
procedures considered appropriate, to obtain an understanding of the controls, if any, that management has established
to:
 identify, account for, and disclose related party relationships and transactions in accordance with the applicable
financial reporting framework;
 authorize and approve significant transactions and arrangements with related parties; and transactions and
arrangements outside the normal course of business.
(ii) During the audit, the auditor shall remain alert, when inspecting records or documents, for arrangements or other
information that may indicate the existence of related party relationships or transactions that management has not
previously identified or disclosed to the auditor.
(iii) The auditor shall consider the susceptibility of the financial statement to risk material misstatement due to fraud or
error that could result from the entity’s related party relationships and transactions.
(iv) The auditor shall obtain the data from the management in respect of:
 associated companies
 Subsidiaries
 list of related parties personnel (as per the definition) in the International
Financial Reporting Standards;
(v) The auditor shall inspect the following for indications of the existence of related party relationships or transactions
that management has not previously identified or disclosed to the auditor:
 Bank and legal confirmations obtained as part of the auditor’s procedures;
 Minutes of meetings of shareholders and those charged with governance; and
 Any other records or documents as the auditor considers necessary (e.g. Form A, Form 29, Register of members,
Documents related to compliance with Code of Corporate Governance etc).

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(vi) The auditor shall inquire of management regarding the following:

 The identity of the entity’s related parties, including changes from the prior period;
 The nature of the relationships between the entity and these related parties;
 Whether the entity entered into any transactions with these related parties during the period and, if so, the type and
purpose of the transactions.
 Ensure that all key management personnel and known related parties are included there in.
(vii) The auditor shall review the extent and nature of business transacted with major customers, suppliers, borrowers
and lenders for indications of previously undisclosed relationships.
(viii) The auditor shall review the significant transactions outside the normal course of business, paying particular
attention to the transaction recognized at or near end of the reporting period and inquire of management:
 the nature of these transactions
 whether related parties are involved in these transactions
(ix) The auditor shall ensure that all related party transactions are disclosed appropriately in the financial statements as
per applicable financial reporting framework.
Implication on Audit Report:
Where the controls over related party transactions are ineffective or non-existent and the auditor is unable to obtain
sufficient appropriate audit evidence about related party relationships and transactions, the auditor will issue a qualified
or disclaimer of opinion as appropriate.
If the above procedures performed by auditor identifies a material misstatement in the financial statements, then the
auditor will ask the management to make appropriate adjustment, and in case of disagreement will issue a qualified or
adverse opinion as appropriate.

Examiners’ Comments:
(b)The requirement in this part was the same as above but with respect to related party transactions. The overall
performance was good. However, a significant number of students restricted their answers to procedures that were aimed at
verifying the list of related party transactions provided by the client and did not address the main issue i.e. risk of unidentified
related parties or related party transactions.

Q.4 The auditor need to ascertain whether transactions with the related party have been appropriately accounted for and
disclosed in accordance with the IFRS and Companies Ordinance, 1984.
Management’s assertion that the transactions were conducted on terms equivalent to those prevailing in an arm’s length
transaction may be materially misstated due to practical difficulties that limit the auditor’s ability to obtain audit evidence
that all aspects of the audit evidence are equivalent to those of the arm’s length transaction.
 In order to address the above factors, the auditor shall:
 Inspect the underlying contracts or agreement.
 Determine the business rationale behind the transaction.
 Determine whether the terms of the transactions are consistent with management’s explanations.
 Obtain audit evidence that the transactions have been appropriately authorized and approved.
 The auditor will evaluate management’s support for the assertion of arms length transaction, which may involve one or
more of the following:
 Considering the appropriateness of management’s process for supporting the assertion.
 Verifying the source of the internal or external data supporting the assertion, and testing the data to determine their
accuracy, completeness and relevance.
 Evaluating the reasonableness of any significant assumptions on which the assertion is based.
 In addition to the above, we shall seek representation that management has disclosed all the facts and documents
related to the above transaction.

Examiners’ Comments:
This question consisted of two parts, both pertaining to the same audit assignment. In each part a situation was identified
and the candidates were required to evaluate and discuss how the auditor should deal with it. Performance in each part is
discussed below:
(a)According to this situation, the client had advanced Rs. 2.5 billion to a related party for construction of an office tower and
it was claimed that it was an arm’s length transaction. Generally, the students were able to highlight most of the steps
required to verify the assertion that it was an arm’s length transaction, except the following:
 Verifying the source of the internal or external data supporting the assertion and testing the data to determine its
accuracy, completeness and relevance.
 Evaluating the reasonableness of any significant assumptions on which the assertion is based.
A significant number of candidates assumed that it was a case of undisclosed related party or related party transaction and
consequently mentioned wholly irrelevant procedures.

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Q.5
Examiners’ Comments:
This was one of the easiest and simple question set by the examiner and candidates performed well and generally secured
good marks as they quoted the relevant points based on ISA 550 ‘Related Parties’.

Q.6
Examiners’ Comments:
The response from candidates on the topic related to verification of related party transactions showed that they have
reasonable practical exposure of such transactions.
However, some students got confused between part (a) and (b) and were unable to distinguish between identification of
related parties for verifying the completeness of the details provided by the client (asked in part -a) and examination of
transactions to identify related parties (asked in part-b).

Q.7
Q.8
Examiners’ Comments:
Students answered this question generally well, and were able to identify the transaction appear unusual in circumstance
and examples that may indicate the existence of previously unidentified related parties, like transactions
• Which have abnormal terms of task
• In which substance differ from form
• With high volume or with certain customers or suppliers as compared with others.

CONCEPT APPLICATION QUESTIONS

Q.1 Factors that should be considered and actions to be taken

(a)The amount of sales made to SL a related party is material (by nature) to the financial statements.

(b)We need to consider the reason for this event. The possible reasons are as follows:
(i)It may be a deliberate attempt by ML to fraudulently siphon off funds by suppressing the sales probably by the
management itself or by any other employee.
(ii)ML may have recorded the sale in the name of any other party with the intention of non-disclosure of related party
transaction.
(iii) The non disclosure of related party transactions may be due to unintentional error made by the management.

(c)We shall discuss the issue with the management and if necessary with those charged with governance and ask them to:
(i)revise the financial statements
(ii)take steps to ensure that those in receipt of the previous financial statements are informed of the situation.

(d)If we establish that the revised audit report should be issued and the management has not yet issued the financial
statements to the shareholders, in this case we shall:
(i)Carry out the audit procedures necessary for verification of amendment in the financial statements.
(ii)Extend the audit procedures regarding subsequent events, to the date of the new audit report.
(iii)Provide a new auditor’s report on the amended financial statements.
(iv)Include an emphasis of matter paragraph or other matter paragraph reflecting such amendment.

(e)If financial statements have already been issued to the shareholders then we should, in addition to the above audit
procedures:
(i)Review the steps taken by the management to ensure that those in receipt of the previous financial statements together
with the auditor’s report thereon are informed of the situation.
(ii)Notify the management and where necessary those charged with governance that we would seek to avoid future
reliance on the audit report, if the management does not take appropriate steps to ensure that those in receipt of
previously issued financial statements are informed of the situation and does not amend the financial statements.
(iii)Seek legal advice in order to prevent the reliance on the audit report on the financial statements, if in spite of our
communication, ML’s management or those charged with governance fail to take necessary steps to prevent reliance on
the audit report issued on the financial statements.

(f)Under the specific law, regulation or the financial reporting framework where we are permitted to restrict the audit
procedures on subsequent event specific to the amendment, we will mention an additional date in the audit report
restricted to the amendment that indicates that the audit procedures on subsequent events are restricted to that specific

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amendment as mentioned in the relevant note. We would also mention the fact in the emphasis of matter paragraph or
the other matter paragraph that our audit procedures on subsequent events are restricted solely to the amendment of the
financial statements as described in the relevant note to the financial statements.

(g)If as a result of a misstatement resulting from fraud or suspected fraud, we feel that our ability to continue performing
the audit has been affected, we should:
(i)Determine the professional and legal responsibilities applicable in the circumstances, including the requirement to
report the matter to the shareholders or the regulatory authorities.
(ii)Consider whether it is appropriate to withdraw from the engagement, and if we decide to withdraw:
Discuss with appropriate level of management and those charged with governance, our withdrawal from the
engagement and the reasons for the withdrawal.
Determine whether there is a professional or legal requirement to report to the shareholders about the withdrawal from
the audit or the responsibility to report it to the regulatory authorities.
Discuss with the legal advisor about withdrawal from the engagement.
Being an associated company the management of ML may be in a position to influence the decision of SL also. Therefore
the auditor should reassess the risk of material misstatement in SL.

Examiners’ Comments:
The situation given in the question required imaginative thinking and only those who had deep insight and good command
over the subject could secure good marks. Most others gave unstructured answers and were only able to produce two or three
valid points.
The common deficiencies were as follow:
• Discrepancy mentioned in the situation could have been intentional as well as unintentional. Most students could
not visualize this aspect.
• It was clearly stated that the audit report has been issued whereas many students answered the question with the
assumption that the audit report has not been signed.
• Some key issues like re-assessment of the risk of material mis-statement in SL, possibility of withdrawal from the
engagement and the impact on audit report were discussed by few students only.

Q.2 Evaluation of the situation:

The loss on disposal has reduced profit before tax by Rs. 20 million and is approximately 13.33% of profit before tax and
is therefore material. Moreover, the transaction is a related party transaction due to 20% director’s holding in NPL.
Course of action:
(i) Consider reasons for disposal of building.
(ii) Promptly communicate the relevant information of the related party transaction to other members of the audit team.
(iii) Request management to identify all transactions with NPL for further evaluation.
(iv) Reconsider the risk that other related parties or significant related party transactions may exist that management has
not previously identified or disclosed to the auditor, and perform additional audit procedures.
(v) Review the appropriateness of depreciation policy. If it is not appropriate then review the remaining non-current
assets to ensure that they are not impaired.
(vi) Investigate the influence of director with respect to the said transactions even though he did not participate in the
voting.
(vii) Inquire as to why the entity’s control over related party relationships and transactions failed to enable the
identification or disclosure of the related party relationships or transactions.
(viii) If the non-disclosure by management appears intentional (and therefore indicative of risk of material misstatement
due to fraud), evaluate the implications for the audit.

Examiners’ Comments:
This question consisted of two scenarios and in each case the candidates were required to evaluate the situation and discuss
the course of action to be taken by the auditor. Each scenario (part) is discussed hereunder:
(b)Surprisingly, majority of the students were not able to identify that transaction is a related party transaction because a
director of the company also held 20% shares in the other company (the buyer). Quite obviously, such students could not
specify the appropriate course of action available to the auditor.
Besides the above, most of the students failed to identify the depreciation and impairment aspects as well. Many of the
students failed to evaluate the situation properly including materiality.

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Q.3 Evaluation
Irrespective of the amount of the related party balance, Fourth Schedule of the Companies Act 2017 requires to disclose all
balances with related parties. Not disclosing the related party balance would be a non-compliance of the Companies Act
2017 and will be a material misstatement.

Course of action
Since the non-disclosure would lead to a material misstatement of the financial statements, we shall discuss the non-
disclosure with those charged with governance.

Implications on the audit report

 If the disagreement persists, we shall qualify our audit report;
 Describe in the Basis for Opinion section the nature of the omitted information; and
 Unless prohibited by law or regulation, include the omitted disclosures, provided it is practicable to do so
provided we are able to obtain sufficient appropriate audit evidence about the omitted information.

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ISA 560
SUBSEQUENT EVENTS
QUESTIONS

CONCEPT REVIEW QUESTIONS

Q.1 State the responsibilities of auditors with regard to the following:

(a) Events occurring after the date of auditors report but before the financial statements are issued.
(b) Discovery of facts after the financial statements have been issued.
(ICAP, CFAP 06 Level – Summer 1992)

Q.2 You are the auditor of a limited company quoted on the stock exchange. You have just completed the audit for the year
ended December 31, 1993 and have issued an unqualified report dated February 20, 1994. The annual general meeting of
the company is scheduled to be held on March 15, 1994. On February 28, 1994 you become aware that a material
disclosure has not been made in the accounts. Briefly describe the steps you would take to deal with the above situation.
(10)
(ICAP, CFAP 06 Level – Summer 1994)

Q.3 State with whether the following events are “adjusting events” or “non-adjusting events”.
(a) The receipt of information concerning changes in taxation including rates.
(b) The discovery of errors or frauds which show that the financial statements were incorrect.
(c) Changes in rates of foreign exchange.
(d) Loss of fixed assets or stocks as a result of fire or flood.
(e) A valuation which provides evidence of a permanent diminution in value of property.
(f) Allotment of shares and debentures.
(ICAP, CFAP 06 Level – Summer 1995)

Q.4 Discuss the course of action the auditor is expected to follow in a situation when facts are discovered after the financial
statements have been issued which if previously known to him would have resulted in the modification of his report. (10)
(ICAP, CFAP 06 Level – Summer 2001)

Q.5 Describe the auditing procedures the auditor would perform to gather evidence concerning subsequent events upto the
date of auditors report on the financial statements. (05)
(ICAP, CFAP 06 Level – Summer 2002)

CONCEPT APPLICATION QUESTIONS

Q.1 You are relaxed that the financial statements of MNOP Corporation have finally been issued by its Board of Directors
together with auditor’s report, when, all of a sudden, the concerned Audit Manager barged in your room to inform you
that he has just become aware of a material fact related to the financial statements of the MNOP Corporation, which
existed at the date of your report and which if known to you at that date may have caused you to modify your report.
You immediately got on your feet and started wondering about your course of action.
Describe the course of action you will follow in the above referred situation. (10)
(ICAP, CFAP 06 Level – Summer 2003)

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Q.2 After the financial statements of DEF Leasing Company Limited, a listed company, for the year ended December 31, 2003,
have been published, you, being the statutory auditor of the company, become aware of the fact that the company had
recorded a total of three fake leases (which were material in nature) in its financial statements for that year.
Required:
What action is required on your part, considering the requirements of International Standard on Auditing 560 –
Subsequent Events, assuming that the management does not agree to revise and republish the financial statements and
the Audit Report thereon? (10)
(ICAP, CFAP 06 Level – Winter 2004)

Q.3 The audit report of Bhit Gas Limited (BGL) was qualified on account of recognition of mark-up on delayed payment from
Salim Enterprises Limited (SEL) amounting to Rs. 2.7 billion, because at the time of signing of audit report, SEL had not
acknowledged its liability towards mark-up due to BGL and the matter was pending in the Court.
After the issuance of the financial statements, the matter was decided by the Court and SEL was ordered to settle the
mark-up by paying Rs. 1.5 billion. After the Court’s decision, BGL had filed an appeal against the order for the remaining
amount of Rs. 1.2 billion and the management has requested the auditor to remove the qualification and issue a revised
audit report. The management has also informed the auditor that subsequent to the Court’s decision, it has decided to
revise the financial statements by making a 25% provision against the remaining amount of mark-up.
Required:
Discuss the factors that the auditor should consider with reference to the above and specify the steps that he should take
under each of the following circumstances:
(i) The management and those charged with governance are prohibited by law and regulation from restricting the
amendment and approval of the financial statements to the effect of the above event.
(ii) The management and those charged with governance are not prohibited by law and regulation from restricting the
amendment and approval of the financial statements to the effect of the above event. (17)
(ICAP, CFAP 06 Level – Winter 2012)

Q.4 An unqualified audit report normally states that the financial statement to which the report refers gives a true and fair
view of the state of the company’s affairs at the balance sheet date and of its profits for the year ended on that date.

Bearing in mind the above statement, the directors of International Buildings Ltd. have drawn up accounts for the year
ended December 31, 1996 which do not reflect certain events which have occurred since the year end. They justify their
action on the grounds that the books and records correctly reflect what was known at the year end. The following are the
events which are not reflected in the draft financial statements (in all cases figures are material):
(i) at a meeting in January 1997 the local planning authority rejected the company’s plants to develop one of its
freehold sites. The site was included in the company’s assets at its cost of Rs. 50 million but it is likely that the
site will have to be sold and will realize no more than Rs. 35 million because of its reduced development
potential;
(ii) Following the completion of a long term contract in April 1997 it has been possible to calculate the final profit on
the contract. It appears that the profit accrued at December 31, 1996 was under-estimated by Rs. 12 million.
This arose from a material error at December 31, 1996 in estimating the amount of work still to be completed;
(iii) A public listed company in which International Builders Ltd. held shares as a long term investment announced in
April 1997 that it was going into liquidation. The investment is shown in the balance sheet at its historical cost of
Rs. 20 million and a note of its market value at December 31, 1996 of Rs. 25 million is included in the notes to
the accounts. It now appears likely that this investment will prove worthless.

Required:
(a) List FOUR detailed procedures which an auditor should adopt in order to detect post balance sheet events; (06)
(b) In respect of each of the three events described above, list the work which the auditor should undertake and comment
on the acceptability of the company’s decision not to adjust its financial statements;
(i) Refusal of planning permission. (05)
(ii) Completion of long-term contract. (05)
(iii) Liquidation of trade investment. (04)
(ICAP, CFAP 06 Level – Summer 1997)

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SUGGESTED SOLUTIONS

CONCEPT REVIEW QUESTIONS

Q.1
Q.2
Q.3
Q.4
Examiners’ Comments:
By and large, this question was attempted well by a majority of the candidates who, in turn, managed to score high marks in
this question. The question was designed to test the knowledge of the candidates in respect of the ISA related to ‘Subsequent
Events’. On an average, the candidates had a ‘field day’ with this question and appeared to have smooth sailing.

Q.5

CONCEPT APPLICATION QUESTIONS

Q.1
Examiners’ Comments:
Students who have studies the related ISA answered this question well. This was a simple question taken from the ISA.

Q.2

Q.3
Suggested Solution:
The decision given by the court confirms the existence of mark-up due from SEL, therefore the qualified report issued on
account of recognition of mark-up amounting to Rs. 2.7 billion does not hold good and therefore the auditor needs to
amend the report.
In view of the above, the auditor needs to take the following steps in each of the two situations i.e. situation given in para
(i) as well as the situation given in para (ii).
Assess whether Salim Limited is in a position to repay the amount as per court’s decision.
If the auditor and the management agree on the amount of provision to be made, (Whether 25% or as may be agreed) or
if the amount of dispute is not material to the financial statements, the auditor will issue an unqualified opinion on the
amended financial statements. Otherwise, the auditor would issue a qualified opinion after duly changing the amounts in
the audit report.
Carryout the audit procedures (as may be necessary under the circumstances) on the amendment.
Review the steps taken by management to ensure that anyone in receipt of the previously issued financial statements
together with the auditor’s report thereon is informed of the situation.
If the management does not take the necessary steps to ensure that anyone in receipt of the previously issued financial
statements is informed of the situation, the auditor shall notify management and where appropriate, those charged with
governance, that the auditor will seek to prevent reliance on the auditor’s report. If despite such notification, management
or those charged with governance do not take necessary steps, the auditor shall take appropriate action to seek to prevent
reliance on the auditor’s report.

When Law and Regulation prohibit management from restricting the amendment of the financial statements to
the effects of subsequent events causing that amendment the auditor will take the following steps:
Extend the audit procedures on (all) subsequent events to the date of the new auditor’s report.
The new auditor’s report shall not be dated earlier than the date of the approval of the amended financial statements.
The auditor shall include in the new auditor’s report an emphasis of matter paragraph or other matter paragraph
referring to a note to the financial statements that more extensively discusses the reason for the amendment of the
previously issued financial statements and to the earlier report provided.

When Law and Regulation does not prohibit management from restricting the amendment of the financial
statements to the effects of subsequent events causing that amendment, the auditor will take the following steps:
Restrict the audit procedures on subsequent events to the decision given by the court.

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Amend the auditor’s report to include an additional date restricted to that amendment that thereby indicates that the
auditor’s procedures on subsequent events are restricted to the adjustment of an amount of mark-up due from SEL as a
result of decision given by the Court; or
Provide a new or amended auditor’s report that includes a statement in an Emphasis of matter paragraph or Other
matter paragraph that conveys that the audit procedures on subsequent events are restricted solely to the amendment of
the financial statements as described in the relevant note to the financial statements. The emphasis of matter paragraph
or other matter paragraph will also include reference to a note to the financial statements that more extensively discusses
the reason for the amendment of the previously issued financial statements and to the earlier report provided.

Examiners’ Comments:
(a)In this part of the question, a brief scenario was given where the financial statements needed to be amended. The scenario
was to be discussed under two different conditions i.e. where (i) law and regulations prohibit management and (ii) when it
does not prohibit management from restricting the amendment of financial statements to the effect of the specific event.
Since most of the points were available direct from the Auditing Standard, generally the students were able to score well.
However, most of them missed an important point that though the court had decided in favour of the company, the auditor
needed to assess whether Salim Limited (the debtor) was in a position to repay the amount.
Moreover, many students talked about reviewing the judgment and checking whether management and those charged with
governance would like to amend the financial statements or not, despite the fact that it was clearly mentioned in the question
that it was the management who had requested for removal of the qualification and issuance of a revised audit report.
Instances were noted where students appeared to be confused and intermingled the two situations.

Q.4

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ISA 570
GOING CONCERN
QUESTIONS

CONCEPT CHECKERS
MCQs

Q.1 (i) An auditor believes there is substantial doubt about an entity's ability to continue as a going concern for a reasonable
period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the
auditor most likely would consider, as a mitigating factor, the entity's plans to:
(a) Postpone expenditures to upgrade its information technology system.
(b) Purchase production facilities currently being leased from a third party.
(c) Pay cash dividends that are in arrears to the preferred stockholders.
(d) Increase the useful lives of plant assets for depreciation purposes.

(ii) Which of the following audit procedures most likely would assist an auditor in identifying conditions and events that
may indicate there could be substantial doubt about an entity's ability to continue as a going concern?
(a) Confirmation of accounts receivable from principal customers.
(b) Reconciliation of interest expense with debt outstanding.
(c) Confirmation of bank balances.
(d) Review of compliance with terms of debt agreements.

(iii) Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an
entity's ability to continue as a going concern?
(a) Significant related party transactions are pervasive.
(b) Usual trade credit from suppliers is denied.
(c) Arrearages in preferred stock dividends are paid.
(d) Restrictions on the disposal of principal assets are present.

(iv) An auditor believes that there is substantial doubt about an entity's ability to continue as a going concern for a
reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and
events, the auditor most likely would consider, as a mitigating factor, the entity's plans to:
(a) Extend the due dates of existing loans.
(b) Operate at increased levels of production.
(c) Accelerate expenditures for research and development projects.
(d) Issue stock options to key executives.

(v) Which of the following procedures most likely would assist an auditor in identifying conditions and events that may
indicate substantial doubt about an entity's ability to continue as a going concern?
(a) Performing cutoff tests of sales transactions with customers with long-standing receivable balances.
(b) Evaluating the entity's procedures for identifying and recording related party transactions.
(c) Inspecting title documents to verify whether any real property is pledged as collateral.
(d) Inquiring of the entity's legal counsel about litigation, claims, and assessments.

(vi) When an auditor has substantial doubt about an entity's ability to continue as a going concern because of the
probable discontinuance of operations, the auditor most likely would express a qualified opinion if:
(a) The effects of the adverse financial conditions likely will cause a bankruptcy filing.
(b) Information about the entity's ability to continue as a going concern is not disclosed.
(c) Management has no plans to reduce or delay future expenditures.
(d) Negative trends and recurring operating losses appear to be irreversible.

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(vii) Both management and the auditors agree that the going concern assumption is appropriate. Having reviewed events
or conditions that could cast significant doubt over the entity’s ability to continue as a going concern, the auditor has
concluded that none of these events or conditions poses a material uncertainty.

What should the audit opinion be?

(a) An adverse opinion
(b) A qualified opinion
(c) An unmodified opinion with emphasis of matter paragraph
(d) An unmodified opinion

(viii) An audit has identified events and conditions that cast significant doubt over the entity's ability to continue as a
going concern.

Which THREE of the following are valid actions that the auditor must take?
(a) Modify the audit opinion
(b) Perform additional audit procedures
(c) Consider mitigating factors
(d) Request management to make an assessment of the entity's ability to continue as a going concern (if not
assessed already)

(ix) A company has a history of profitable operations. Accordingly the company's management has not performed an in
depth analysis to support its assessment of going concern.

Are the following statements true or false in relation to the auditor's approach?
1. The auditor must rectify the lack of analysis by preparing a detailed assessment of going concern.
2. If management does not prepare a detailed assessment of going concern, the auditor must conclude that the use of the
going concern assumption is inappropriate.

(a) 1.True 2. True

(b) 1.False 2. False
(c) 1.True 2. False
(d) 1.False 2. True

(x) Which TWO of the following are appropriate procedures that the auditor can use to evaluate management's
assessment of the entity's ability to continue as a going concern?
(a) Corroborate management's plans for future actions with knowledge of the entity and documentary evidence
(b) Evaluate the assumptions on which the assessment is based
(c) Ask for an independent expert to review management's assessment
(d) Review prior year audit files

(xi) Are the following statements true or false?

1. Reliance on long term borrowings to finance long term assets is an example of a condition that could cast doubt about
the use of the going concern assumption.
2. Inability to pay creditors on due dates is an example of a condition that could cast doubt about the use of the going
concern assumption.

(a) 1.True 2. True

(b) 1.False 2. False
(c) 1.True 2. False
(d) 1.False 2. True

(xii) Which of the following is NOT detailed as an primary objective of the auditor as detailed in ISA 570?
(a) To obtain sufficient appropriate evidence regarding the appropriateness of management's use of the going
concern assumption
(b) To conclude whether a material uncertainty exists which casts significant doubt over the entity's ability to
continues as a going concern
(c) To obtain written representations from management regarding the use of the going concern assumption
(d) To determine the implications of evidence obtained regarding going concern on the audit report

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(xiii) If management has informed the auditor that it has not performed a going concern assessment which THREE of the
following should the auditor do?
(a) Inquire if any events/conditions exist that may cast doubt over going concern
(b) Discuss the basis of the use of the going concern assumption with management
(c) Modify the audit opinion
(d) Remain alert throughout the audit for audit evidence of events or conditions that may cast significant doubt on
the entity's ability to continue as a going concern

Cloze
(xiv) The following statements relate to ISA570 Going concern requirements. For each statement indicate whether it is
true or false.

(a) ISA570 requires auditors to conclude whether a material uncertainty exists which casts significant doubt over the
entity’s ability to continues as a going concern:
 True  False

(b) ISA570 requires auditors to request management to perform an assessment of going concern in all circumstances:
 True  False

(c) ISA570 requires that auditors remain alert throughout the audit for audit evidence of events or conditions that may
cast significant doubt on the entity’s ability to continue as a going concern.
 True  False

CONCEPT REVIEW QUESTIONS

Q.1 Discuss the basic accounting assumption of “Going Concern”.

(ICAP, CFAP 06 Level – Winter 1992)

Q.2 Indications of risk that continuance as a Going Concern may be questionable could come from the Financial Statements or
from other sources including Operating and Others. What are some of these indications? You are required to list them
under Financial indication, Operating indications and Others. (10)
(ICAP, CFAP 06 Level – Winter 1997)

Q.3 During your planning of the audit for the year to December 31, 1993 of one of your clients you become aware of the
following:
Pressure from creditors generally is increasing and unless the company’s results improve in the near future then it is
possible that it will be unable to continue operations. Briefly explain the steps you would expect to take keeping in view
the above factors during your audit.
(ICAP, CFAP 06 Level – Summer 1994)

CONCEPT APPLICATION QUESTIONS

Q.1 You are the audit manager of Bolan Pharmaceuticals Limited (BPL) a listed company. For the year ended 30 September
2016, BPL has prepared its financial statements which indicate a net operating loss, current ratio of 0.79 and significant
amount appearing as capital work in progress comprising of expenses incurred on acquisition and installation of plant
and machinery. The following information is also available:
(i) The operations of BPL are currently suspended due to Balancing, Modernization and Replacement (BMR) work.
(ii) The decision to carry out BMR was approved by the Board of Directors in 2015 with a completion deadline of 31
March 2016.
(iii) Due to certain technical issues, BPL has not been able to complete the project to date.
(iv) Because of the above situation, loan from a bank became overdue on 1 September 2016. Further, BPL had also not
complied with certain key covenants.
(v)In this difficult situation BPL has requested its major shareholders to inject additional equity.
Required:
(a) You have asked the client to give a comprehensive plan explaining the steps to counter the above situation. Briefly
discuss what kind of details you would expect in the above plan. (12)
(b) Besides the issue of going concern, state the other key matters that affect financial statements, and the auditor should
consider with respect to the above situation. (05)
(ICAP, CFAP 06 Level – Winter 2016)

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Q.2 Mr. Burhan is working as audit manager in a firm of Chartered Accountants. The audit teams have brought the following
matters to his attention:
There are multiple uncertainties which impact the ability of Link Telecom Limited to operate as a going concern. An
important assumption in the working provided by the client is the continuous financial support from the parent company.
The team incharge wants guidance as to how the validity of this assumption can be evaluated. (05)
Required:
Explain how the audit teams should deal with the above situations.
(ICAP, CFAP 06 Level – Summer 2016)

Q.3 Qasmi Steels Limited (QSL) is a manufacturer of steel and iron products. During the year the company has incurred a net
loss of Rs. 306 million. The following information is also available:
(i) At the year end, the company’s accumulated losses amounted to Rs. 17 million whereas its net equity was Rs. 283
million.
(ii) During the year, QSL has defaulted in repayment of a loan. The management is however quite hopeful that the lender
would agree to a rescheduling.
(iii) The management believes that the company’s profitability has been hampered on account of soaring electricity prices
along with a fall in demand for steel which have had a negative impact on the prices of its finished products. Moreover, its
production has also suffered on account of the prevailing energy crisis. Consequently, the management has decided to
discontinue its operations temporarily.
(iv) To counter the impact of high electricity prices, the company intends to convert its plant to run on gas as well.
(v) The management has informed you that it would need to install a gas converting unit which would be imported at a
cost of Rs. 30 million. However, as the process of installing the gas conversion unit and completing the necessary
formalities would take at least a year, therefore the management is negotiating to lease the plant to Nadeem Enterprises
for a period of one year.
Required:
(a) Evaluate the above situation and state the procedures which you would perform as an auditor in the above situation.
(10)
(b) Describe the implications of the above issues on the audit report. (10)
(ICAP, CFAP 06 Level – Summer 2013)

Q.4 You are the engagement partner responsible for the audit of Saleem Auto Parts Limited (SAPL), a listed company. SAPL
supplies auto parts to three large motor car assemblers which are listed on the Karachi Stock Exchange. Your review of
the working paper files has disclosed that the company has been facing liquidity issues for the last few months. You have
also been informed that subsequent to the year-end, SAPL has defaulted on one of its long term loan installments.
SAPL’s directors have assured that this liquidity crunch is for a short span of time. To substantiate their assertion they
have provided cash flow projections for the next four years. An important assumption in the cash flow projections is that
agreements with all the motor car assemblers would continue for the foreseeable future. However, during the year, one of
the motor car assemblers, Pannu Motors Limited (PML), has incurred substantial losses and has announced to close down
one of its plants.
Required:
(a) State the audit procedures which your firm should perform in the above situation. (05)
(b) Identify and explain the implications of the above issues on the audit report. (09)
(ICAP, CFAP 06 Level – Summer 2011)

Q.5 You are the manager in charge on the audit of financial statements of Haroon Private Limited. During the course of audit
you noticed certain conditions which created significant doubts about the validity of the going concern assumptions.
You have discussed the issue with the client which further revealed that the management has developed certain plans to
cope with the situation but on the basis of your assessment of their plans, you concluded that the going concern
assumption is no more appropriate.
Required:
(a) Advise the client as to what should be done in the above circumstances.
(b) What procedures would you perform if the management agrees to your proposals?
(c) If the management does not agree, draft appropriate modifications for inclusion in the audit report. (You may assume
necessary details) (10)
(ICAP, CFAP 06 Level – Summer 2009)

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Q.6 During the audit of a manufacturing company, you have noted certain conditions that cast significant doubt on the
company’s ability to continue as a going concern. You had a meeting with the CEO of the Company to discuss the issue and
communicated your decision that at least an emphasis of matter paragraph in the Audit Report is inevitable. The CEO
disagreed with your opinion and shared with you the management’s plan to deal with the potential going-concern
uncertainty. The plan mainly constitutes the following measures:
(i) The Company is guaranteed a continuous financial support by the parent company;
(ii) It has recently rescheduled its borrowing facilities;
(iii) The management has plans to reduce overheads and administrative expenses;
(iv) The management has decided to discontinue a segment with non-profitable operations;
(v) The management has plans to increase equity; and
(vi) The management is expecting profitable operations in the next year.
Required:
Describe the audit procedures that should be performed to gather sufficient appropriate audit evidence to support the
validity of the CEO’s claims and assess the viability of the above measures being taken by the management. (16)
(ICAP, CFAP 06 Level – Winter 2008)

Q.7 (a) The financial position of Sonia Limited as at 31 December 2005, is as follows:
• Current liabilities over current assets are Rs. 200 million.
• Carrying value of property, plant and equipment is Rs. 600 million.
• Long term borrowing is Rs. 750 million.

You are the senior incharge of the audit engagement for this client and have expressed your concern on the company’s
ability to continue as a going concern. The management shared with you its five-year plan. You are satisfied that the
assumptions used in preparation of the plan are appropriate and reasonable but the ability to obtain further borrowing is
uncertain.
However, management is confident that the company would be able to obtain borrowing. Management is willing to give
disclosures of its five-year plan in the financial statements.

Explain and discuss the above situation to your partner along with your suggestions with regard to type of audit report
that should be issued? (05)

(b) Discuss those factors, which should be considered by the management in assessment of going concern assumption?
(04)
(ICAP, CFAP 06 Level – Summer 2006)

Q.8 You have recently completed the review of the annual audit working papers of a private limited company. Although the
financial statements of the company have been prepared on a going concern basis, your review indicates that the
company can no longer be considered a going concern.
You are required to draft a suitable audit report in the prescribed format on the financial statements which have been
prepared on a going concern basis. You may make whatever assumptions you consider necessary. You are not required to
reproduce the full contents of a standard audit report. (15)
(ICAP, CFAP 06 Level – Winter 1987)

Q.9 While going through the newspaper, Mr. Akram came to know that the Ministry of Health had issued show-cause notices
to those pharmaceutical companies which had not yet started their own manufacturing within a period of two years from
the issuance of permission of toll manufacturing, as the said permission was subject to this condition.
Akram is involved in the audit of Dine Pharma Limited (DPL) as engagement partner. The audit is expected to be finalized
within one month. DPL’s products are manufactured under toll manufacturing arrangements and it has three to five years
noncancelable agreements with five manufacturing units. Akram has approached you as the firm’s Technical Director for
consultation on the above matter.
Required:
Briefly advise Akram about impact of the above matter on the financial statements disclosure as well as auditors’ report.
(10)
(ICAP, CFAP 06 Level – Summer 2007)

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SUGGESTED SOLUTIONS

CONCEPT CHECKERS

Q.1
MCQ # Correct Option
(i) (a)
(ii) (d)
(iii) (b)
(iv) (a)
(v) (d)
(vi) (b)
(vii) (d)
(viii) (b, c, d)
(ix) (b)
(x) (a, b)
(xi) (d)
(xii) (c)
(xiii) (c)
a. True
b. False
(xiv) c. True

CONCEPT REVIEW QUESTIONS

None.
CONCEPT APPLICATION QUESTIONS

Q.1 (a)I would expect the following details in the plan:

 Probable date of commencement of operations.
 Measures to deal with the technical issue which is faced, either in the form of correspondence with an expert or minutes
of board of directors meeting.
 Financial effects of breach of key covenants of bank loan.
 Cost overruns due to delay in completion of project (till the estimated date of commencement of operations).
 Negotiation with the banks and how the bank has reacted on default of the company including information of
restructuring (if any) and penalties.
 Plans of the company to recapture its lost customer ship and costs related to unfulfilled customer orders.
 Employee’s reaction to suspension of operation e.g. employees turnover since the suspension of operations. Calculation
of redundancy payments relevant to employee’s turnover.
 Implications on company of loan default e.g. calling of security by the bank etc.
 Form of equity injection, whether by way of right or subordinated loan. In case of right shares, probability of
subscription.
 Status of regulatory compliances in the case of equity injection e.g whether necessary resolutions had been passed or
permissions have been obtained from relevant bodies.
 Does company have adequate number of resources other than finance to commence operations? e.g. technical staff etc.
 Status of other liabilities, whether these had become overdue and if yes what are the company’s plans to deal with these
liabilities.
 Cash flow forecast in support of going concern assumption.
 Assumptions used in support of the cashflow forecast.
 Evidence of continuous financial support from the major shareholders/ evidence in support of funding of working
capital requirements.

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(b) Besides the going concern issue, the auditor should also consider the following matters with respect to the given
situation:
 As the loan covenants have been breached by the Company, the fact should be disclosed in the financial statements.
 Proper understanding of the loan agreements need to be obtained.
 The correspondence with the banks should also be obtained / examined and the potential contingency arising as a result
of any case filed by the bank, if any be disclosed in the financial statements.
 The classification of liabilities either “current” or “long term” should also be assessed in the light of the loan agreements.
 The proper accrual of markup, penalties and any related charges due to non-payment on a timely basis should be
properly accounted for in the financial statements.
 Appropriate accrual of redundancy payments and salaries with respect to leavers should be reflected in financial
statements.
 Proper adjustments in the financial statements to be ensured in respect of Impairment of existing plant and machinery
as well as Capital work in progress.
 Treatment and bifurcation of revenue and capital nature expenditures incurred on BMR.
Impact of subsequent events on the financial statements of BPL.

Examiners’ Comments:
This question was based on a scenario whereby a company was facing a situation in which its status as a going concern
seemed to be in doubt. The requirements were specified in two different parts as discussed below:
(a)Overall, the students failed to understand the crux of the requirement which was to list the details which the auditor
would expect in the management’s plan regarding turnaround of the company. Instead, most of them tried to narrate the
procedures which the auditor would perform to assess the plan. Some of the students restricted themselves to the
recommencement of operations and ignored the other aspects. Many students kept on repeating the same point again and
again. Such practice not only results in wastage of precious time which could be better utilized in planning the other answers
but also results in mistakes as contrary views are sometimes expressed which exposes the candidate unnecessarily.
(b)Performance in this part was the worst. Most of the students focused on explaining the concept of Key Audit Matters rather
than the key aspects or risk that the audit team should focus on besides the issue of going concern. Many students seemed to
be in continuation of part (a) and kept on discussing the issue of commencement of operations.

Q.2 (b)
 Obtain evidence with respect to the financial support from the parent company, such as support letter/ agreement, etc.
 Review the financial statements of the parent company to assess whether the parent company is in a position to support
LTL.
 Ascertain the form of support i.e. loan or equity injection and ensure that both the companies would be able to comply
with the relevant legal requirements.
 Review the business plans of LTL and assess whether it would be able to continue for the foreseeable future and
generate sufficient future profits/cashflows.
 After performing the above procedures, if there is a doubt about the appropriateness of the going concern assumption,
carryout additional audit procedures (including discussion with management) depending upon the circumstances.

Examiners’ Comments:
This question contained three independent situations and in each case the candidates were required to explain how the audit
team should deal with it. The performance was quite poor. The most notable issue in this question was that the question
required the students to answer on the approach to be taken but a significant number of candidates put their major stress on
the reporting aspect. Comments on each situation are given below:
(b)The overall performance was average as the candidates generally covered the routine procedures that are performed
when there are doubts as regards going concern assumption. However, very few of them got deeper into the given scenario as
they failed to discuss about the ability and the willingness of the parent company to provide support.

Q.3 Suggested Solution:

(a) Although QSL’s accumulated losses are only Rs. 17 million i.e. about 5% of the share capital yet the following
circumstances indicate that QSL is facing going concern issues:
 QSL has incurred huge loss during the past year which is almost equal to its share capital.
 QSL has defaulted on its loan repayments.
 The management has certain plans to revive the business however these are subject to major uncertainties as discussed
below:
 The company plans to convert the plant to make it possible to run it on gas. However, it would require significant costs
whereas QSL is in financial crisis.
 It is not certain whether the company’s banker would agree on the restructuring of loan.

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ISAs – Application Guide ISA 570

 The above conversion would require a year’s time and the company may be required to bear the fixed costs for that
period.
 Due to current energy crisis prevailing in the country it seems doubtful that the company would be able to secure a gas
connection in the first place and whether sufficient gas would be available to it or not.
 The company is negotiating to lease its plant temporarily to reduce losses during the period of its planned inactivity.
However this plan does not seem very convincing as the prospective lessee would also be subject to the same
circumstances.
The auditor would need to evaluate the company’s detailed plan by carrying out the following procedures:
(i) Review the cash flow projections provided by QSL and assess their reasonableness
(ii) Discuss with the management about the uncertainties described above and assess whether the management would be
in a position to overcome them.
(iii) Consider subsequent events and discuss the impact thereof, with the management, if necessary.
(iv) Seek written representation from management regarding its plans for future actions.
(v) After performing the above procedures, if there is a doubt about the appropriateness of the going concern assumption,
auditor will need to carryout additional audit procedures depending upon the circumstances.
 Besides the going concern issues, the discontinuance of operations of company and reduction in production of steel may
result in impairment of plant and machinery, as the company may not be able to recover the carrying amount of the plant.
The auditor needs to review the value in use of the plant and machinery provided by the client.
(b) Implications on the Audit Report:
(i) If it is concluded that going concern assumption is appropriate and no material uncertainty exists, the auditor shall
express an unmodified opinion.
(ii) If it is concluded that going concern assumptions is appropriate but a material uncertainty exists which is adequately
disclosed in the financial statements, the auditor shall express:
 an unqualified opinion
 include an emphasis of matter paragraph in the auditor’s report to:
 highlight the existence of material uncertainty relating to the event or condition that may cast significant doubt on the
entity’s ability to continue as a going concern; and
 draw attention to the note in the financial statement which contains the disclosure.
However, If material uncertainty exists and is not adequately disclosed in the financial statements. The auditor shall
express a qualified opinion or adverse opinion as appropriate.
(iii) If it is concluded that the going concern assumption is not appropriate, in the preparation of the financial statements
the auditor should advise the company to revise the accounts appropriately. In case of disagreement, the auditor shall
express an adverse opinion.
(iv) If the company revises its financial statements, the auditor shall include an emphasis of matter paragraph referring to
the note in the financial statements and explaining that the financial statements are prepared on estimated realizable
settlement values of assets and liabilities respectively as the company is no longer a going concern for the reason stated in
the aforesaid note.
(v) If management is unwilling to make or extend its Assessment, the auditor will issue a qualified opinion or a disclaimer
of opinion, as appropriate.

Examiners’ Comments:
(a)An average performance was observed in this question. The scenario pertained to a company which was faced with a
going concern situation. While most students mentioned about the huge loss during the past year and default on loan
repayments, the following points were not adequately covered:
• The management had given various plans for the revival of the company which included leasing the plant for a year
and converting it to gas. The auditor is required to evaluate such plans and the candidates should have commented
whether these plans were realistic.
• Possibility of impairment of plant and machinery.
• The need to carryout additional audit procedures if the uncertainty regarding going concern assumption persists,
even after performing the necessary procedures.

(b)In this part, the candidates were required to describe the implications of the issues described in the question, on the audit
report. The question was reasonably well attempted. However, it was a 10 mark question but many students gave very short
answers in which they only discussed the implications on audit report in case the going concern assumption was not valid. In
fact, they should have discussed various possible situations such as when there is uncertainty regarding going concern
assumption but that uncertainty is adequately disclosed and also when it is not adequately disclosed or when the going
concern assumption is definitely invalid.

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Q.4 (a)Cash flow problems, default in loan installment and possibility of the use of inaccurate assumptions in projecting the
cash flows indicate a need to review the appropriateness of the going concern assumption. Therefore, the auditor should
carry out the following audit procedures:
(i)Evaluate the reliability of the underlying data and assumptions used in cash flow projections.
(ii)Ascertain the amount of sale to PML and its factory that was closed down and assess its significance for the business
operations of SAPL.
(iii)Review the last published financial statements and corporate announcements of PML to assess future viability of its
business operations. In case there are indications that PML may need to close down or significantly curtail its business
operations the auditor should require the management to revise its cash flow projections.
(iv)Consider subsequent events to assess whether any additional fact or information have become available since the date
of management¡¦s assessment. Discuss the impact thereof, with the management, if required.
(v)Seek written representation from management regarding its plans for future actions.
(vi)After performing the above procedures, if there is a doubt about the appropriateness of the going concern assumption,
auditor will need to carryout additional audit procedures depending upon the circumstances.

(b)Implications on audit report:

(i)If it is concluded that going concern assumption is appropriate and no material uncertainty exists, we shall express an
unmodified opinion.
(ii)If it is concluded that going concern assumptions is appropriate but a material uncertainty exists which is adequately
disclosed in the financial statements, we shall express:
an unqualified opinion
include an emphasis of matter paragraph in the auditor¡¦s report to:
°highlight the existence of material uncertainty relating to the event or condition that may cast significant doubt on the
entity¡¦s ability to continue as a going concern and
°draw attention to the note in the financial statement which contains the disclosure.
(iii)If it is concluded that going concern assumptions is appropriate but a material uncertainty exists which is not
adequately disclosed in the financial statements, we shall express a qualified opinion or adverse opinion as appropriate.
(iv)If it is concluded that the going concern assumption is not appropriate, in the preparation of the financial statements
we should advise SAPL to revise the accounts appropriately. In the case of disagreement, we shall express an adverse
opinion.

Examiners’ Comments:
(a) This question required analysis of going concern assumption in the light of the given situation and a list of audit
procedures to be carried out. Most of the students were able to identify going concern issue but copied audit procedures from
the book without considering the fact that they were dealing with a practical situation. As a result, they missed some very
relevant points such as
• Assessing the significance of the revenues generated from the loss making customer, for the business of the client.
• Assessing the viability of that customer and its implications on Company’s future cash flow projections.
• Consideration of subsequent events in assessing the company’s status as a going concern.
Majority of the students spent too much time on going round vetting the loan agreement with the bank and discussing
alternate financing arrangement that the company may have in place. Moreover, very few could mention an important point
that after performing above procedures, if there is a doubt about the appropriateness of the going concern assumption,
auditor will need to carry out additional audit procedures.
(b) This part of the question carried 09 marks and yet many students simply wrote that since the going concern assumption
was no more valid, the auditor should express an adverse opinion. All such students missed the following important points:
• There was no clear indication in the given scenario on the basis of which they could have concluded firmly that the
going concern assumption was invalid. Consequently, they should have discussed all the various possibilities.
• It is not necessary that if the going concern assumption is not valid, the auditor would express an adverse opinion
i.e. if the client agrees with the auditor and revises the financial statement in an appropriate manner, an adverse
opinion may not be required.

Q.5 (a) If it is finally concluded that Haroon Private Limited is not a going concern, advise the client that the financial
statements should be prepared on the alternative authoritative base as follows:
 assets to be valued at recoverable amounts;
 all assets and liabilities to be classified as current assets; and
 a note in the financial statements disclosing that HPL is not a going concern.
 recording of additional liabilities such as redundancy cost etc

(b)
 Auditors will ensure that alternative approach as discussed in (a) above has been properly applied and adequate
disclosures are made accordingly.

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 If auditors are satisfied by the alternative approach and disclosures, they can issue unqualified opinion. An emphasis of
matter paragraph referring to the note in the financial statements, describing the going concern situation may be
included.

(c) Adverse opinion:

In our opinion, because of the effects of the matters discussed in the preceding paragraph(s), the financial statements do
not give a true and fair view of the financial position of Haroon Private Limited as of December 31, 2008, and of its
financial performance and its cash flows for the year then ended, in accordance with International Financial Reporting
Standards”.

Q.6 Following Audit Procedures should be performed in the given circumstances:

(i) Financial Support from parent company
In support of parent company’s guarantee to provide continuing financial support to the Company, we should obtain
 A copy of legally binding agreement between the parties / Board Resolution, and
 Ensure that the parent company is financially capable of supporting the Company (e.g. historical financial
statements, forecasted information).

(ii) Rescheduling of borrowing facilities

We should obtain a
 copy of written agreement or
 Communication in respect of debts rescheduled by the Company with banks or financial institutions. /
Confirmation from financial Institutions.

(iii) Reduction of overheads and Administrative expenses.

 Assess whether it would be feasible to reduce overhead and administrative costs. For example such reduction
may have serious negative impact on the company’s ability to provide quality services to the customers.
 Such plans might be evidenced by an approval of board of directors.

(iv) Discontinuance of non-profitable segment

The auditor should consider the
 marketability of the segment assets,
 restrictions on their disposal (such as loan agreements or encumbrances),
 possible direct and indirect effects of disposal,
 the Company’s ability to discontinue operations of the segment without any negative impact on the other
operations,
 sale agreement, letter of intent or an appraisal report in respect of the above,
 approval of the board of directors and the shareholders.

(v) Increasing the Equity

 Evaluate management’s feasibility plan to inject further capital or issue of further capital.
 Examine related documentation and the steps taken so far( Board minutes, Permission from regulator)

(vi) Profitable operation in next year

 Discuss with the management, the basis of estimating the increase in profits such as new products, customers,
markets, etc., that may result in profitable operation as supported by a detailed marketing plans.
 analyze and discuss the entity’s latest available interim financial statements;
 Consider whether the assumptions underlying the forecast appear appropriate in the circumstances.
 Compare the prospective data for the current period with results achieved to date.
 Analyze and discuss the profit and other relevant forcaste.

General Procedures
We would obtain sufficient appropriate audit evidence that the above plans are likely to be implemented and that the
outcome of these plans will improve the situation. We would seek written representation from management regarding
the above plans.

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Q.7
Examiners’ Comments:
(a)The case given was a situation of existence of uncertainty as regards the entity's ability to continue as a going concern.
Most of the students stated that only an emphasis of the matter paragraph was necessary. However, they failed to discuss the
uncertainty regarding availability of further borrowing and what impact it may have on the audit report.
(b)A large number of students submitted only one aspect of management's assessment of going concern assumption, that is,
the nature and condition of the business. Other factors like (i) time required to know the outcome of related uncertainty and
(ii) absence of precise knowledge at the time of assessment etc. and impact of these factors on the management's assessment
were mentioned by few good students only.

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ISA 580
WRITTEN
REPRESENTATIONS
QUESTIONS

CONCEPT REVIEW QUESTIONS

Q.1 Why does the auditor obtain representations from the management of the company? (03)
(ICAP, CFAP 06 Level – Winter 1997)

Q.2 (a) What factors should be considered by an external auditor in placing reliance on representations by management as
audit evidence? (08)
(b) What are the basis elements of a management representation letter? (03)
(c) What action should be taken by an external auditor if the management of a company refuses to provide written
representations? (04)
(ICAP, CFAP 06 Level – Winter 1986)

Q.3 You are manager incharge on the audit of the financial statements of XYZ Pakistan Limited, a large multinational FMCG
company, which has appointed your firm as auditors for the first time. During the course of finalization of audit you had
various meetings with the senior management of the Company. The management of the company is really proud of their
systems, business ethics and transparency in the financial reporting systems. Nevertheless, during discussion you came
across a situation whereby the management has refused the request of signing the general representation letter. The chief
executive and chief financial officer of the company are of the view that all their procedures and financial reporting
systems are transparent and you are given full liberty to check and verify any information and there is no bar on
providing you any information that you may require for the purpose of your audit. Accordingly, they feel that through a
representation letter, you wish to transfer your responsibility to them. Therefore, they are not willing to sign any sort of
representations by whatever name called.

In this respect you are required to submit a memorandum to the management highlighting the requirements of the
International Standard on Auditing on management’s representations. Accordingly, you are required to:
(a) List down the documents through which the auditor can ensure that the management and those charged with
governance acknowledge their responsibility for the preparation of the financial statements; (03)
(b) Identify who should sign the representation letter. (02)
(c) Explain as to what should be the date of representation letter; and (02)
(d) Describe what would be your action, if the management continues to refuse providing a written representation letter.
(03)
(ICAP, CFAP 06 Level – Summer 2006)

CONCEPT APPLICATION QUESTIONS

Q.1 Your firm has been appointed as the auditors of Star Limited, a well established consumer goods manufacturing company.
During the audit you were provided with various oral representations during meetings and discussions. While finalizing
the audit you requested the management to provide such representations in writing. The management has however
informed you that they are not accustomed to providing any representations to the external auditor in writing.
The management is of the view that it has provided full access to whatever records, documents and evidences were
available with it without any exception and that now it is the auditor’s responsibility to correlate the same with the oral
representations. The management has further informed that the only signed documents which it will be providing to you

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 ISAs – Application Guide ISA 580

would be the signed copy of the financial statements and the certified true copy of the resolution of the BOD approving
the financial statements and other significant matters, in line with the requirements of the corporate law.

Required:
You are required to explain the following:
(a) Is there any relevance of oral representations for the External Auditors?
(b) What are the situations in which written representation from the management is mandatory?
(c) What course of action would you like to take in the above circumstances? (12)
(ICAP, CFAP 06 Level – Winter 2008)

Q.2 An audit client did not record depreciation during the year under audit on a manufacturing machinery. On inquiry
management explained that this machinery is classified as ‘held for sale’ and will be sold as soon as a good customer is
found. Therefore, in accordance with accounting standards, it is included in current assets of the entity and no
depreciation has been charged on this. Management has also given written representation in this regard.
Does written representation in this case constitutes sufficient appropriate audit evidence? Why or why not? What
additional audit procedures you may carry out to reach a conclusion?
(Assume that effect of above item is material.)

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 ISAs – Application Guide ISA 580

SUGGESTED SOLUTIONS

CONCEPT REVIEW QUESTIONS

Q.1
Q.2
Q.3
Examiners’ Comments:
The question was of elementary level and it was expected that the answers from final level students would cover every aspect
of the issue. But a large number of replies were not comprehensive enough. There was no reference of the following in most
answers:
In certain circumstances, the auditor may wish to obtain representation from other members of management.
In certain circumstances separate representation letter may also be obtained during the course of audit.
While answering part (d) very few could mention that any refusal to provide necessary representation at the end of audit
would require the auditor to re-evaluate any representations made by the management during the course of audit

CONCEPT APPLICATION QUESTIONS

Q.1 Suggested Solution:

(a) Relevance of Oral representation:
An auditors should document the oral representations made by the management during the course of audit and make
them part of audit working papers. However oral representation is less reliable then written representation.
(b) The following types of representations should mandatorily be in writing:
(i) Relating to a matter material to the financial statements when other sufficient appropriate audit evidence cannot
reasonably be expected to exist.
(ii) Management’s acknowledgement of its responsibility for the design and implementation of internal controls to
prevent and detect error; and
(iii) Management’s acknowledgment that (according to its belief) the effects of uncorrected errors aggregated by the
auditor during the audit are immaterial, both individually and in the aggregate, to the financial statements taken as a
whole. A summary of such items should be included in or attached to the written representations.
(iv) Management’s acknowledgement of its responsibility for the design and implementation of internal controls to
prevent and detect fraud;
(v) That the management has disclosed to the auditor the results of its assessment of the risk that the financial statements
may be materially mis-stated as a result of fraud;
(vi) That the management has disclosed to the auditor its knowledge of fraud or suspected fraud affecting the entity
involving:
 Management;
 Employees who have significant roles in internal control; or
 Others, where the fraud could have a material effect on the financial statements; and
(vii) That the management has disclosed to the auditor its knowledge of any allegations of fraud, or suspected fraud,
affecting the entity’s financial statements as may have been communicated by employees, former employees, analysts,
regulators or others.
(c) An auditor may accept the oral representation provided by the management of Star limited but these need to be
documented in the working papers.
Moreover, since oral representations are less reliable, the auditor should reassess whether it needs to perform additional
procedures in view of the above situation.
However, where written representation is mandatory the auditor should obtain written representations and in case of
management’s refusal, it shall consider appropriate modification of the auditor’s report.

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Q.2 Accounting of manufacturing machinery in this case is dependent on intention of management, so Written Representation
is an important audit evidence in this case.

However auditor should consider reliability of such evidence by considering followings:

 Entity’s Past History in carrying out its intentions
 Entity’s Ability to pursue a specific course of action
 Entity’s Reason for choosing a particular course of action
 Any other information which is consistent or inconsistent with entity’s judgment and intention e.g. whether
entity used this asset during the year, if asset used during the year where is depreciation for that period, if asset
not used during the year why is it held for sale for such a long period, whether active efforts to make sale are
being done.

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 Auditing – The Case Book ISA 600

ISA 600
AUDIT OF GROUP FINANCIAL
STATEMENTS
QUESTIONS

CONCEPT CHECKERS

Q.1 Which definition best describes a component auditor?

(a) An individual or organisation possessing expertise in a field other than accounting or auditing whose work in
that field is used by the auditor to assist in obtaining sufficient appropriate evidence
(b) An auditor who audits and reports on the financial statements of an entity that uses a service organisation
(c) An auditor who at the request of the service organisation provides an assurance report on the controls of a
service organisation
(d) An auditor who at the request of the group engagement team performs work on financial information related to
an entity that should be included in the group financial statements

CASE STUDIES

Q.1 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
Name of company Revenue
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 (UTIL):

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 earned 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 dosing 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)
(ICAP, CFAP 06 – Summer 2021, Q.# 6)

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 Auditing – The Case Book ISA 600

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)
(ICAP, CFAP 06 –Winter 2020, Q.# 2)

Q.3 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:

Profit/(loss Total
Name of company Revenue Materiality Remarks
) before tax assets
---------------------Rs. in million---------------------
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 Cosmelics 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:
Critically evaluate the extracts of the planning memorandum prepared by the audit senior and advise the course of action.
(15)
(ICAP, CFAP 06 Level – Winter 2019, Q.# 1)

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 Auditing – The Case Book ISA 600

Q.4 (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 December 2018:

(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

(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)
(ICAP, CFAP 06 Level – Winter 2018, Q.# 7)

Q.5 Your firm is the auditor of Noor Group of Companies which has three subsidiaries namely Venus Limited, Jupiter Limited
and Sun Limited. Your firm is the auditor of all the group companies except for Sun Limited, which is incorporated in a
foreign country.
Required:
Explain the procedures you would perform to decide the extent of reliance on the work of the auditor of Sun Limited. (10)
(ICAP, CFAP 06 Level – Summer 2017, Q.# 7)

Q.6 ABC and Company, Chartered Accountants are faced with the following situations:

(i) On the audit of Jalal Holdings Limited, the auditor of a subsidiary has issued a qualified report.
(ii) On a joint audit, there is a difference of opinion whereby ABC wants to issue a qualified report whereas the joint
auditor are convinced with the client’s explanation and intend to issue an unmodified report.

Required:
Explain how the above situations should be dealt with. (06)
(ICAP, CAF 03 Level – Summer 2016, Q.# 7a)

Q.7 You are the audit manager of a listed company having seven subsidiaries. Three of them are audited by other audit firms.
Required:
State the key matters / instructions which you would communicate to the component auditors. (08)
(ICAP, CFAP 06 Level – Winter 2015, Q. # 6)

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 Auditing – The Case Book ISA 600

Q.8 You are the job in-charge on the audit of Globe Industries Limited (GIL) which is the holding company of a large group of
companies engaged in production and marketing of consumer items, food products and textiles. The net worth of the
group is approximately Rs. 89 billion whereas profit for the year ended December 31, 2006 is Rs. 6.4 billion (2005 : Rs. 4.8
billion).
During the planning phase of the audit, you have gathered the following information:
(i) GIL holds 25% shares in Multan Industries Limited (MIL), at the beginning of the year. GIL purchased further 30%
shareholding in MIL on April, 2006. MIL is audited by a large firm having international affiliation.
(ii) One of the group companies i.e. Karachi Industries Limited has incurred serious losses during the year. Company had
to discontinue two of its main products after facing litigations on a copy right issue. The auditor of the company has
expressed serious doubts about the status of the company as a going concern and has issued a disclaimer of opinion.
Required:
Describe the important aspects that you would consider at the planning stage. (11)
(ICAP, CFAP 06 Level – Summer 2007, Q. # 10)

Q.9 A listed company situated in Pakistan has two independent branches in other countries. At the planning stage of audit for
the year ended June 30, 2005 you sent appropriate instructions to the auditors of both branches and requested them to
perform the work in accordance with the International Standards on Auditing and send audit opinion on the financial
statements accordingly.
One of the reports you received from the auditors states that audit work has been carried out in accordance with the local
auditing standards. The other auditor has completed his work according to your satisfaction.
How would you handle the above situation? (06)
(ICAP, CFAP 06 Level – Summer 2006, Q. # 11)

Q.10 In reporting on financial statements of a company a principal auditor may utilize the work and report of another auditor
who has examined the financial statements of a branch or division or other components of the company. What are the
courses of action available to the principal auditor to enable him to obtain sufficient information concerning the other
auditor and what minimum procedures the principal auditor will carry out for his satisfaction? (14)
(ICAP, CFAP 06 Level – Winter 1995)

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 Auditing – The Case Book ISA 600

SUGGESTED SOLUTIONS

Q.1
MCQ
Correct Option
#
(i) D. The other definitions relate to an auditor's expert, a user auditor and a service auditor respectively

CASE STUDIES

Q.1 Suggested Solution by ICAP

(a) United Health Limited (UHL):

Customers with risk of non-payment and delayed payment:
Evaluation:
For customers with risk of non-payment, recording of revenue is not correct. If collecting the consideration is
not probable at contract inception, the IFRS 15 guidance does not apply. Instead, the revenue will be recognized
only when it is collected and no remaining obligations is to be performed. In effect, the entity should account for
transactions of this nature on receipt basis. For the customers having risk of late payment the audit team needs
to ensure that adequate provisioning has been made by UHL.
Course of action:
• Inquire with the management about their assessment of the financial health of their doubtful
customers and their ability to pay.
• Check subsequent payment of these customers to assess whether any recovery has been made.
• Inspect any correspondence made with such customers for recovery of receivable balances.
• Obtain the financial statements of the customers to assess their financial viability.
• Ask the management to reverse the revenue recognized, receivable booked and instead record a
contract asset equivalent to the cost of the inventory sold.
• Obtain the age analysis of these customer receivables and ensure that adequate provision has been
made as per the company policy.
Onerous contract:
Evaluation:
The delivery has not been made and the probable loss of performance bonus may render the contract as onerous
contract due to a decrease in consideration. The audit team should review contracts to determine if there are
any special terms (e.g. force majeure) that may relieve either party to the contract of its obligations under it.
Course of action:
• Inquire with the management and assess whether the sale of equipment would still be profitable
without the performance bonus.
• Inquire with the management about their intention of fulfilling the contract or to exit the contract by
paying the penalty amount.
• Obtain and review the agreement to verify the termination clause including the amount of penalty.
• Ensure onerous contracts are appropriately recorded and disclosed in the financial statements.

Quality Labs Limited (QLL):

Evaluation:
The management may be enquired regarding amending reporting timescales. A delay in the reporting timetable
could allow easing/lifting of travel restrictions.
Since cross-border sharing of data is not allowed, the auditor should consider alternative activities to
demonstrate the review and evaluation of the component team where originally a visit by the group auditor was
planned:
Course of action:
• Consider video calls and/or screen sharing software be used to talk through the work with the
component auditor.
• Gain an understanding of what work has been performed as interim audit work and to what extent
could it be used.
• Consider asking the component auditor to complete a detailed questionnaire or clearance on the work
they have performed.
• Consider the past work of the component auditor – have there been significant errors or issues, or has
work been to a high standard?

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Auditing – The Case Book ISA 600

• Request the component auditor to provide a detailed reporting memorandum;

• Corroborate it through discussions with the component auditor, especially on the significant risks of
material misstatement and areas of significant estimates and judgements.

The group auditor should also ensure that the response of component auditor in the reporting memorandum is
sufficiently detailed and appropriate to conclude on the adequacy of the work performed by the component
auditor.
The group auditor should document the discussions with the component auditor as part of audit documentation.

(b) QLL’s assets are 63.7% of the group and its revenue is 72% of the total revenue of the group. Therefore the
auditor’s in-ability to obtain sufficient appropriate audit evidence regarding QLL’s financial statements would be
a scope limitation whose impact would be material and pervasive to the group financial statements.
Being material and pervasive, this would require the group auditor to disclaim the opinion.
Auditor will need to include a basis of disclaimer of opinion section in the audit report. This section needs to
explain the specific reasons for the disclaimer of opinion and make clear why the possible effects on the financial
statements could be both material and pervasive.
Since the auditor is disclaiming the opinion, the auditor should not report on key audit matters when
disclaiming an opinion.
ISA 705 states that unless required by law or regulation, when the auditor disclaims an opinion on the financial
statements, the section on ‘Other Information’ should also be deleted.
Auditor should change the statement which indicates that the financial statements have been audited, to state
that the auditor was engaged to audit the financial statements.
The auditor responsibility paragraph will now only briefly discuss the fact:
(i) that auditor’s responsibility is to conduct an audit and issue report thereon
(ii) that auditor was not able to obtain evidence to provide basis for audit opinion; and
(iii) about auditor’s independence.
As the auditor has identified an issue that is so pervasive and is therefore unable to conclude on the financial
statements as a whole, it is not appropriate for the auditor to conclude on whether the use of the going concern
basis of accounting is appropriate. Therefore, the section on ‘Conclusions relating to going concern’ is not
required.

Examiner Comments
Question 6(a)
• Examinees could not comprehend that when there is a risk of non-payment, revenue is recognized on
receipt basis. Consequently, examinees also missed out relevant course of action to be taken.
• Examinees were also weak in evaluation of highlighted issues. Examinees who identified the issues could only
mention one or two courses of action for each issue.
• Examinees’ performance in the issue related to the inability of the group audit team to visit component
audit team was poor. It seemed that the examinees did not understand the scenario as most of the examinees
mentioned that group auditor should appoint a component auditor, which was irrelevant. At most, some of
the examinees were only able to mention about arranging video call or consider amending the reporting
timescales.

Question 6(b)
• Examinees mentioned about expressing a qualified or adverse opinion which was incorrect.
• Examinees who correctly mentioned about disclaiming the opinion did not mention the following
reporting implications when a disclaimer of opinion is given:
- the auditor should not report on key audit matters.
- the section on ‘Other Information’ should also be deleted.
- change the statement from ‘the financial statements have been audited’ to ‘the auditor was engaged to
audit the financial statements’.
- the auditor responsibility paragraph also needs to be amended.

Marking Scheme
Mark(s)
(a) • Evaluation of the issues 6.0
• 01 mark for each course of action 11.0
(b) • Discussion on the pervasiveness of the matter 2.0
• 01 mark for discussing each reporting implication 5.0

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 Auditing – The Case Book ISA 600

Passing Percentage
2%
Q.2 Suggested Solution by ICAP

(a) HTC should at the planning stage agree with other joint auditor regarding procedures for carrying out review of
the work of each other before finalization of the audit opinion. The review may include evaluating whether:
• audit procedures have been executed according to the agreed audit strategy and plan;
• sufficient and appropriate audit evidence has been obtained and properly documented from the audit
procedures performed; and
• the conclusions drawn by the other joint auditor are generally appropriate and consistent with the
audit evidence obtained.
If HTC, after carrying out the review, evaluates and concludes that the work of the other joint auditor is
insufficient, HTC should then highlight the observations to the other joint auditor requesting to make
arrangements for performing additional work as appropriate.
If the other joint auditor disagrees on carrying out additional procedures, HTC should perform these additional
procedures to obtain sufficient appropriate audit evidence required to form an opinion on the financial
statements.

(b) The difference of opinion, if any, that may arise between HTC and joint auditor should first be discussed among
the joint engagement partners for resolution of the matter.
Where the differences of opinion between the joint auditors cannot be resolved, the joint auditors should inform
management and/or those charged with governance as soon as possible.
Under the joint audit arrangement, entered into between the joint auditors and the entity, it is expected that an
auditor’s report containing the audit opinion is issued by the joint auditors. However, where this is not possible,
each joint auditor should issue separate auditor’s report and include under the heading ‘other matters’ reference
to the other joint auditor report and explain reason for issuing separate audit report. Both these reports will be
taken jointly as auditors’ report on the financial statements and attached accordingly.

Examiner Comments

Question 2(a)
• Examinees only repeated the requirement of the question about agreeing on the audit strategy with the joint
auditor, rather than mentioning that how it is to be ensured that work was performed in accordance with the
agreed audit strategy.
• Examinees failed to mention any course of action if the work carried out by the other joint auditor is insufficient
or inappropriate.

Question 2(b)
• Examinees did not mention about discussing the difference of opinion with those charged with governance.
• Examinees failed to realize that if separate opinions are being issued by joint auditors then an “other matter
paragraph” needs to be included in the audit report discussing the reasons for doing so.

Marking Scheme

Marking Scheme: Mark(s)

(a) • Discussing agreeing upon joint audit strategy and how to perform 3.0
review of the joint auditor’s work
• Discussing the course of action if the work performed by the joint 2.0
auditor is insufficient
(b) • 01 mark for each step to resolve the disagreement with the joint 2.0
auditor
• Discussing the reporting implication in case the disagreement cannot 2.0
be resolved

Passing Percentage
15%

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 Auditing – The Case Book ISA 600

Q.3 Suggested Solution by ICAP

(a) Health Pharmaceuticals Limited:

Audit senior has determined the materiality of the group at Rs. 286 million, whereas the materiality of HPL has
been determined at Rs. 322 million. It seems that the audit senior has either calculated a higher materiality level
for HPL or a lower materiality at the group level.
To reduce to an appropriate low level the probability that the aggregate of uncorrected and undetected
misstatements in HPL’s separate financial statements exceeds materiality for the group financial statements as a
whole. HPL materiality shall be lower than materiality for the group financial statements as a whole.

Fair Cosmetics Limited:

Even though the Lahore office would be sharing common policies, procedures, and quality control procedures, it
is still not a guarantee of competence for group audit purposes. Multiple offices within the same firm may have
their own variations on the firm’s quality control, training, recruitment and independence policies and
procedures. Therefore, we still need to document our understanding of component auditors, and for component
auditors to acknowledge their compliance with our requests. Even if the past experience with the Lahore office
has been satisfactory, we at least need to confirm whether anything related to the previous questionnaires has
changed since the previous years.

Service Private Limited:

SPL can be considered as an in-significant component as its revenue is 0.39% of the group’s revenue, and its
total assets are only 0.27% of the group’s total assets. Furthermore, the total revenue and total assets of SPL are
below the group materiality level. Furthermore we should also consider the group wide controls before
concluding SPL as in-significant component.
Since SPL may be treated as an in-significant component we are required to perform analytical procedures at
group level covering non-significant component to corroborate conclusions that there are no significant risk.
When no additional risks are identified as a result of analytical procedures, we may document that there is
nothing to indicate a need for the performance of additional procedures.
However, if the results of analytical procedures indicate that there may be a risk of material misstatement, we
need to document the nature, timing and extent of the procedures that will be performed to address the
identified risks.
Furthermore, we will obtain understanding of a component auditor only when we plan to request the
component auditor to perform work on the financial information of a component for the group audit. If
analytical procedures are to be used then it won’t be necessary to obtain the understanding of the component’s
auditor.

Quality Chemicals Limited:

The audit senior conclusion regarding the fact that no procedure is to be performed on the disposed-off
component is also not correct. The revenue from 1 December to 30 June would be consolidated in the group
financial statements. After considering the significance of the revenue of that period audit guidelines must be
communicated to the component auditor.
Group auditor would also have to obtain and document the understanding of QCL auditors.

(b) (i) Obtain the statement of financial position of the subsidiary to confirm the value of assets and liabilities
which have been derecognized from the group.
(ii) Obtain legal documentation/sale agreement in relation to the disposal to confirm the date of the
disposal and confirm that the subsidiary’s profit has been consolidated up to this date only.
(iii) Perform substantive analytical procedures to gain assurance that the amount of profit consolidated
from the beginning of the year to the date of disposal appears reasonable and in line with expectations
based on prior year profit.
(iv) Review the group financial statements to ensure that disposal of the subsidiary has been correctly
recorded and the required disclosures as per the IFRS are made.
(v) Review relevant board minutes for approval of disposal.
(vi) Ensure that all legal compliances have been made for the disposal of the subsidiary.

Examiner Comments
Question (a)
• Examinees failed to realize that the materiality of the component was greater than the materiality of the group
and consequently they did not provide any discussion from this aspect.

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 Auditing – The Case Book ISA 600

• Examinees also did not discuss that even if Fair Cosmetic Limited was audited by the Lahore office, the group
auditor still needs to plan procedures for obtaining the understanding of the component auditor.
• Many examinees failed to identify Services Private Limited as an in-significant component and consequently
failed to mention that only analytical procedures were required to corroborate conclusions that there are no
significant risks. Furthermore, understanding of component auditor was also not required if analytical
procedures are to be used, was not mentioned.

Question (b)
• Obtaining the financial position of the subsidiary to confirm value of assets and liabilities, which had been
derecognized from the group, was not mentioned by the examinees.
• Examinees failed to mention that audit procedures for obtaining assurance that the amount of profit
consolidated from the beginning of the year to the date of disposal appears reasonable.
• Ensuring whether all legal compliance have been made for the disposal was also ignored by the examinees.

Marking Scheme

Marking Scheme: Mark(s)

(a) Discussion on:
• materiality of the group 3.0
• obtaining the understanding of the component auditor 5.0
• identification of insignificant component and the related implication 5.0
on the audit strategy
• communicating audit guidelines to the auditor of disposed subsidiary 2.0
(b) 01 mark for each key audit procedure 5.0

Passing Percentage
4%

Q.4 Suggested Solution by ICAP

(a) Consideration related to audit of component:

(i) The financial reporting framework used by APL to prepare the financial statements, including any need
for reconciliation to another reporting framework.
(ii) The size of operation of APL, it’s materiality for YCL and who are the auditors.
(iii) The extent of involvement in the audit of APL and whether the working papers will be available to the
firm.
(iv) The nature of the business of APL and whether any specialized knowledge is required for the
component.
(v) Expected types and timing of reports to be issued by the auditor and the component auditor.
(vi) How the competence of the component auditors would be confirmedalong with the acceptability of the
ethical standards and quality control policies followed by them.
(vii) The preliminary identification of material classes of transactions, account balances and disclosures of
APL.

Consideration for engaging expert:

(i) Audit team should consider whether they have the expertise of calculating or estimating the agreed
milestones or would they require the services of an expert.

Consideration related to fraud risk:

(i) The reliance placed on internal control and increasing the extent of substantive testing.
(ii) Identification of fraud by the payroll department indicates that there might be other instances of fraud
even though there is a functioning internal audit department, therefore team members need to
maintain a questioning mind and to exercise professional skepticism in gathering and evaluating audit
evidence.
(iii) Even though an internal audit department exist, but due to the emergence of fraudulent activity we
need to consider the management commitment to design, implementation and maintenance of sound
internal control.

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Auditing – The Case Book ISA 600

(iv) The selection of the engagement team and the assignment of audit work in light of fraud risk and the
complexity of the group and its operations.

Consideration related to service organisation:

(i) YCL’s use of service organizations and how the audit team will obtain evidence concerning the design
or operation of controls performed by them, i.e will the type 2 reports be available.
(ii) Significance of those services to YCL and materiality of the transactions processed or accounts or
financial reporting processes affected by the service organization.
(iii) The nature of the relationship between the user entity and the service organization, including the
relevant contractual terms for the activities undertaken by the service organization.

Identification of high risk areas:

(i) Identify areas of higher risk of material misstatement such as, staff lay-off, recognition of revenue from
project management services, related party transactions and business combination along with the
appropriate audit approach.

(b) Even though regulators of foreign subsidiary have granted relaxation for the implementation of IFRS-15 but still,
the financial statements need to be converted as per financial reporting framework of the group.
Since the group auditor is responsible for obtaining sufficient appropriate audit evidence regarding the financial
information of the entities within the group to express an opinion on the consolidated financial statements, we
would need to verify the impact of IFRS-15.
Furthermore, if the impact is material to the group financial statements then it would need to be adjusted
otherwise we would express a qualified opinion.
With regards to audit report, issuance of 2018 Regulations 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.

Examiner Comments
This question consisted of two parts. The performance was very poor as only 10% candidates secured passing marks. Part
wise performance is discussed below:

Question 7(a)
According to the scenario given in this part, a company had three subsidiaries. One of the subsidiaries had been
incorporated in the current year, in a foreign country. Further, ghost employees had been identified by the internal audit
in one of the company’s business segment and as a result, a major reshuffle had been carried out and payroll processing
department had been outsourced. The requirement was to discuss the matters which needed to be considered while
devising the overall audit strategy.
Though this part of the question was attempted by almost all the students and some basic factors to be considered for
devising the overall audit strategy of a group audit were pointed out by majority of the students, only a few secured
passing marks. The main reason was that candidates produced answers based on general factors that are to be considered
in any group audit. There was very little focus on the fact that one new subsidiary was added to the group during this year
and several ghost employees were identified in the parent company.
Considerations like requirement of any specialized knowledge especially the expertise needed for calculating or
estimating the agreed milestones to ensure correct revenue recognition were hardly discussed. Similarly, actions like less
reliance on internal controls and increasing the extent of substantive testing along with need to exercise professional
skepticism were rarely touched upon.

Question 7(b)
According to the given scenario, the financial statements of a client’s foreign subsidiary were not in compliance with IFRS
15 as the regulator there had deferred the adoption of IFRS 15. The management does not agree that any change is
necessary as the previous year’s audit report stated that in giving the opinion the auditor had relied solely on the report
issued by subsidiary’s auditor.
The performance remained below average as majority of the students missed the point that Auditors (Reporting
Obligations) 2018 Regulations have eliminated the previous concept of division of responsibilities, thus making the group
auditor solely responsible for the audit opinion on the consolidated financial statements.

Marking Scheme

Marking Scheme: Mark(s)

(a) Up to 01 mark for each consideration to be taken into account while devising 13.0

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 Auditing – The Case Book ISA 600

the over-all audit strategy

(b) • 01 mark for each valid discussion point in response to the argument 4.0
presented by the management
• Discussion on reporting implication 1.0

Q.5 Suggested Solution by ICAP

Procedures:
(i) Assess whether the degree of access to be provided to us by the component auditor is sufficient.
(ii) Assess the professional competence of Sun Limited’s (SL) auditor by obtaining information about his
membership with relevant professional bodies.
(iii) Obtain confirmations from professional bodies under which the auditor of SL is registered with and his good
standing etc.
(iv) Obtain a statement from the auditor of SL that it has complied with the relevant ethical requirements.
(v) Review the code of ethics followed by the auditor of SL, and assess whether ethical requirements of that code
are in agreement with the ethical requirements relevant to the group audit.
(vi) Ascertain the competence and qualification of staff assigned by the auditor of SL to assess whether they have
necessary skills to address the issues related to the group audit.
(vii) Ascertain the quality control policies and procedures used by the auditor of SL.
(viii) Determine whether the auditor of SL’s is a member of network of audit firms and inquire whether the network
firm carries out regular quality reviews.
(ix) Discuss the audit methodology to be used by SL’s auditor and whether it would be sufficient for the group audit
and determine the necessary audit instructions to be issued.
(x) Identify the differences in the applicable financial reporting framework of the group and the component, if any
and obtain a statement that the component auditor understands the applicable financial reporting framework.
(xi) Request any results of monitoring or inspection visits conducted by the regulatory authority.

Examiner Comments

35.45% candidates secured passing marks in this question

Question 7
Common errors:
1. The requirement of the question was not understood i.e. how to assess the extent of reliance to be placed on the
work of the component auditor and consequently, procedures which would be performed as part of the audit
were described such as meeting with component auditor to obtain understanding of the component and its
environment, discussing with component auditor about risk of material missstatement, etc.
2. Too much stress was laid on the qualification and experience of the auditor and the remaining aspects were
ignored.

Suggested answer:
Procedures:
(i) Assess whether the degree of access to be provided to us by the component auditor is sufficient.
(ii) Assess the professional competence of Sun Limited’s (SL) auditor by obtaining information about his
membership with relevant professional bodies.
(iii) Obtain confirmations from professional bodies under which the auditor of SL is registered with and his good
standing etc.
(iv) Obtain a statement from the auditor of SL that it has complied with the relevant ethical requirements.
(v) Review the code of ethics followed by the auditor of SL, and assess whether ethical requirements of that code
are in agreement with the ethical requirements relevant to the group audit.
(vi) Ascertain the competence and qualification of staff assigned by the auditor of SL to assess whether they have
necessary skills to address the issues related to the group audit.
(vii) Ascertain the quality control policies and procedures used by the auditor of SL.
(viii) Determine whether the auditor of SL’s is a member of network of audit firms and inquire whether the network
firm carries out regular quality reviews.
(ix) Discuss the audit methodology to be used by SL’s auditor and whether it would be sufficient for the group audit
and determine the necessary audit instructions to be issued.
(x) Identify the differences in the applicable financial reporting framework of the group and the component, if any
and obtain a statement that the component auditor understands the applicable financial reporting framework.

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 Auditing – The Case Book ISA 600

(xi) Request any results of monitoring or inspection visits conducted by the regulatory authority.

Marking Scheme

Marking Scheme: Mark(s)

01 mark for each procedure which may be performed by the group auditor 10.0

Q.6 Suggested Solution by ICAP

(a) (i) When a component auditor presents a qualified audit report on the financial statements of a
subsidiary, the principal auditor has to first assess whether:
• The modification is material from the view point of the group as a whole.
• If the qualification is material to the group’s financial statements the modification should be
carried forward to the auditor’s report on the group’s financial statements. However, the type
of modification may need to be changed depending upon the degree of materiality for the
group.
• If the qualification is not material with a view point of group’s financial statements, the group
auditor will make no reference to them in the audit report.
(ii) In order to resolve the difference of opinion, discuss the matter with the joint auditor.
In case the matter is not resolved, both the joint auditors should express their own opinion.
(b) (i) Journal vouchers were not pre-numbered
• There could be no assurance that all JVs have been posted in the ledger.
(ii) There was no mechanism for recording the phone lines of equity traders
• In the absence of recording of phone lines the transparency of deals executed by the dealers
cannot be ensured.
• There would be no recourse incase of a dispute or incase something goes wrong.
(iii) Margin requirements in case of certain individual clients is below the normal margin
requirements of 30%
• In case of any default by customer or crash of market, company will be required to bear the
losses.
• Excess financial charges or margin requirements are to be borne by the company.
• Maintaining margin requirements below the prescribed limits may attract legal implications.

Examiner Comments
This part of the question consisted of two sub-parts, each containing a different scenario and the candidates were
required to explain how the auditor should deal with them. Performance in each sub-part is discussed below:
(i) According to the situation described in this part, the audit report of a subsidiary had been qualified. The most
common error in this part was that the students suggested that the auditor should consider the materiality of
the subsidiary to the group instead of mentioning that the impact of the qualification on the group as a whole
should be considered. Further, many students suggested that the matter should be discussed with the
subsidiary’s auditor which was totally irrelevant.
(ii) This was a rare situation in which two joint auditors had a difference of opinion. One of them wanted to issue a
qualified report whereas the other was quite satisfied and wanted to issue an unmodified report. The overall
performance was quite poor as very few students could clearly specify that if the dispute cannot be resolved,
each of the two auditors may express their own opinion. Many students did not attempt this sub-part whereas a
wide variety of incorrect answers were observed such as referring the dispute to ICAP/SECP, withdrawing from
the assignment, going for a third party review, etc.

Marking Scheme
Mark(s)
(a) (i) 01 mark for discussion/explanation of each step 3.0
(ii) 1.5 mark for discussion/explanation of each step 3.0

Q.7 Suggested Solution by ICAP

The following matters may be communicated to the auditor of the subsidiaries (component auditor):
• work to be performed, the use to be made of that work, and the form and content of the component auditor’s
communication with the group engagement team

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 Auditing – The Case Book ISA 600

• A request for confirmation from the component auditors that they would cooperate with group engagement
team.
• The ethical requirements that are relevant to the group audit and, in particular, the independence requirements.
• Component materiality and the amount lower than the materiality level for particular classes of transactions,
account balances or disclosures, if applicable and the threshold above which misstatements cannot be regarded
as clearly trivial to the group financial statements.
• Already identified significant risks of material misstatements in the group financial statements, due to fraud or
error that are relevant to the work of the component auditor.
• Request to the component auditor to communicate on a timely basis any other significant risks of material
misstatement of the group financial statements, due to fraud or error, in the component, and the component
auditor’s responses to such risks.
• A list of related parties prepared by group management, and any other related parties of which the group
engagement team is aware. Request the component auditor to communicate on a timely basis related parties not
previously identified by group management or the group engagement team.
• Request the component auditor to communicate mattes relevant to the group engagement team’s conclusion
with regard to the group audit.
• Reporting deadlines by which the component auditor is required to comply.

Examiner Comments

Question 6
This was a straightforward question where the candidates were required to state the key matters which the auditor of a
holding company communicates to the component auditors (ISA 600). This was a high scoring questions and a large
number of students were able to secure full marks also.

Marking Scheme

Marking Scheme: Mark(s)

• 01 mark for identification of each matter / instruction which may be
communicated to the component auditor, subject to a maximum of 08 marks

Suggested Solution:
The following matters may be communicated to the auditor of the subsidiaries (component auditor):
 work to be performed, the use to be made of that work, and the form and content of the component auditor’s
communication with the group engagement team
 A request for confirmation from the component auditors that they would cooperate with group engagement team.
 The ethical requirements that are relevant to the group audit and, in particular, the independence requirements.
 Component materiality and the amount lower than the materiality level for particular classes of transactions, account
balances or disclosures, if applicable and the threshold above which misstatements cannot be regarded as clearly trivial
to the group financial statements.
 Already identified significant risks of material misstatements in the group financial statements, due to fraud or error
that are relevant to the work of the component auditor.
 Request to the component auditor to communicate on a timely basis any other significant risks of material misstatement
of the group financial statements, due to fraud or error, in the component, and the component auditor’s responses to such
risks.
 A list of related parties prepared by group management, and any other related parties of which the group engagement
team is aware. Request the component auditor to communicate on a timely basis related parties not previously identified
by group management or the group engagement team.
 Request the component auditor to communicate mattes relevant to the group engagement team’s conclusion with
regard to the group audit.
 Reporting deadlines by which the component auditor is required to comply.

Examiners’ Comments:
This was a straightforward question where the candidates were required to state the key matters which the auditor of a
holding company communicates to the component auditors (ISA 600). This was a high scoring questions and a large number
of students were able to secure full marks also.

Q.8
Examiners’ Comments:

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 Auditing – The Case Book ISA 600

The question pertained to the planning stage of an audit of consolidated accounts. The students were generally able to
answer the points related to the company Multan Industries Limited (MIL) which had been converted into a subsidiary,
during the year under review. However, most of the students failed to give a proper response as regards Karachi Industries
Limited (KIL). KIL was a group company whose status as a going concern was doubtful and its auditor had issued a
disclaimer of opinion. Usually, in such a situation, the auditor of the holding company assesses the materiality of the
investment and its possible impact on the consolidated accounts and draws up a strategy based on such assessment. Most of
the students could not understand the question. They failed to realize that the audit has already been carried out by KIL’s
auditor and wrote details about the procedures an auditor should follow when the going concern status becomes doubtful.

Q.9

Examiners’ Comments:
Audit approach in case of work performed by other auditor under local standards, was asked. It was expected that students
would consider all aspects of the situation like application of own procedures by principal auditor and consideration of
materiality in case own procedures are not possible. Majority of the students focused only on comparison of local standards
applied by the other auditor with the international standards.

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 ISAs – Application Guide ISA 610

ISA 610
USING THE WORK OF INTERNAL
AUDITORS
QUESTIONS

CONCEPT CHECKERS

Q.1 (i) It is possible to buy in an internal audit service from an external organisation.
(ii) As objectivity is a key issue for internal auditors, they are likely to routinely be involved in operational activities.
(iii) Indicate whether each of the following statements concerning an auditor’s reliance on the work of others is true or
false.
(a) The external auditor may refer to the work of the internal auditor in the auditor report
(b) An external auditor may use an internal auditor for direct assistance with their external audit procedures if not
prohibited by the regulatory body.
(c) An auditor cannot refer to the work of a management’s expert in the auditor’s report

(iv) Which THREE of the following must an external auditor when assessing the potential adequacy of internal audit
work?
(a) The objectives and scope of the internal audit function
(b) The technical competence of internal audit
(c) The reduction in audit fee possible for reliance on internal audit work
(d) The objectivity of the internal audit function
(e) The seniority of the employees who carried out the work

(v) Which of the following steps does NOT need to be performed when using the direct assistance of internal auditors?
(a) Evaluate the competence capabilities and objectivity of the internal auditors
(b) Obtain written agreement from management that the usage of direct assistance is not excessive
(c) Include in the external auditor's working papers the working papers prepared by the internal auditor
(d) Re-performance of the work performed by the internal auditor

(vi) Are the following statements true or false?

1. The external auditor may refer to work of the internal auditors in the audit report.
2. External auditors can assess the specific work of internal audit by re-examining items already examined by the internal
auditors.
(a) 1.True 2. True
(b) 1.False 2. False
(c) 1.True 2. False
(d) 1.False 2. True

(vii) Are the following statements true or false?

1. When the objectives and scope of internal audit work includes evaluation and testing of internal controls over financial
reporting, the external auditor may wish to rely on the work of the internal auditor.
2. Internal auditors can provide direct assistance on any type of audit work.
(a) 1. True 2. True
(b) 1. False 2. False
(c) 1. True 2. False
(d) 1. False 2. True

(viii) Which THREE activities represent work that internal auditors often undertake?
(a) Monitoring of internal controls
(b) Providing an opinion to shareholders on the fair presentation of the financial statements

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 ISAs – Application Guide ISA 610

(c) Reviews of compliance with laws and regulations

(d) Reviews of adequacy of governance arrangements

(ix) There are many similarities between the internal auditor and the external auditor. However, there are some crucial
differences that are important to note.
Which two of the following usually only relate to the internal auditor?
(a) A They provide an opinion on the financial statements
(b) B Their work is focused on the operations of the entire business
(c) C The role can be carried out by employees of the entity
(d) D They are appointed by the shareholders of an entity

(x) Which three of the following activities would typically be performed by both the internal and external auditor?
(a) Review of compliance with laws and regulations
(b) Assessment of the effectiveness of internal controls
(c) Review of the efficiency of operations
(d) Carrying out tests of details on transactions and balances

(xi) Internal and external auditors provide different services to companies.

For each of the following examples, select whether it is a service which would be provided by internal auditors only, by
external auditors only or by either.
(a) Statutory audit
(b) Monitoring of internal controls

(xii) Many of the procedures undertaken by the internal auditor are very similar to those performed by the external
auditor.
Which three of the following may be performed by the internal auditor if he is to operate effectively?
(a) Monitoring of internal controls
(b) Making recommendations regarding improvements to controls
(c) Examining and testing financial information
(d) Expressing an opinion on the truth and fairness of the financial statements

(xiii) Which one of the following best describes the term 'operational audit'?
(a) Any audit performed by the internal auditor
(b) An audit of the operational processes of the organisation
(c) An audit performed by the operations director
(d) A statutory audit

CONCEPT REVIEW QUESTIONS

Q.1 Name three key differences between external and internal audit.

Q.2 Salman Limited (SL), a listed company, is engaged in the manufacturing and sale of Fast Moving Consumer Goods. SL has
approached your firm for conduct of internal audit.
Required:
Write a letter to SL to briefly explain the scope of the proposed internal audit assignment.
(You may assume necessary details) (08)
(ICAP, CFAP 06 Level – Summer 2015)

Q.3 (a) What is the difference in the objective and scope of internal and external audit? (03)
(b) Will you rely on the work of an internal auditor who reports to the Finance Manager of company who largely carries
out certain pre-audit functions such as checking of invoices prior to payments? (03)
(ICAP, CFAP 06 Level – Summer 2002)

Q.4 Explain the Scope and objectives of the internal audit function.
(ICAP, CFAP 06 Level – Winter 1992)

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 ISAs – Application Guide ISA 610

CONCEPT APPLICATION QUESTIONS

Q.1 You are a member of the audit team engaged in the audit of a listed company. At the planning stage the audit in-charge
paid little attention to the internal auditing activity on the pretext that internal auditor generally lacks independence in
performing its duties.
The department is headed by a professional and experienced individual who is a close friend of the Chief Executive Officer
and the General Manager of the company. He utilizes such relations very effectively and applies surprise physical checks,
unplanned investigations and takes on-the-spot corrective measures on detection of errors or flaws in controls. This
approach has reduced the lengthy paper work that is normally seen in internal auditing departments of other companies.
Required:
(a) Assess the internal audit function of the company and its relevance for the external auditors; (07)
(b) Comment on the present approach of the audit in-charge and how it would affect the overall audit performance. (03)
(ICAP, CFAP 06 Level – Winter 2007)

Q.2 M & B Limited is an unquoted public company engaged in the manufacture and marketing of textile products. Its
production facility and head office is located in Karachi. Sales are made through a network of merchants across the
country. The audit of the company is in planning stage and you, in your capacity as audit senior, have been assigned the
task of evaluating the internal audit function of the Company.
The Company has an adequately manned internal audit department (IAD). Scope and objectives of the IAD are determined
by the Audit Committee, which reports directly to the Board of Directors of the Company.
Major functions of IAD include:
(i) Systems review and compliance testing;
(ii) Review of monthly management accounts including variance, trends and ratio analysis;
(iii) Substantive testing as per the overall internal audit plan. The internal audit planning is performed by the head of
internal audit department and approved by the Audit Committee; and
The work and reports of the IAD are reviewed by the Audit Committee on a quarterly basis.
Required:
(a) Explain why an auditor should consider internal audit activities while planning the audit. (02)
(b) Based on the above, perform preliminary assessment of internal audit. Also state further information, if any, regarding
the internal audit function that you may require. (05)
(c) Assuming you have planned to rely on the work of the internal auditor, describe what would you consider in
evaluating specific work of the internal auditor. (03)
(ICAP, CFAP 06 Level – Summer 2004)

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 ISAs – Application Guide ISA 610

SUGGESTED SOLUTIONS

CONCEPT CHECKERS

Q.1
MCQ # Correct Option
(i) True.
(ii) False.
(iii) (a) False, (b) True (c) True
(iv) a, b, & d
(v) d
(vi) d
(vii) c
(viii) a, c, & d
(ix) b&c
(x) a, b, & d
(xi) (a) by external auditor only, (b) by internal auditor
(xii) a, b, & c
(xiii) b

CONCEPT REVIEW QUESTIONS

Q.1
Q.2
Suggested Solution:
The Chief Executive Officer Date: 2 June 2015
Salman Limited
RE: SCOPE OF INTERNAL AUDIT ASSIGNEMENT
Dear Sir,
Based on the discussion and the understanding derived therefrom, we understand that we are required to conduct a
comprehensive internal audit assignment.
Therefore, the scope of our work would be as under:
SCOPE OF INTERNAL AUDIT ASSIGNMENT:
 Developing understanding of risk associated with audit areas and the related controls.
 Controls evaluation, controls testing, potential substantive testing and the formulation of findings in all areas.
 Comparison of policies and procedures adopted by the Company with the best practices and procedures based on our
study for improvement in the existing procedural framework.
 Redesigning of procedures in consultation with management, to achieve the desired objective, in case if the specific test
/ procedure fails to address a desired objective.
 Issuance of a detailed report presenting our schedule of findings / observations and recommendations for
improvements thereof.
 Seeking comments from the management and issuing formal reports.
 Investigate cases of misappropriation, misconduct, fraud.
 Keep audit committee and Board fully informed on a timely basis of the activities of the Internal Auditing Department.
 Communicating with the external auditors to the extent required by the management.
 Review and monitor corrective actions to be taken by the management.
We hope that the above information will suffice your need with respect to scope of our internal audit assignment.
ABC & Company
Chartered Accountants

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 ISAs – Application Guide ISA 610

Examiners’ Comments:
In this question, the candidates were required to explain the scope of the proposed internal audit assignment and were
allowed to assume necessary details. Most of the candidates failed to appropriately explain the scope of internal audit which
may include developing understanding of risks associated with various audit areas and the related controls, control
evaluation, control testing, comparison of policies and procedures, reporting and seeking comments, communication with
audit committee and external auditor, etc. Instead, they wasted time in copying the general points from Application and
Explanatory Material given in ISA-610 ‘Using The Work Of Internal Auditor’ whereas many students stated the contents of
Agreed upon procedures’ report.
Many candidates tried to convert engagement letter of external audit to that of internal audit without appreciating that their
scope and objectives are significantly different.

Q.3

Examiners’ Comments:
(a) of this question students were required to explain the difference between the scope of internal and external audit which
they attempted well.
(b) although the students answered that reliance could not be placed on the internal auditor as he is reporting to the finance
Manager but no one mentioned that he should report to the audit committee and the work of the internal auditor should be
considered in assessment of related components of financial statements.

CONCEPT APPLICATION QUESTIONS

Q.1
Examiners’ Comments:
(a) A large number of students answered this question in a general manner i.e. without giving due consideration to the
situation which was presented in the question. Consequently, they simply listed the various factors that are considered by the
auditor while assessing the internal audit function and consequently secured very few marks. They were expected to highlight
the following issues in their assessment of the Internal Audit Function:
• The Head of Internal Audit (HIA) enjoyed a good position but his close relationship with the top management could
impair his objectivity.
• The scope of his functions is wide and his recommendations are given due consideration.
• HIA seems competent but competence of his staff need to be evaluated.
• His actions lack due professional care as his work is not properly planned and documented.
• An overall view as to whether the internal audit function should be taken into account to modify nature, timing and
extent of audit procedures.
(b) Surprisingly at this level also many students fully agreed with the approach of the audit incharge and declared that since
internal audit function lacks independence it cannot be relied upon altogether. Making such a decision even before making
any assessment of the relevance thereof is not justified. It is generally true that internal audit lacks independence yet some of
its objectives are similar to those of external audit and hence it may be useful.

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 ISAs – Application Guide ISA 620

ISA 620
USE OF EXPERT
QUESTIONS

CONCEPT CHECKERS

Q.1 (i) Indicate whether each of the following statements concerning an auditor’s reliance on the work of others is true or
false
(a) A management’s expert’s work is used by the entity to assist the entity in preparing the financial statements
(b) Both auditor’s and management’s experts refer to individual(s) or organization(s) possessing expertise in
accounting.

(ii) Are the following statements true or false?

1. The audit report must not refer to the work of a management's expert but must refer to the work of an auditor's expert.
2. An auditor's expert may be either an internal expert or an external expert.
(a) 1. True 2. True
(b) 1. False 2. False
(c) 1. True 2. False
(d) 1. False 2. True

(iii) When assessing the adequacy of the work, on which the external auditor has already decided to place reliance, of a
management's expert or auditor's expert, what THREE steps should this include?
(a) Evaluating the relevance and reasonableness of the expert's findings and conclusions
(b) Evaluating the nature and level of expertise of the auditor's expert
(c) Evaluating the relevance and reasonableness of any assumptions and methods used
(d) Evaluating the relevance, completeness and accuracy of any source data used

(iv) Are the following statements true or false?

1. A management expert's work is used by the auditor to assist them in obtaining sufficient appropriate audit evidence.
2. Both auditor's and management's experts refer to an individual or organization possessing expertise in a field other
than accounting or auditing.

(a) 1. True 2. True

(b) 1. False 2. False
(c) 1. True 2. False
(d) 1. False 2. True

(v) There are several instances when an auditor may use the work of others when obtaining sufficient appropriate
evidence. Which TWO of the following could be considered as “other” in this context?
(a) An entity's Non-Executive Directors
(b) An independent quality control reviewer
(c) Internal Audit
(d) Service auditor

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 ISAs – Application Guide ISA 620

CONCEPT REVIEW QUESTIONS

Q.1 During the course of the audit of the accounts of Zafar Corporation Limited for the year ended June 30, 2002, you have
decided to use the work of an Expert as audit evidence. However, before proceeding with the same, you need to discuss
this matter with the management of the Corporation, and for that, you are expected to make a small presentation thereto
which should include such matters as:
(a) circumstances under which you would consider the need to use the work of an expert
(b) consideration which you will have in determining the need to use the work of an expert
(c) consideration which you will have in assessing the professional competence of the expert.
Address these matters in your presentation. (10)
(ICAP, CFAP 06 Level – Winter 2002)

Q.2 Quail & Company, Chartered Accountants has recently been appointed as the external auditor of Penguins Limited
(Penguin) for the year ending December 31, 2010. Penguin uses a fully automated integrated accounting system which
meets all its operational and financial reporting requirements. Quail & Company is considering to hire a firm of
consultants to assist it in evaluating the IT related controls and procedures in order to attain a level of comfort over the IT
controls employed by Penguin.
Required:
(a) List any five important matters which Quail & Company should consider while deciding upon the need to hire a firm of
IT consultants.
(b) Specify the important matters which should be clarified in the agreement with the consultants. (16)
(ICAP, CFAP 06 Level – Winter 2010)

Q.3 Rentals Limited (RL) is a real estate company engaged in the business of renting of office buildings and shopping centres
across the country. The investment properties are carried at fair value. The fair values are determined by an internal
valuer at the end of each reporting period.
Required:
Considering the inherent complexities involved in the determination of fair values of investment properties, discuss the
key controls that RL is expected to employ while carrying out the valuation internally. (09)
(ICAP, CFAP 06 Level – Winter 2015)

CONCEPT APPLICATION QUESTIONS

Q.1 You are the audit manager of Paidar Tameerat Limited (PTL) for the year ended 31 May 2012. PTL is a listed company
and is engaged in the construction of high rise buildings including residential and commercial complexes.
Last year serious differences of opinion had arisen with the management of PTL while determining the stage of
completion of certain projects. The matter was ultimately resolved after an independent valuer had rendered a report and
on which the auditor had placed reliance. This year the management has employed an engineer to monitor the various
projects. The engineer has reported minor discrepancies in the estimates provided by various project managers.
Required:
Assess the above situation and discuss how you would address the related issues during the course of the audit. (07)
(ICAP, CFAP 06 Level – Summer 2012)

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SUGGESTED SOLUTIONS

CONCEPT CHECKERS
Q.1
MCQ # Correct Option
(i) (a)True, (b) False
(ii) (d)
(iii) (a), (c), (d)
(iv) (d)
(v) (c), (d)

CONCEPT REVIEW QUESTIONS

Q.1 (a) circumstances under which you would consider the need to use the work of an expert
 Actuarial calculations (e.g. pension calculation)
 Engineering data (e.g. estimation of life of machinery)
 Valuations (e.g. valuation of fixed assets, or specialized inventory).
 Analysis of complex or unusual tax compliance issues.
 IT Expertise.
 Legal Opinions.

(b) consideration which you will have in determining the need to use the work of an expert
This decision depends on:
1. Factors with regard to matter:
a. Significance of the matter.
b. Risk of the matter.
c. Nature of procedures to be performed to address risk.
2. Factors with regard to management’s expert:
a. Whether Management's expert is Competent, Capable, and Objective; and his work is Appropriate.
b. Scope and objective of expert’s work
c. Entity’s controls over management’s expert
3. Whether auditor himself possesses necessary expertise (from his education, experience, discussion with
other auditors).

(c) consideration which you will have in assessing the professional competence of the expert.
Competence relates to required knowledge and skills to perform tasks.

We shall consider following factors in assessment of competence:

 Personal experience with previous work of that expert.
 Discussions with that expert.
 Discussions with other auditors or others who are familiar with that expert’s work.
 Knowledge of that expert’s qualifications, membership of a professional body or industry association, license to
practice, or other forms of external recognition.
 Published papers or books written by that expert.

Examiners’ Comments:
It was a very simple question taken directly from the standards. Students answered this question well and secured good
marks.
(a) Most of the students were able to identify the circumstances where there is a need for using the work of an expert like
valuation of certain types of assets, quantity of physical condition of assets (like numerals stock piles), actuarial valuation,
legal opinions and contracts work in progress.
(b) Most of the students were not able to identify the considerations in determining the need to use work of an expert, like,
materiality of the financial statements being considered, risk of mis-statements based in the nature and complexity of the
matter being considered and quantity and quality of the audit evidence available.
(c) This part of the question was answered well by all the students. Factors like professional certification, licencing by or
membership, experience and reputation in the field in which the auditors is seeking audit evidence were identified.

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 ISAs – Application Guide ISA 620

Q.2 (a)While employing an IT Consultant, Quail & Co. should consider the following:
4. Significance of the matter i.e. how much significant role IT system plays in financial reporting.
5. Risk of the matter i.e. is this system complex, are there any frequent changes/updations.
6. Nature of the procedures to be performed i.e. how much Computer Assisted Audit Techniques (CAATs) will be
used.
7. Does firm itself has necessary expertise to evaluate client’s system, or to evaluate adequacy of expert’s work.
8. Is expert competent, capable and independent from entity.
9. How much scope of work is necessary to obtain sufficient appropriate audit evidence over operations of IT
system.

(b)
1. The nature, scope and objectives of expert’s work.
2. The respective roles and responsibilities of the auditor and expert e.g.
a. Who will perform detailed testing of source data,
b. Consent of expert to discuss findings or conclusion with entity, details to be included in modified
opinion (if necessary).
c. Informing expert if auditor concludes expert’s work is not adequate
d. Access and Retention of working papers (if not agreed, expert’s working papers are his own)
3. The nature, timing and extent of communication between the auditor and expert, including the form of any
report to be provided by that expert; and
4. Confidentiality requirements to be observed by expert. (confidentiality requirements, that apply to auditor, also
apply to expert).

Examiners’ Comments:
(a)This was an easy question. However, a large number of students were unable to specify the matters which Quail &
Company should consider while deciding upon the need to hire a firm of IT consultants.
(b) This was the easiest of questions and almost all students did well.

Q.3 Internal Controls over management’s expert may include:

 Professionals involved in the valuation of property must be different from those involved in the acquisition of
property.
 There should be policies and procedures to ensure that only competent, capable and objective professionals are
used as expert to value investment properties.
 An agreement should be made with expert detailing nature, scope and objective of valuation, roles and
responsibilities, and nature, timing and extent of communication.
 Policies and procedures to ensure accuracy and completeness of source data.
 Assumptions and methods should be approved by directors or other appropriate authoriy.
 Findings and conclusions should be compared with estimated/budgeted values.

Examiners’ Comments:
This part of the question related to the controls that an entity would employ where it used internal valuers for determining
fair value of investment properties. A large number of the candidates did not perceive the question correctly and restricted
their response only to the assessment of the expert, his qualification and set of skills. They failed to specify the controls that
are employed in such situations such as controls over the development and use of evaluation model, segregation of duties,
completeness, relevance and accuracy of data, etc. Further, many candidates discussed totally irrelevant things such as:
 Inherent complexities of the fair value estimates;
 Complexities involved in hiring an external valuer.

Author’s Comments:
In my opinion, allocation of 09 marks to such a question is unfair. This question should have 5-6 marks at most.

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 ISAs – Application Guide ISA 620

CONCEPT APPLICATION QUESTIONS

Q.1 (i) The engineer is a managements’ expert, employed by management.

(ii) If auditor decides to use information prepared by Management’s Expert as audit evidence, auditor is required to:
1. Evaluate competence, capabilities and objectivity of that expert.
2. Obtain an understanding of field of that expert.
3. Evaluate the appropriateness of expert’s work.

(iii) Auditor can also perform following procedures to determine appropriateness of stage of completion of projects:
 Verification of actual cost incurred to date, and comparing it with budgeted cost of projects.
 Analysis of subsequent costs incurred on completed projects.

(iv) If there are significant differences in costs incurred, auditor shall not rely on report of management’s engineer.
(v) Auditor shall revise his risk assessment, and shall engagement auditor’s expert to obtain evidence in this case.

Examiners’ Comments:
Initially it seemed an easy question which required the students to discuss various issues related to the use of an expert. A
large number of students restricted their discussions to assessing the competence of the expert and assessing as to
whether the auditor can rely on the work of the expert. The use of the term “discuss the related issues” meant that the
requirement went beyond that.

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 ISAs – Application Guide ISA 700

ISA 700
FORMING AN OPINION AND
REPORTING ON FINANCIAL
STATEMENTS
QUESTIONS

CONCEPT CHECKERS

Q.1 (i) According to ISA700 Forming an opinion and reporting on financial statement, which THREE of the following should
always be included within the auditor’s report?
(a) The auditor’s opinion on the financial statements
(b) The financial framework used
(c) The materiality level
(d) A description of the audit scope
(e) Name of engagement partner

(ii) Are the following statements true or false?

1. If a company includes supplementary information as an integral part of the financial statements even though not
required by the applicable financial reporting framework, then the supplementary information will be within the scope of
the audit opinion.
2. If an auditor has been required to comply with local auditing standards and has also complied with ISAs then the
auditor can never refer to compliance with ISAs in the audit report.

(a) 1. True 2. True

(b) 1. False 2. False
(c) 1. True 2. False
(d) 1. False 2. True

(iii) Are the following statements true or false?

1. The auditor's report should include a description of the audit.

2. The auditor's report does not need to be in writing. It can take the form of a presentation at the annual general meeting.

(a) 1. True 2. True

(b) 1. False 2. False
(c) 1. True 2. False
(d) 1. False 2. True

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 ISAs – Application Guide ISA 700

(iv) Are the following statements true or false?

1. ISA 701 requires the audit reports on financial statements of listed entities to include a description of key audit matters.
2. Communicating key audit matters in the auditor's report is not a substitute for the auditor expressing a modified
opinion.

(a) True 2. True

(b) False 2. False
(c) True 2. False
(d) False 2. True

(v) According to ISA 700 which THREE of the following should be included within the auditor's report?
(a) Management's responsibilities
(b) Auditor's responsibilities
(c) Details of uncorrected misstatements
(d) Auditor's opinion on the financial statements

(vi) Which ONE of the following statements is true?

(a) ISA 700 requires the auditor to form an opinion on the financial statements based on an evaluation of the
conclusions drawn from the audit evidence obtained
(b) ISA 700 requires the auditor to communicate to TCWG and management all identified deficiencies in internal
control
(c) ISA 700 requires the auditor to communicate to those charged with governance the responsibilities of the
auditor in relation to the financial statements audit
(d) ISA 700 requires the auditor to prepare documentation that provides a sufficient and appropriate record of the
basis for the auditor's report

(vii) Which three of the following statements best describe auditor’s responsibility in case of Group Audit?
(a) Auditor is responsible to obtain sufficient appropriate audit evidence regarding the financial information of all
entities within the group, whether significant or not.
(b) The auditor is responsible for the direction, supervision and performance of the group audit, even if he engages
a component auditor.
(c) The auditor remains solely responsible for the auditor’s opinion, even if he engages a component auditor.
(d) Group auditor has to comply with ethical requirements applicable on component auditor.

CONCEPT REVIEW QUESTIONS

Q.1 Identify the differences between the auditor’s report on financial statements of a listed company as compared to an
unlisted company, based on International Standards on Auditing. (04)
(ICAP, CFAP 06 Level – Winter 2016)

CONCEPT APPLICATION QUESTIONS

None.

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 ISAs – Application Guide ISA 700

SUGGESTED SOLUTIONS

CONCEPT CHECKERS

Q.1
MCQ
Correct Option
#
(i) a, b & d
(ii) c
(iii) c
(iv) a
(v) a, b & d
(vi) a
(vii) a, b & c

CONCEPT REVIEW QUESTIONS

Q.1
Element of Audit report Additional Requirements for audit report in case of Listed Company (by ISAs)
Key Audit Matters KAMs are required in audit report of listed company.
This section shall describe auditor’s responsibility:
Auditor’s Responsibilities for the  To communicate Statement of compliance with ethical requirements to
Audit of the Financial Statements TCWG.
 To communicate Key Audit Matters to TCWG
Name Name of engagement partner is required for listed company.
For unlisted companies, this section is included only if auditor has obtained such
Other Information
information at time of report.

Examiners’ Comments:
The overall performance was below average although some of the students (about 2%) did really well and secured full marks
also. About 15% of the students could not secure any mark and most of them stated that there are no differences between the
two reports. Many candidates identified the key audit matters as the only difference.

Author’s Comments:
Difference between ISA and Companies Act report include Four Additional Opinions, Signature, and Name of Engagement
Partner.

CONCEPT APPLICATION QUESTIONS

None.

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 ISAs – Application Guide ISA 701

ISA 701
KEY AUDIT MATTERS
IN AUDIT REPORT
QUESTIONS

CONCEPT CHECKERS
MCQs
Q.1 (i) Are the following statements true or false?

1. Key audit matters must be included in the auditor's report on the financial statements of all audited entities
2. An area of higher assessed risk of material misstatement may be considered a key audit matter.

(a) 1. True 2. True

(b) 1. False 2. False
(c) 1. True 2. False
(d) 1. False 2. True

(ii) Smith plc is required to apply ISA 701, Communicating Key Audit Matters in the Independent Auditor's Report.
Which one of the following may not be key audit matters?
(a) Areas of high audit risk
(b) Areas in relation to which the auditor expresses a separate opinion
(c) Areas of significant auditor judgement
(d) Significant transactions or events

(iii) Which of the following statements is correct in accordance with ISA 701:
(a) Auditor omits key audit matter section in his report if he expresses adverse opinion on financial statements.
(b) If auditor determines valuation of intangible assets to be a Key Audit Matter but there is pervasive scope
limitation in area of property plant and equipment, auditor cannot include valuation of intangible assets as key
audit matter.
(c) If there is no key audit matter on a listed audit client, key audit matter section is not included in audit report.
(d) ISAs do not allow auditor to include key audit matter in case of unlisted audit client.

True-False

Q.2 (i) If auditor expresses qualified opinion, he must refer to basis of qualified opinion in key audit matter section.
(ii) A matter cannot be determined as key audit matter if it is not already communicated to TCWG.

Fill in the blanks

Q.3 (i) Definition of Key Audit Matters is given below. Fill the words left blank.

Those matters that, in the ①_______ professional judgment, were of ②_______ in the audit of the financial statements of
the③_______. Key audit matters are selected from matters communicated with④_______.

CONCEPT REVIEW QUESTIONS

None.

1
 ISAs – Application Guide ISA 701

CONCEPT APPLICATION QUESTIONS

Q.1 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.

Key audit matter How our audit addressed key audit matter
In the course of conducting a sales tax Our key audit procedures in this area included amongst others were:
audit for the period from January 2019  We reviewed the correspondence of the company with relevant tax
to December 2019, FBR raised certain authorities and tax advisors including judgements or orders passed
issues with respect to the company’s by the competent authorities.
sales. On May 2020, the company  We also obtained and reviewed confirmations from the company’s
received an order in which demand of external tax advisor for the latest status of the case.
Rs. 100 million was raised. The company  We involved internal tax experts to assess and review the
has filed an appeal with the appellant management’s conclusion on this matter.
board and is confident that it would be  We verified all the journal entries posted in the ledgers related to
decided in company’s favour. legal expenses.
Due to the materiality and significance of  We obtained representation from the management regarding the
the above matter we have considered favourable outcome of the matter.
this tax contingency as a key audit Based on the procedures performed, we concluded that there is no
matter. material misstatement and contingency has been adequately disclosed.

Required:
Critically analyse the Key Audit Matter section of the audit report. (13)
(ICAP, CFAP 06 Level – Winter 2020)

Q.2 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 details where required) (10)
(ICAP, CFAP 06 Level – Summer 2019)

Q.3 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)
(ICAP, CFAP 06 Level – Summer 2018)

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 ISAs – Application Guide ISA 701

Q.4 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)
(ICAP, CFAP 06 Level – Winter 2017)

Q.5 You are a partner in a firm of Chartered Accountants. Annual audits of various clients are at finalization stage and since
this is the first time that ISA related to Key Audit Matters is to be applied, several issues have been referred to you for
guidance. These include:
(a) An adverse report is being issued in the case of Muneer Limited. The draft report also contains certain matters as Key
Audit Matters. (02)
(b) A qualified report has been drafted by the audit manager of Nadir Limited as the company has failed to make adequate
provision of contingency. The details of qualification are mentioned in the Key Audit Matters section. (03)
(c) The Key Audit Matters section of audit report of Zia Limited includes details of Key Audit Matters of only the current
period. However, the opinion has been expressed on current as well as prior year. (03)
(d) At one of the listed clients, investigation by a Government agency against some of its staff members is in progress. Due
to sensitivity of the matter the management has requested you to not to include such information in the Key Audit Matters
section. (03)
Required:
Advise the concerned partners/managers with respect to the above matters.
(ICAP, CFAP 06 Level – Winter 2016)

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 ISAs – Application Guide ISA 701

SUGGESTED SOLUTIONS

CONCEPT CHECKERS
Q.1 (i) d
(ii) b
(iii) b

Q.2 (i) True

(ii) True

Q.3 (i) ①auditor’s, ②most significance, ③current period, ④those charged with governance

CONCEPT REVIEW QUESTIONS

None.

CONCEPT APPLICATION QUESTIONS

Q.1
Error Suggestion/Correction
The auditor shall describe each key audit matter, using an appropriate
No sub-heading included for key audit matter.
subheading.
While describing why matter was determined Significance should also be discussed on the basis of risk, judgments
KAM, only materiality is discussed. involved.
Instead of referring to notes, original Such detailed information about the matter should be included in notes
information has been discussed in Key Audit to the account. If it is not available there, auditor should ask
Matter section. management to include it in notes.
Irrelevant and detailed procedures have also Procedures regarding verification of journal entries and obtaining
been mentioned in how the auditor addressed representation from management should be not be included in the
KAM. section.
Last sentence of the section gives perception KAM should not include language which imply that auditor is expressing
as if auditor is expressing opinion on an opinion on specific elment (particularly in the presence of adverse
element of financial statements. opinion on financial statemetns).

Q.2
Key Audit Matter How the matter was addressed in our audit
(i) Acquisition of subsidiary during the year:
Refer note xxx to the financial statements. The company  Checked approval of board and members for acquisition.
has acquired 65% shares in Pyrus Limited.  Obtained revaluation report from valuer and discussed
with management and expert appropriateness of
We identified this transaction as a Key Audit Matter assumptions and methodologies used for valuation.
because its amount is significant to the financial  Corroborated the assumptions and other data used in
statements. valuation, with market and our understanding.
In addition, there is also higher risk of material  Ensured that fair value adjustments, goodwill and other
misstatement in this transaction because of valuation of intangibles are appropriately recorded in accounts.
assets and liabilities (particularly goodwill and other  Assessed the adequacy of disclosures related to
intangibles). acquisition of subsidiary in notes to the accounts.

(ii) Major Development Project:  On a sample basis, tested cost incurred with supporting
Refer note xxx to the financial statements. The company documents and contracts.
entered into a major project.  Analyzed nature of expenditure to evaluate whether
expenditure meets criteria for capitalization as per
We identified this project as a Key Audit Matter because applicable accounting standards.
its amount is significant to financial statements.  Inspected supporting documents (e.g. completion report)

4
 ISAs – Application Guide ISA 701

In addition, there is also risk of misclassification between to confirm date when asset is available for use and
revenue and capital expenditure incurred on the project. ensured it has been capitalized from that date.
 Assessed reasonableness of useful life of transmission
lines.
 Tested calculation of depreciation expense.
 Assessed the adequacy of disclosures related to
development project in notes to the accounts.

Q.3
Key Audit Matter How the matter was addressed in our audit
1. Litigation:  We reviewed the correspondence of competitor and entity to
Refer note xxx to the financial statements. understand the issue involved.
Company has litigation pending against it.  We circularized confirmation to company’s lawyer for their views
on expected outcome and financial implications involved.
We identified litigation as a Key Audit Matter  We used our own legal expert to assess outcome and financial
because it requires significant judgment to implications. We also reviewed some precedents on this matter.
assess the outcome (i.e. level of provisions and  We inquired management and TCWG about likely out of court
disclosures) of litigations. settlement.
 Evaluated the adequacy of disclosures in financial statements.

Q.4

Key Audit Matter How the matter was addressed in our audit
(i) Tax contingencies:  We circularized confirmation to company’s external tax
Refer note xxx to the financial statements. Company has a consultants for their views on tax assessment, and
number of tax contingencies. discussed the rationale and justification of their views.
 We used our own tax specialist to consider the level of
We identified tax contingencies as a Key Audit Matter provision required considering nature of case, legal
because of significance of amounts involved, and precedents, and company’s correspondence with the tax
judgments involved to assess the outcome (i.e. level of authorities.
provisions and disclosures) of tax litigations.  We analyzed significant changes from prior period.
 Assessed the adequacy of disclosures related to tax
contingencies in notes to the accounts.
(ii) Related party transactions and disclosures:  Obtained understanding of controls over identification,
Refer note xxx to the financial statements. Company has recording and disclosure of related party transactions.
many related party transactions mainly with subsidiaries Also, tested such controls.
and associated companies.  Inspected minutes of BOD meetings and shareholders’
meetings to understand nature and approval of
We identified related party transactions as a Key Audit transactions.
Matter because of nature of such transactions and its  On a sample basis, compared transactions with related
significance to the financial statements as a whole. parties with underlying supporting documents and
agreements.
 Obtained confirmation (on sample basis) from related
parties for transactions and balances.
 Assessed the adequacy of disclosures related to related
parties in notes to the accounts.
5. Non-current assets held for sale:  Discussed with management regarding their plan to
Refer note xxx to the financial statements. Company has dispose-off the asset. Checked status of sales process and
classified some of its non-current assets as held for sale. reviewed correspondence with prospective buyers.
 Reviewed board-minutes to confirm approval of disposal
We identified non-current assets held for sale as a Key of assets.
Audit Matter because this is a non-routine transaction,  Assessed competence, capability and objectivity of
involving significant management judgments. Further, expert.
there are also requirements regarding determination of  Obtained revaluation report from valuer and discussed
fair value, presentation and disclosures relating to assets with management and expert appropriateness of
held for sale. assumptions and methodologies used.
 Assessed the adequacy of disclosures related to non-
current assets held for sale in notes to the accounts.

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 ISAs – Application Guide ISA 701

Q.5 (a) Key Audit Matter section should still be included in audit report even if a qualified or adverse opinion is expressed.
In Key Audit Matter section:
 Auditor shall refer to basis of adverse opinion section where matter giving rise to modified opinion is explained.
 Description of other key audit matters should not give image as financial statements are more credible with
respect to these matters, in view of the adverse opinion.

(b) Details of qualification should not be mentioned in Key Audit Matter section.
Although the matter causing qualification in opinion is (by definition) Key Audit Matter, however its detail should be
included in “basis of qualified opinion” to make it more prominent. Reference to the basis for qualified opinion is to be
included in the Key Audit Matter section.

(c) Only those matters are reported as Key Audit Matters which relate to current year (even if opinion is expressed on two
years).
Therefore, it is appropriate not to include Key Audit Matters in respect of previous year (unless they are also significant
for current year).

(d) A key audit matter is not included in the audit report if auditor determines that adverse consequences of
communication will be more than pubic interest benefits.
Therefore, it is appropriate not to include such information in key audit matter.

Examiners’ Comments:
(a)Majority of the students could not explain the main issue i.e. that other key audit matters can be reported in the case of an
adverse report also but reporting of such matters does not imply that the financial statements as a whole are more credible
than would be appropriate in the circumstances. Many students were of the view that Key Audit Matters are not reported
where an adverse report is issued.
(b)This was fairly answered by majority of the students as they correctly identified that matters giving rise to a qualification
are not discussed again in the Key Audit Matters section, however, reference to basis of qualified opinion is included therein.
(c)Average performance was witnessed in this part as only about 50% of the students could state categorically that prior
period items would not be included in Key Audit Matters even if opinion in the audit report has been expressed in respect of
current as well as the prior period.
(d)This proved difficult as only few candidates were able to specify the circumstances under which the client’s request for
non-disclosure could have been accepted by the auditor. Most of the students were of the view that the matter had to be
disclosed in any case.

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 ISAs – Application Guide ISA 705

ISA 705
MODIFICATIONS TO THE OPINION
QUESTIONS

CONCEPT CHECKERS

Q.1 (i) Indicate whether each of the following statements concerning the auditor’s report is true or false.

(a) The ‘basis for modification’ section should always be placed after the opinion section:
 True  False

(b) An ‘emphasis of matter’ section should be placed before the audit opinion:
 True  False

(c) An ‘other matter’ section should always be placed immediately after the audit opinion:
 True  False

(ii) An auditor has completed the audit of an entity and is forming the opinion. There is insufficient evidence to support
the financial statements that in the auditor’s opinion is material and pervasive.

What type of audit opinion should be auditor issue?

 Qualified  Adverse
 Disclaimer  Unmodified

(iii) An auditor has completed the audit of an entity and is forming the opinion. The auditor has been unable to obtain
sufficient appropriate evidence over non-current assets in the financial statements though this does not represent a
substantial proportion of the financial statements.

What types of opinion should be the auditor issue?

 Qualified  Adverse
 Disclaimer  Unmodified

(iv) An auditor has completed the audit of an entity and is forming the opinion. Inventories are materially misstated. In
addition receivables are materially misstated and together with the inventory misstatement this represents a substantial
proportion of the asset value of the entity.

What type of audit opinion should the auditor issue?

 Qualified  Adverse
 Disclaimer  Unmodified

(v) An auditor has completed the audit of a company's financial statements and is forming the audit opinion. There is a
misstatement in the financial statements which in the auditor's opinion is material and pervasive.

What type of opinion will the auditor issue?

 Qualified  Adverse
 Disclaimer  Unmodified

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(vi) An auditor has completed the audit of a company and is forming the audit opinion. Inventories are materially
misstated and management will not amend the misstatement. The misstatement is confined to one element of the
financial statements and is not considered pervasive.

What type of opinion would the auditor issue?

 Qualified  Adverse
 Disclaimer  Unmodified

(vii) An auditor has completed the audit of a company's financial statements and is forming the audit opinion. The auditor
was unable to obtain sufficient appropriate evidence relating to an investment which represented 90% of the company's
net assets.

What type of opinion would the auditor issue?

 Qualified  Adverse
 Disclaimer  Unmodified

(viii) Which THREE of the following are types of modification to the audit opinion?
 Qualified  Other matter paragraph
 Adverse  Disclaimer

(ix) Which THREE of the following describe the characteristics required for matters to be considered pervasive?
(a) Represent a substantial proportion of the financial statements
(b) Not confined to specific elements in the financial statements
(c) Also present in the previous year
(d) Fundamental to users understanding (for disclosures)

(x) In which TWO circumstances will an auditor need to modify the audit opinion?
(a) If the auditor is unable to obtain sufficient appropriate evidence to form a conclusion
(b) If the auditor agrees that there is material uncertainty in relation to the ability of the entity to continue as a
going concern which has been disclosed properly
(c) If the auditor concludes that the financial statements are not free from material misstatement
(d) If the auditor believes that there are significant deficiencies in internal control, that have not caused a material
misstatement in the current financial year

(xi) Which TWO of the following are examples of circumstances where a modification could be required because the
financial statements are materially misstated?
(a) There are material uncorrected misstatements
(b) Accounting records have been destroyed in a fire
(c) Selected accounting policies have not been properly applied
(d) Management would not allow the auditors access to key personnel

(xii) Which statement best describes what happens if Management/Those Charged With Governance impose a limitation
on the scope of a proposed audit engagement, where such a limitation would result in a disclaimer of opinion?
(a) The auditor should always decline/withdraw from the engagement
(b) The auditor should decline /withdraw from the engagement if local regulations permit
(c) The auditor should accept/continue with the engagement but modify the audit opinion as required
(d) The auditor should accept/continue with the engagement but design actions to overcome the limitations being
imposed.

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CONCEPT REVIEW QUESTIONS

Q.1 State the types of opinions expressed by an auditor’s report and discuss the circumstances in which the auditor’s opinion
need to be modified. (05)
(ICAP, CFAP 06 Level – Summer 1982)

Q.2 (a) Is it important that errors found during audit are discussed with the client promptly and not left until the end of the
audit? Support your answer with reasons. (05)
(b) State the duty of auditors and the disclosure requirements in the event of a change in accounting policy by a listed
company. (05)
(ICAP, CFAP 06 Level – Summer 1995)

Q.3 What are the basic elements of the Auditor’s report?

(ICAP, CFAP 06 Level – Winter 1998)

Q.4 (a) Distinguish between a limitation on the scope of the auditor’s work imposed by the entity and a limitation in this
respect imposed by circumstances. Support your answer with examples in your distinction. (03)
(b) What disclosure is required by the auditor in his report when there is a limitation on the scope of his work that
requires expression of a qualifies opinion or disclaimer of opinion? (03)
(ICAP, CFAP 06 Level – Summer 1998)

Q.5 There are circumstances in which auditors should qualify their opinions in reporting on financial statements and other
circumstances in which they should disclaim an opinion on the financial statements.

Explain the general nature of the circumstances that would make each course necessary. (10)
(ICAP, CFAP 06 Level – Summer 1997)

Q.6 Distinguish the circumstances in which a qualified opinion or an adverse opinion or a disclaimer of opinion may be
expressed in an audit report.
(ICAP, CFAP 06 Level – Summer 1989)

Q.7 In case of industries working on seasonal basis, is it permissible to adjust depreciation in order to give effect to the length
of seasonal operations? (03)
(ICAP, CFAP 06 Level – Winter 1996)

Q.8 (a) What is an accounting policy? (04)

(b) List the accounting policies which are required to be disclosed by a listed company? (08)
(c) State whether a change in the method of calculation of the depreciation is a change in an accounting policy or it is a
change in accounting estimate. (02)
(d) State disclosure requirement in respect of a change in the accounting policy. (02)
(ICAP, CFAP 06 Level – Summer 1992)

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CONCEPT APPLICATION QUESTIONS

Q.1 Items (i) to (xv) listed below present various situations an auditor might encounter in conducting an audit of financial
statements. For each situation describe the type of opinion to be issued by the auditor i.e. unqualified opinion, emphasis
of matter, qualified opinion, disclaimer of opinion, adverse opinion.
Do not draft qualifications.
(i) The financial statements of a listed company do not disclose significant related party transactions.
(ii) A client changes its accounting policy for valuation of inventories from FIFO to Moving Average Cost Method.
The auditor concurs with the change although it has a material effect on the comparability of the financial statements.
(iii) An auditor is engaged to audit a client’s financial statements after the annual physical inventory count. The
accounting records are not sufficiently reliable to enable the auditor to become satisfied as to the year end inventory
balances.
(iv) A client has significant amount of deposit in a bank which is under liquidation. Pending completion of liquidation
proceedings of the bank, no provision has been made in the accounts. This matter is adequately disclosed in the financial
statements.
(v) A client has significant amount of receivable which is disputed by the customer and the matter is under litigation.
Pending adjudication in court, no provision has been made in the accounts. This matter is adequately disclosed in the
financial statements.
(vi) The financial statements of a listed company do not disclose remuneration paid to chief executive, directors and
executives of the company.
(vii) The financial statements of a listed company do not include a cash flow statement.
(viii) Due to losses and adverse key financial ratios, an auditor has substantial doubt about a client’s ability to continue as
a going concern for a reasonable period of time. Despite the material uncertainty, the auditor concludes that the use of
going concern assumption is appropriate based on management’s plans to deal with the events and conditions that raise
doubt about the going concern. The client has adequately disclosed its financial difficulties in a note to its financial
statements, which do not include any adjustments that might result from the outcome of this uncertainty.
(ix) The chief executive officer refuses the auditor access to minutes of board of directors’ meetings.(x) The auditor is
unable to obtain audited financial statements of a consolidated subsidiary.
(xi) Previous year’s financial statements were audited by another firm of chartered accountants who issued an
unqualified audit opinion thereon.
(xii) Certain material transactions cannot be tested because of management’s retention policy related to records.
(xiii) Management does not provide reasonable justification for a change in accounting policy.
(xiv) The client refuses to permit the auditor to confirm certain significant accounts receivable or apply alternative
procedures to verify these balances.
(xv) The chief executive officer is unwilling to sign the management representation letter (15)
(ICAP, CFAP 06 Level – Summer 2002)

Q.2 You have encountered following independent situations in conducting an audit of a manufacturing company. For each
situation select the type of opinion you consider suitable and give reasons for your choice. Assume that each situation has
a material impact on the financial statements.

(a) You were appointed as auditor after the year end date and the accounting records are not sufficiently reliable to
ensure accuracy of the year end inventory balances. (02)
(b) Gratuity and pension liabilities recorded on the basis of workings prepared by client were reasonably close to the
liability assessed by the actuary. Small errors found in the data used by the actuary may have impact on actuarial
computation to a maximum of 5% of gratuity and pension liability. (02)
(c) A term deposit of Rs. 10 million with a bank has been carried in the financial statements at cost. The bank has filed a
voluntary liquidation petition subsequent to the year-end date and the net realisable value of the deposit is not more than
20% of cost. (02)
(d) The company changed its method of inventory valuation from FIFO to average. You concur with the change although it
has a material effect on the comparability of the financial statements. (02)
(e) Financial statements do not disclose certain long-term obligations (02)
(ICAP, CFAP 06 Level – Summer 2004)

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Q.3 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 plants for production. (10)

Required:
Discuss your firm’s course of action along with the implications on the audit report.
(ICAP, CFAP 06 Level – Summer 2019)

Q.4 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 million respectively.
(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 the audit report. (12)
(ICAP, CFAP 06 Level – Winter 2018)

Q.5 (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)

(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 reluctant to disclose in the financial statements, the circumstances that lead to the impairment of
plant and machinery.
Required:
Evaluate the above situation and state the implications on the audit report, if any. (05)
(ICAP, CFAP 06 Level – Winter 2017)

Q.6 You are the audit incharge of Domestic Appliances Limited, a listed company, for the year ended 31 March 2015. The draft
financial statements disclose profit before tax of Rs. 1.2 billion (2014: Rs. 0.98 billion) and total assets of Rs. 15.5 billion
(2014: Rs. 13.8 billion) Company’s products are covered under warranty arrangements for twelve months. The company
has changed its policy for recording warranty expense from cash basis to accrual basis. The company has made provision
for warranty claims equal to twelve times the actual warranty claims of March 2015.

Required:
Analyse the above situation and discuss how you would deal with it in your audit. (07)
(ICAP, CFAP 06 Level – Summer 2015)

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Q.7 (a) Haali Limited has a policy to carry its buildings at revalued amounts. At the balance sheet date i.e. 31 December 2012,
the valuer had finalised the valuation reports of only 3 out of a total of 8 properties. According to these reports these
properties were assigned a valuation of Rs. 50 million as against the carrying amount of Rs. 62 million.
Required:
Evaluate the above condition and discuss the impact on the audit report in each of the following situations:
(i) The impairment of Rs. 12 million is recorded in the financial statements.
(ii) The impairment is not recorded. (06)

(b) During the year ended 31 December 2012 Chiragh Limited has changed its policy for valuation of investment in a
subsidiary from the ‘fair value’ to ‘cost’. Had the company continued with its previous policy for valuation of investment at
‘fair value’, the subject value would have been reduced by Rs. 50 million.
Required:
Discuss the matters which you should consider in respect of the above situation and the possible impact thereof on the
audit report. (04)
(ICAP, CFAP 06 Level – Summer 2013)

Q.8 The following situations have arisen at different audit clients of your firm:

(a) Zafar Technology Limited (ZTL), a listed company, is engaged in the manufacture of compressors used in electrical
appliances. During the conduct of the audit for the year ended 31 March 2012, a team member has discovered a letter
dated 18 March 2012 from Sartaj Electronics Limited (SEL) which states that SEL will not pay the current outstanding
invoices as according to it the compressors supplied by ZTL are of an incorrect specification.
ZTL’s Technical Director believes that the problem arose due to changes in the design of appliances produced by SEL and
not because of faulty production by ZTL. However, both the companies have agreed to refer the matter to arbitration.
Sales to SEL account for approximately 25% of the revenue of ZTL and the balance due from SEL as at 31 March 2012
amounted to Rs. 3.12 million. The profit after taxation of ZTL is Rs. 25 million with an asset base of Rs. 150 million. (07)

(b) The directors’ report of XCP Limited states without any further explanation that the 20% increase in profit as
compared to the previous year is due to increase in sales and austerity measures introduced by the management. The
income statement for the year shows an increase in profits and sales amounting to Rs. 20 million and Rs. 8 million
respectively whereas the costs have reduced by Rs. 12 million. A review of your working papers however indicates that
costs have reduced mainly on account of reduction in import duty on certain raw materials. (04)

(c) IPL is a manufacturer of diversified products and has factories in seven major cities of the country. The demand for
some of its products has been falling and the company wants to concentrate on its core products only. Consequently, it
has decided to close three of its factories and has made a provision of Rs. 30 million in respect of redundancies and
restructuring. The directors’ report for the year ended 31 May 2012 comprehensively discusses the restructuring plan
and states that the factories in Lahore and Multan would be closed in the months of July and September 2012
respectively. The third factory will be closed before December 2012 however, the location of that factory will be decided
in November 2012.
The profit after taxation of IPL according to its draft financial statements for the year ended 31 May 2012 is Rs. 80 million.
(06)
Required:
Discuss the matters which the auditor should consider for each of the above situations and the possible impact thereof on
the respective audit reports.
(ICAP, CFAP 06 Level – Summer 2012)

Q.9 Ranjha Limited (RL), a listed company, is engaged in the manufacture of fast moving consumer goods. The draft financial
statements for the year ended March 31, 2011 show a profit before taxation of Rs. 12 million and total assets of Rs. 300
million.
As the audit manager, you are reviewing the following issues which were brought to your notice by the audit team:

(i) On June 1, 2010 RL acquired a plant at a cost of Rs. 50 million. The plant has a useful life of 10 years with no residual
value. RL follows the policy to depreciate the plant on the straight line method. On January 1, 2011 the plant suffered
physical damage due to a fire in the factory. The technician from the manufacturer has inspected the plant and reported
that the damage has affected its production capacity which has now been reduced by 30%.

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(ii) During the year a petition has been filed against RL by one of its customers for recovery of Rs. 20 million, alongwith
mark-up, damages and compensation, on the ground that materials supplied by RL were defective. RL has filed a written
statement in the Court denying the allegations.
RL’s legal advisor is of the view that the final liability of the company may range from 0% to 50%. However, at this point
of time, it is not possible to determine the amount with reasonable degree of accuracy. No provision in this regard has
been made in the draft financial statements.

(iii) In April 2007, RL acquired a high-tech production management software for Rs. 10 million. The useful life of the
software is 10 years. During the year it was discovered that in the past the software was erroneously amortised assuming
a useful life of 20 years.
The management has decided to adjust the amount short provided, over the remaining useful life of the software.

Required:
Discuss the matters that may be of significance to you as an auditor in respect of each of the above issues. Also explain
their implication on the audit report. (12)
(ICAP, CFAP 06 Level – Summer 2011)

Q.10 The draft accounts of Kingfisher Pharmaceutical Limited (KPL) for the year ended September 30, 2010 show a profit
before taxation of Rs. 115 million and total assets of Rs. 450 million.
Being the audit manager you are currently reviewing the following matters:

(i) The basis of preparation of financial statements states that these have been prepared in accordance with the
International Financial Reporting Standards. However, the accounting policy note for borrowing costs states that all
borrowing costs are expensed as incurred. Results of audit tests show that borrowing costs expensed during the year
include Rs. 15 million which relate to qualifying assets.

(ii) On October 17, 2010 the Income Tax Department issued amended assessment orders for the tax years 2006 to 2009 in
which an aggregate tax of Rs. 40 million has been demanded. KPL has filed appeals against the orders before the Income
Tax Appellate Tribunal. KPL’s tax consultant has advised that it is not possible at this stage to give a reasonably accurate
estimate of the amount of tax that the company may ultimately be required to pay but it would range between Rs. 10-35
million. There is no reference of this matter in the draft financial statements.

(iii) The directors’ report contains a statement that “current year’s increase in profit before taxation by over 10% is
primarily due to the improved operating performance of the company”. However, the income statement shows that KPL’s
profit before taxation includes a gain on sale of a factory amounting to Rs. 30 million. In the absence of this gain, the
company would have reported a reduction in operating profit by 19%.

Required:
In respect of each of the above matters:
(a) State with reasons what action you would take; and
(b) discuss the implications on the audit report, if any. (13)
(ICAP, CFAP 06 Level – Winter 2010)

Q.11 You are the senior responsible for the audit of Iqra Industries Limited (IIL). During the course of the audit you became
aware that a legal action has been instituted against IIL by some of its customers, on account of disputes related to
performance of its products. In response to your request for an opinion the company’s lawyer has simply stated that “We
are totally unable to give any estimate”.
No provision was made in the financial statements for the possible loss as a result of the claims (which are considered to
be material) or for the related legal expenses, although details of those legal claims were fully disclosed in the notes.
Required:
Comment on the implication of the above matter on the auditors’ report and the financial statements of IIL. (04)
(ICAP, CFAP 06 Level – Winter 2009)

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Q.12 You are the manager incharge responsible for the audit of Day Pharma Limited, a subsidiary of a multinational
pharmaceutical company. One of the drugs being imported/marketed by the company is VITABE. It was introduced a few
months back but contributes significantly to the company’s revenues. While the audit was in progress, you came across a
news item in a well known publication, according to which the authorities in many countries have banned the use of
VITABE as some of its ingredients were considered dangerous for human health and required further testing. While going
through some files you have discovered that the parent company had informed Day Pharma Limited about the harmful
effects of the drug. However, it had not given any further instruction in this regard.
You have discussed this matter with the CEO who has informed you that the company had not called off the medicine nor
has it provided any information in this regard to the users of the drug or the general public as the management is of the
view that there is very limited risk of any harm being caused by the drug. However, you had discussed this matter with a
senior physician who believes that these types of products are also banned in Pakistan.

Required:
Assess the above situation and describe what measures the auditor should take in such circumstances. (14)
(ICAP, CFAP 06 Level – Winter 2009)

Q.13 You are the senior in charge on the external audit of Brown Limited (BL), a company dealing in consumer products. The
draft financial statements for the year ended December 31, 2008 show profit before tax of Rs. 30.1 million and total assets
of Rs. 242.4 million. The following issues have been identified during the course of the audit:

(i) On January 10, 2009, a liquidator has been appointed at Express Pakistan Limited (EPL), a major customer of the
company. Sales to EPL during the year under review amounted to 35% of BL’s revenue and the balance due from EPL at
December 31, 2008 was Rs. 5.89 million.

(ii) On January 25, 2009, a direct confirmation was received from BL’s lawyers. He had informed that because of the
complexity of the issues involved in one of the litigation faced by the company, which was initiated in October 2008, it is
not possible to forecast its outcome. However, he has advised that the possible impact of an unfavorable decision (if any),
ranges between zero to Rs. 10 million. The draft financial statements do not contain any disclosure in respect of this
uncertainty.

(iii) During the year the company incurred costs of Rs. 1.1 million in respect of repairs and maintenance of its machinery.
These costs have been capitalized and included in the carrying value of property, plant and equipment. The management
has refused to make any adjustments in the financial statement in respect of this matter.

(iv) During the year, the company has commercially imported certain branded products amounting to Rs. 200 million,
which are subject to FTR at import stage. The final tax paid at import stage amounted to Rs. 4 million and the entire
amount has been recognized as expense, in the current period. However, goods costing Rs. 50 million remained unsold
and are included in the stock-in-trade.

Required:
Explain the possible effects of the situations described above, on BL’s financial statements for the year ended December
31, 2008 and discuss the implications thereof, if any, on the audit report. (10)
(ICAP, CFAP 06 Level – Summer 2009)

Q.14 Your firm has completed the audit of financial statements of Flora Limited (FL), a public listed company, as of June 30,
2008 and has issued the audit report on September 30, 2008. While preparing to attend the Annual General Meeting
(AGM), you noted that a particular sub-note was altogether missing from the published financial statements.
On scrutiny, you found that the original signed copy of the financial statements available in your records did contain the
note.

Required:
(a) Explain the auditor’s responsibility in such a situation if the amount involved is considered material.
(b) What difference would it make if the amount is immaterial? (06)
(ICAP, CFAP 06 Level – Winter 2008)

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Q.15 You are the engagement partner of a listed company. After completing audit field work, you have provided the draft audit
report alongwith the draft financial statements prepared by management to the Board of Directors with a cover letter
stating that the firm will issue its audit report after the Board has approved the financial statements.
Your manager has brought to your knowledge that last week the client has published its annual report including Financial
Statements and audit report (which had not been signed by the firm). Notice of Annual General Meeting (AGM) has also
been published in the newspapers.
Required:
Explain what course of action should the firm take in the above situation. (06)
(ICAP, CFAP 06 Level – Summer 2008)

Q.16 You are the audit engagement partner of a listed company, Steel Limited (SL). The firm is currently in the process of
completing limited scope review of SL’s interim financial statements for the half year ended December 31, 2007. The audit
team has recently concluded their work with following findings for your decision:

(i) Inventory is a significant item of the balance sheet but the auditor was not asked to attend the stock count at the end of
the period. Consequently, the audit team relied on the count communicated by the management.

(ii) SL has executed many contracts with its customers for long term future deliveries at different prices, amounting to Rs.
1,200 million. To avoid loss on account of price fluctuation, short term futures had been bought in international market
against future deliveries valuing Rs. 300 million only. Such futures are carried-over on maturity. Remaining deliveries
have been left open.

(iii) A set up of the company in Lahore having carrying value of Rs. 235 million has been sold to an associated undertaking
for Rs. 240 million. The minutes of the Board of Directors show that the transaction was carried out at an arm’s length
price. No explanatory note has been given in the financial statements in this regard.

(iv) As a percentage of total debts the provision for bad debts are in accordance with the previous history of the company.
However, due to time constraints the practice of using age-analysis of debtors has not been used this time.

(v) Due to time constraints the review of subsequent event was not carried out by the audit team.
Required:
Discuss the above issues and their implications on your report. (11)
(ICAP, CFAP 06 Level – Summer 2008)

Q.17 The financial statements of Modern Equipment (Pvt) Limited reveal that the company has paid a donation of Rs. 15
million to a charitable organization where one of the directors of the company is a trustee. The company has earned a
gross profit of Rs. 40 million. The selling and administration expenses including the donation amount to Rs. 60 million and
as a result the company has incurred a net loss of Rs. 20 million.
Required:
(a) Discuss the significance of the above donation, to the auditor and design appropriate audit procedures to address the
issue. (06)
(b) Discuss the possible impact of the above issue on the auditor’s report. (04)

(ICAP, CFAP 06 Level – Summer 2008)

Q.18 While going through the newspaper, Mr. Akram came to know that the Ministry of Health had issued show-cause notices
to those pharmaceutical companies which had not yet started their own manufacturing within a period of two years from
the issuance of permission of toll manufacturing, as the said permission was subject to this condition.
Akram is involved in the audit of Dine Pharma Limited (DPL) as engagement partner. The audit is expected to be finalized
within one month. DPL’s products are manufactured under toll manufacturing arrangements and it has three to five years
noncancelable agreements with five manufacturing units. Akram has approached you as the firm’s Technical Director for
consultation on the above matter.

Required:
Briefly advise Akram about impact of the above matter on the financial statements disclosure as well as auditors’ report.
(10)
(ICAP, CFAP 06 Level – Summer 2007)

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Q.19 During the audit of financial statements of an investment advisory company, for the year ended 31 December 2005, you
noted the following:
(a) The company has accumulated losses at the close of financial year amounting to Rs. 50 million which have eroded the
company’s capital of Rs. 30 million.
(b) During the financial year, the company provided loan of Rs. 250 million to its directors for their personal business.
The receivable from directors at year-end is NIL.
Explain how would you deal with the above matters while finalizing the audit of the company. Suggest a suitable
modification in audit report if the same is considered necessary. (08)
(ICAP, CFAP 06 Level – Summer 2006)

Q.20 While reviewing the published financial statements of a listed company audited by you, it was found that a note to the
financial statements as contained in the signed copy available in your working paper is missing. The amount involved in
the note was not material.
Discuss auditor's responsibility in such case? (04)
(ICAP, CFAP 06 Level – Summer 2006)

Q.21 KIBOR & Co., a firm of Chartered Accountants, is engaged in the audit of City Cars Limited. The financial statements of City
Cars Limited are prepared in accordance with International Accounting Standards and Interpretations issued by the
International Accounting Standards Board and the International Financial Reporting Interpretations Committee
respectively. You are the manager in charge of the audit and Zara, the senior in charge has submitted to you, the draft
auditor’s report and financial statements for review.
The draft financial statements for the year ended December 31, 2004 show the following:
(Rs. in million)
Revenue 540
Profit before taxation 25
Total assets 75
The draft auditor’s report on the financial statements shows the following extract of matter reported:
“As stated in note 5 and 6 to the financial statements, lease rentals paid amounting to Rs.18 million have not been
reflected in the balance sheet but included in administrative expenses and deferred tax debit amounting to Rs.5 million
has not been recognized in the accounts.
In our opinion, the financial statements give a true and fair view of the financial position of the Company as of December
31, 2004 and of the results of its operations and its cash flows for the year then ended in accordance with IASs as
applicable in Pakistan.”
The relevant notes as stated in the financial statements are as follows:
Note:
(5) Rentals paid amounting to Rs.18 million in respect of assets acquired on lease are charged to the profit and loss
account. The fair value of fixed assets acquired on leasing arrangement is Rs.40 million.
(6) Provision for current taxation is based on taxable income determined in accordance with taxation laws at the current
rate of taxation. The company accounts for deferred taxation using the balance sheet liability method on all temporary
differences. However, as a matter of prudence, the company does not recognize net deferred tax debit balance which
amounts to Rs.5 million as of the balance sheet date.

Required:
Give your comments on the above for submission to the audit partner for his review. (12)
(ICAP, CFAP 06 Level – Summer 2005)

Q.22 Your client XYZ Limited, a listed company, has investments in three companies A, B and C. XYZ Limited owns and holds
75% of the shares in company A, 65% of the shares in company B and 50% of the shares in company C. However, XYZ
Limited has decided not to consolidate its three subsidiaries on the premise that it does not have control over the same.
The client insists that it is permitted to do this under the requirements of International Accounting Standard (IAS) 27.
You, being the statutory auditor of the company, are in a fix whether to disagree with the client on the accounting
treatment accorded to the above.

Required:
In the light of the requirements of the Companies Ordinance, 1984 and IAS-27, give your decision whether the treatment
adopted by the client is correct. Give reasons in support of your answer. (10)
(ICAP, CFAP 06 Level – Winter 2004)

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 ISAs – Application Guide ISA 705

Q.23 You are engaged in the audit of a listed manufacturing concern as audit senior. The audit field work has been completed
and you have completed your review. The following issues have remained unresolved after your final meeting with the
Finance Director of the client:

(a) Company has incurred certain expenses on the launch of a new product. The company has recognized only one third of
the expenses in the profit and loss account while the remaining expense are being deferred over a period of three years.
The amount of expense being deferred is Rs. 20 million which is material in the context of the company’s financial
statements. (06)

(b) The company has provided interest free loan amounting to Rs.25 million to its associated company without obtaining
the approval of its share holders. The Finance Director has indicated to you that the company does not intend to disclose
this loan separately in the financial statements. (06)

Required:
Prepare a Memorandum for your Audit Partner giving your opinion about these issues, keeping in view the requirements
of the relevant International Accounting Standards and provisions of the Companies Ordinance, 1984.
(ICAP, CFAP 06 Level – Summer 2004)

Q.24 You are the manager in charge on the audit of Hexa Garments Limited (HGL). The company is listed on the Karachi Stock
Exchange and has nine directors. It is engaged in the manufacture and sale of fancy garments through its own retail
outlets. You are considering the following matters in respect of the audit for the year ended December 31, 2009:

(a) The diluted earnings per share of Rs. 36.60 has been calculated without taking into account the share options held by
three directors. To justify the above calculations, these directors have confirmed in writing that they do not intend to
exercise the share option. Had the share options been considered, the diluted earnings per share would have been Rs.
35.60. The review of subsequent events revealed that four of the remaining directors had exercised their share options
following the balance sheet date. The share options are available upto December 31, 2010.

(b) According to the draft financial statements the total assets of the company are valued at Rs. 375 million. These include
value of ten retail outlets amounting to Rs. 175 million. The valuation is based on historical cost less accumulated
depreciation. During the year ended December 31, 2009, the management had decided to revalue all the retail outlets. The
valuer appointed by the management has not been able to complete the assignment to date. However, he has submitted
two interim reports as described below:
Interim Report
First Second
Date of report 31/12/09 20/02/10
Number of shops revalued 3 4
Book value as on 31/12/2009 (Rs. in million) 40 60
Revalued amount (Rs. in million) 70 100

(c) During the year HGL has developed two new brands “Deebal” and “Kalachi” and has launched an aggressive marketing
campaign for their promotion. The company has recognised the cost incurred on the campaign amounting to Rs. 10
million as an intangible asset. It is being written off over the estimated useful life of the brands i.e. four years.

Required:
Discuss the matters that may be of significance to you as an auditor, in respect of the above issues. Also explain their
implications on the audit report. (16)
(ICAP, CFAP 06 Level – Summer 2010)

Q.25 Your client, a limited company, is incurring substantial operating losses and in view thereof is inclined not to charge
accounting depreciation in the accounts which you are auditing. The Board is of the view that good maintenance coupled
with rising cost of fixed assets, on the contrary, has the effect of appreciating the value of fixed assets. Discuss the position
you would take as an auditor giving cogent reasons for your views on the subject. `
(ICAP, CFAP 06 Level – Winter 1982)

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Q.26 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 to draft 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.
(ICAP, CFAP 06 Level – Summer 2018)

Q.27 You have recently completed the audit of Naveed Limited, a listed company.
Significant matters concerning the audit include classification of certain debts as long term. The debt covenants of the
loans have been breached but subsequent to the year end the banks have confirmed verbally that they will not demand
immediate repayment.

Required:
Evaluate the above situation and draft the modification, if required, for inclusion in the audit report. You may assume
necessary details. (06)
(ICAP, CFAP 06 Level – Summer 2017)

Q.28 Rentals Limited (RL) is a real estate company engaged in the business of renting of office buildings and shopping centres
across the country. The investment properties are carried at fair value. The fair values are determined by an internal
valuer at the end of each reporting period.

Assume that after performing the audit procedures, the auditor is not satisfied with the valuation and has finally decided
to modify the audit report.

Required:
Draft an appropriate basis of modification paragraph in the above situation, for inclusion in the audit report. (Assume
necessary details) (06)
(ICAP, CFAP 06 Level – Winter 2015)

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Q.29 You are the auditor of Blue Sky Limited (BSL). The draft consolidated financial statements of BSL and its subsidiary Sea
Green Limited (SGL) for the year ended September 30, 2009 show a profit before taxation of Rs. 10.5 million (2008 : Rs.
9.4 million) and net assets of Rs. 55.2 million (2008 : Rs. 50.7 million). You have performed the audit procedures you
considered necessary for the year ended September 30, 2009 and are satisfied with the results of those procedures.

However, your firm is also the auditor of Sea Green Limited (SGL). You were appointed as SGL’s auditors for the year
ended September 30, 2009 after BSL acquired 90% shares of SGL on June 30, 2008. SGL’s draft financial statements for
the year ended September 30, 2009 show profit before taxation of Rs. 0.7 million (2008: Rs. 1.7 million) and net assets of
Rs. 16.1 million (2008: Rs. 16.6 million). Both the companies are exempt from tax.

The previous auditors’ report on SGL’s financial statements, for the year ended September 30, 2008 was unmodified.
However, during the audit of SGL it was discovered that due to an error, the inventory as appearing in the audited
financial statements for the year ended September 30, 2007 was overvalued by Rs. 5.7 million. This amount is now being
adjusted by SGL over a period of three years i.e. over the years ended September 2008 to 2010.

You have approached the management advising them to adjust the full amount in the current year. However, the
management is not willing to accept your point of view.

Required:
Draft the modification paragraph of the report which you would issue on the consolidated financial statements, in the
above situation. (A full report is not required) (11)
(ICAP, CFAP 06 Level – Winter 2009)

Q.30 (a) Iqbal & Company are engaged in the audit of Lasbella Tractors Limited for the year ended June 30, 2005. Zeeshan is
the audit supervisor at this client. While performing the relevant audit procedures for taxation, he identified that the
Company had opted for tax assessment under Final Tax Regime (FTR) of the Income Tax Ordinance, 2001 for the tax year
2005. However, during the year the said scheme has been abolished by the taxation authorities retrospectively and
accordingly the Company has become liable for assessment under normal tax. Upon discussion with the tax manager, he
was informed that the Company has made provision for taxation in the financial statements for the current year on the
basis of FTR, as the management believes that it is unjust to withdraw the scheme retrospectively. The Company has
decided to make representations before the Central Board of Revenue (CBR) seeking its administrative jurisdictions for
removal of this unjust action. Further the management asserts that if the CBR does not agree, the company will file a writ
petition before the High Court to contest the retrospective amendment. The tax advisor however, in his opinion has stated
that the probability of the company’s success on the matter is low. Zeeshan is faced with the dilemma whether to include
the matter in the audit report or not. The draft financial statements of the Company for the year ended June 30, 2005
show the following data:
(Rs. in million)
Revenue 500
Gross Profit 200
Income tax on FTR basis 27
Income tax on normal rates of taxation 48

Required:
(i) Explain the implication of the matter on the financial statements; and (04)
(ii) Discuss the type of audit report to be issued in the above situation and draft a suitable modification, if any, in the light
of relevant International Standard on Auditing. (04)

(b) During the year the company has paid dividend amounting to Rs. 50 million and deducted zakat thereon @ 2.5 percent
of the par value of the shares where applicable. The zakat has not been deposited till the board of directors meeting in
which financial statements have been approved. Draft suitable opinion paragraph relating to zakat? (03)
(ICAP, CFAP 06 Level – Winter 2005)

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Q.31 You are engaged in the audit of Fine Exports Limited – a listed company involved in export of garments. Besides the
export of garments, the company is also involved in certain local businesses including dyeing on toll manufacturing basis
and sale of left over or rejected garments in the local market. During the interview of client’s staff at planning stage, you
have got hints that there might be certain undisclosed or un-recognized revenues. Consequently the audit is now
considered to be high risk.
The Partner in charge of audit has asked you to develop a specific audit program to address the risk of completion of
revenue. Based on the additional work performed on the basis of such audit program you came across few instances of
unrecorded revenues and revenues recorded as fake liabilities. At this stage, you can not conclude with reasonable
certainty that these are the only unrecognized revenues and as to whether there are any corresponding expenses that
have not been recorded particularly keeping in view the fact that the goods receipt and dispatch functions are not
adequately documented and the costing and production reporting systems are not adequate. At the audit concluding
meeting the management disagreed with all of your findings.

Required:
(a) List at least six audit procedures to specifically address the enhanced risk of completeness of revenue duly mentioning
the risk addressed by each of such procedures; (06)
(b) Describe which form of modified audit opinion would be most adequate in such circumstances; and (02)
(c) Draft a report modification paragraph and audit opinion paragraph that should be included in the auditors’ report.
(06)
(ICAP, CFAP 06 Level – Summer 2005)

Q.32 Review each of the following situations in respect of an audit client which is managed by you in the capacity of audit
manager:

(i) The company made investment amounting to Rs.10 million in an associated company which has ceased operations.
The auditors of the associated company have qualified their report on the going concern issue. However, the company has
not made any provision in respect of this investment.

(ii) The total liability of the company in respect of accumulated leaves of employees is Rs. 150 million. However, the
company has made a provision of only Rs. 40 million representing the encashable portion of the leaves based on the
contention that the remaining portion of the liability is not required to be paid.

(a) Write a note to your partner explaining each of the above issue and your contention on the same. (04)
(b) Draft qualifications in audit report on the above issues. (06)
(ICAP, CFAP 06 Level – Winter 2004)

Q.33 Your client XYZ Limited, a listed company, has decided to recognize the deferred tax asset arising from unassessed tax
losses in its books. You are the audit manager at this client and are faced with the dilemma whether to include the matter
in the Audit Report or not. Your audit partner of this engagement is of the view that benefit of tax losses cannot be taken
until and unless the tax losses are determined by the tax authorities.
Last year, M/s. XYZ Limited suffered huge loss due to the golden handshake expenses paid to around 200 employees
whose services were terminated by the company in view of its plans for restructuring in future.

Required:
Based on the financial and regulatory reporting framework currently prevailing in Pakistan for listed companies, present
your views as to who do you think is correct – your client or your audit partner and why? Further, assuming that your
partner agrees with the client on recognition of deferred tax asset in respect of the unassessed tax losses, state the related
disclosures which are required to be made in the financial statements of XYZ Limited keeping into consideration the
requirements of International Accounting Standard 12 “Income Taxes” (revised).
Further, also draft the modification in the Audit Report, if you consider it to be necessary. (12)
(ICAP, CFAP 06 Level – Summer 2004)

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Q.34 During your audit of the financial statements of Triple AAA Insurance Company Limited for the year ended December 31,
2002, you noted that the company had not complied with the requirements of S.R.O. 938, issued during the current year
by the Securities and Exchange Commission of Pakistan, insofar as the valuation of “available for sale” investments in the
financial statements was concerned. The company had stated such investments at cost, as opposed to valuing these at the
lower of cost or market value (market value to be taken as lower if the fall is other than temporary), as required in the
above S.R.O. As a result, you noted that provision amounting to Rs.131. 036 million required for valuing such investments
on this basis had not been made by the company in the financial statements of the company.
Further, you noted that although the company had made a provision of Rs.28.929 million for claims “Incurred But Not
Reported” (IBNR) in the above referred financial statements, the same fell short by Rs.57.859 million, as a result of which
provision in the required amount of Rs.86.788 million was not made on this account.
Given the materiality of the amounts involved and their effects on the financial statements of the Company, you have
decided to express qualifications with regard to these matters in your report.

Draft qualifications in respect of the above matters in your Report on the financial statements of the Triple AAA Insurance
Company Limited, together with the related appropriate wording in the opinion paragraph of your Report. Do not attempt
to write the whole report. Draft qualifications and the related wordings of the opinion paragraph. (10)
(ICAP, CFAP 06 Level – Summer 2003)

Q.35 (a) At the conclusion of the audit of XYZ (Private) Limited for the year ended June 30, 2002, you have decided to express a
reservation in your report on the accounts of the above-referred company as a result of your disagreement with the
management in respect of its failure to record depreciation on its building and equipment, using annual rates of 5% and
20% respectively. You have determined that a Qualified opinion would be issued. Draft your reservation, along with the
opinion paragraph, to be included in your report in accordance with the requirements of related International Standard
on Auditing. Do not draft the entire report pursuant to the requirements of the Companies Ordinance, 1984. (04)

(b) Usman, an Audit Manager, is toying up with the idea of expressing a disclaimer of opinion in his report on the accounts
of ABC Corporation for the year ended June 30, 2002 due to his inability to observe physical inventories and confirm trade
debts on account of certain limitations placed by management of the company. Assist him in drafting the Scope paragraph,
a paragraph discussing the scope limitation and the concluding paragraph of the report. You are expected to follow the
requirements of related International Standard on Auditing in your drafting of the above. (04)
(ICAP, CFAP 06 Level – Winter 2002)

Q.36 Rana has just completed the necessary field work in respect of the audit of the financial statements of Akbar
Manufacturing Company (Private) Limited for the year ended June 30, 2000 and is currently going through the various
issues that arose during the course of the audit, before presenting her files to her Manager for his review. She noted that
she was able to successfully resolve all such issues with the exception of one issue which related to the consolidation of
the financial statements. Akbar Manufacturing Company (Private) Limited ceased to consolidate the financial statements
of its subsidiary companies because it considered this basis to be inappropriate in view of substantial minority interests.
Rana is well aware of the fact that under International Accounting Standards, the existence of such minority interests is
not an acceptable reason for not consolidating the financial statements of subsidiary companies with those of the parent.
Rana has, therefore, concluded that modification in the Auditor’s Report is necessary and, to impress her Manager, she
has decided to prepare a draft of the same.

Required:
(a) Identify the type of opinion which should be expressed and reasons thereof (04)
(b) Assist Rana in drafting the required modification and its effect in the opinion paragraph of the Auditor’s Report. You
are expected to follow the requirements of the relevant ISA in the drafting of the modification and its effects in the
Auditor’s Report. (06)
(ICAP, CFAP 06 Level – Summer 2001)

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Q.37 Faraaz, one of your Manager deputed by you on the audit of the financial statements of Quaid Manufacturing Company
Limited for the year ended June 30, 2000, has assembled the following facts in his Review Memorandum for your
consideration:

“The recent introduction of a computerized accounts receivable system resulted in errors and, although the system
deficiencies causing these errors have now been rectified, the management of the company is concerned about preserving
customer goodwill. As a result, I was instructed not to obtain confirmation of certain accounts receivables amounting to
Rs.123.98 million and was not able to satisfy myself concerning the validity of these accounts by alternative means.
Accordingly, I was not able to determine whether any adjustments might be necessary to accounts receivable, sales,
income taxes and working capital”.

You immediately knew that your work was cut out for you and, therefore, decided to have an urgent meeting with the top
officials of the company. In the meantime, however, you requested Faraaz to prepare the potential reservation in the
Auditor’s report, assuming that a qualification is the type of reservation required under the circumstances.

Required:
Prepare a draft of the reservation in the Auditor’s Report together with the opinion paragraph to be incorporated therein.
Ensure that you follow the requirements of the relevant ISA in the preparation of your draft. (10)
(ICAP, CFAP 06 Level – Summer 2001)

Q.38 During the course of your examination of the accounts of Naila, Shahida and Shafaq Company Limited for the year ended
June 30, 1999, you –the audit senior– noted that a sum of Rs. 504 million has been advanced by the company to an
associated undertaking, Shabbir Sultan Enterprises, a few years back. The said sum was shown by the company under
advances as unsecured in its accounts for the above referred year. Although the amount was duly recoverability in the
near future. In fact, you have been able to determine and, accordingly, concluded that the above referred associated
company is at the verge of bankruptcy and as such the likelihood of any recovery there from is virtually minimal, in view
of the unsecured nature of the advance, you are concerned about the effects of the possible default on part of the
associated company on the financial statements of Naila, Shahida and Shafaq Company Limited. The management of the
company is prepared to disclose in a note to the financial statements that the company is currently experiencing problems
in recovering the above referred advance from its associated company, it is, nonetheless, hopeful of recovering the same
but is unwilling to make provision there against.

Required
(a) Exercise your professional judgment, state whether the above matter affairs the auditor’s opinion or not. Support your
answer with reasons. (05)
(b) If the above matter affects his opinion, should this be regarded as limitation of scope or disagreement with
management? Give reasons to support your answer. (05)
(c) Assuming that you are not satisfied with the adequacy of the disclosure made by the management of the company in a
note to its accounts for the year ended June 30, 1999, draft:
(i) The Auditor’s Reservation (05)
(ii) Opinion paragraph in the Auditor’s report (05)
(ICAP, CFAP 06 Level – Summer 2000)

Q.39 While reviewing the notes, prepared for you by your Audit Manager, before the Closing meeting with the Chief Executive
Officer of NY Corporation in respect of the financial statements for the year then ended June 30, 2002, you noted the
following:

(a) The management of the Corporation is not willing to reverse an accrual of Rs.350.00 million it made in the above-
referred financial statements on account of certain rebates, the Corporation claims, are due from a Telecommunication
company, as a result of a law suit filed by the corporation against the Telecommunication company, in the local High
Court. These rebates relate to the period commencing July 1, 1998 to June 30, 2000. The Telecommunication company, in
turn, filed a counter lawsuit against the Corporation. Legal proceedings in both cases are currently in the initial stages of
hearing. Realization of amount accrued by the Corporation, therefore, appeared uncertain to you, as well as to the legal
advisor of the Corporation.
All your efforts failed to persuade the management that the accrual in question should be reversed. (03)

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(b) The Corporation during the current year transferred a sum of Rs.575.00 million, representing the cost of a Project,
from capital work-in-progress to fixed assets and claimed depreciation and investment tax credit thereon, even though
the said project had not resulted in the production of intended products in commercially feasible quantities by the end of
the current year. Whilst your Audit Manager agreed with the management that the said project commenced production,
he regards the production to be in trial run period and, as such, is of the firm view that commencement of commercial
production had not taken place and, hence, is of the view that all expenditure of revenue nature should continue to be
capitalized up to the date of commencement of commercial production. The management of the Corporation, however, is
not willing to listen to your Audit Manager who has determined that due to the above referred transfer, profit for the year
is overstated by Rs.27.00 million.

(c) The Corporation during the current year advanced a sum of Rs.287.00 million to one of its associated undertakings.
The above sum was extended with complete disregard to the approval of the shareholders as a result of which your Audit
Manager noted that the advance in question had been given without arranging for a Special resolution and that the said
advance was, in fact, in excess of thirty percent of the paid up capital and free reserves of the Corporation at the time
when the same was given. The management of the Corporation had not made any disclosures in this regard in its financial
statements.

Required:
As Engagement Partner of the audit of NY Corporation, you are expected to:
• Give a convincing reason to the CEO as to why the views of your Audit Manager may be correct in respect of each
of the above matters. (06)
• Identify the circumstances why it may not be possible for you to render an unqualified opinion if the CEO insists
on his point of view in each of the above matters. (02)
• Assuming that it is not possible for you to render an unqualified opinion, draft your reservations in respect of
each of the above matters. (12)
(ICAP, CFAP 06 Level – Winter 2002)

Q.40 After completion of the audit of the accounts HP Manufacturing Company Limited for the year ended June 30, 2000, you,
the Audit Manager, have been requested by the Engagement Partner to draft the required auditors’ report on the accounts
of the above- referred company in respect of which you are confronted with the following matters highlighted by your
staff in the Review Memorandum:
1. The accounts of the company for the current year shows sustained substantial losses from operations.
2. The operations of the company have been substantially reduced in the recent past.
3. The company’s ability to operate profitably is not certain.
4. The availability of necessary financing is somewhat doubtful.
5. The company’s current liabilities exceeded its current assets by a material amount and its total liabilities
exceeded its total assets by a significant sum.

Consequently, your staff has wondered about the given situation, in view of the presence of material uncertainties, which
have not been adequately disclosed by the company in its above-referred accounts. Accordingly, you have decided to meet
the top officials of the company with a view to discuss this matter and, consequently, consider the impact in your report.

Required:
Assuming that the company decides, as a result of your meeting with its officials, to make adequate disclosures to your
satisfaction in its accounts in respect of the above situation, state:
(a) The type of opinion which should be expressed. (01)
(b) Whether modification is required in your report and how? (02)
(c) The matters to be disclosed in the notes to the Accounts. (06)
(d) Draft the modification, if it is required, (06)
(ICAP, CFAP 06 Level – Winter 2000)

Q.41 In the following cases, (a) identify and (b) draft auditor’s opinion which should be issued by the auditor, assuming that he
is not able to express an unqualified opinion:
(a) The company does not account for deferred taxation arising as a result of major timing differences. (03)
(b) Disclosure of certain material information in respect of warranty obligations has not been made by the
company in its accounts. (03)
(c) The auditor is not able to confirm pending legal cases with the concerned attorneys due to the limitations
placed on the scope of his work by the company. (03)

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(d) Inadequate disclosure in relation to staff retirement benefits was made by the company, resulting in non-
compliance with the requirement of the relevant statutes or law, the effects of which were determined as
significant. (03)
(ICAP, CFAP 06 Level – Winter 1999)

Q.42 You are Manager in charge of the audit of the account of Irfan Mazhar and Company Limited for the year ended June 30,
1998. You have informed the Engagement Partner of the above referred Audit about a fire in a branch office of the
company that destroyed its records of trade debtors and about your resulting inability to confirm or verify by alternative
means trade debtors included in the accounts of the company, aggregating to a martial sum of Rs. 100 million. The
Engagement Partner has instructed you to prepare a draft of the auditor’s report with necessary qualification in this
regard.

As Manager in charge of the audit of the accounts of Irfan Mazhar and Company Limited, prepare a draft of the auditor’s
report, using the format given in the International Statement on Auditing (IAS), for the Engagement Partner of the audit.
You have already ruled out the possibility of a disclaimer of opinion and have decided to express a qualified opinion. (16)
(ICAP, CFAP 06 Level – Winter 1998)

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SUGGESTED SOLUTIONS

CONCEPT CHECKERS

Q.1
MCQ
Correct Option
#
(i) (a) True, (b) False, (c) False
(ii) Disclaimer
(iii) Qualified
(iv) Adverse
(v) Adverse
(vi) Qualified
(vii) Disclaimer
(viii) Qualified, Adverse, Disclaimer
(ix) (a), (b) & d
(x) (a) & (c)
(xi) (a) & (c)
(xii) (b)

CONCEPT REVIEW QUESTIONS

Not Available.

CONCEPT APPLICATION QUESTIONS

Q.1
Q.2
Q.3
Q.4 (a)
The auditor will include other matter paragraph in his audit report mentioning the fact that the previous year’s financial
statements were audited by another firm of chartered accountants and they had expressed a qualified opinion along with
the reasons of qualification and the date of the audit report.

Management of RPL has accounted for an impairment of Rs. 67 million in the financial statements of the current year,
whereas it should have been provided in the previous year. Hence the current year’s profit is understated by the same
amount and corresponding figures/opening balances also contain a material misstatement of Rs. 67 million.

The auditor should ask the management and those charged with governance to restate the comparative figures and take
the effect of the impairment retrospectively.

If the management agrees to make the adjustment retrospectively, an unqualified opinion will be expressed with an
emphasis of matter paragraph giving reasons for restatement of figures and a reference to the notes to the financial
statements.

If the management does not agree then the auditor’s report will be qualified due to the misstatement in current year as
well as the corresponding figures/opening balances.

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(b)
In extremely rare cases, if disclosure of some or all of the information required by IFRS can be expected to prejudice
seriously the position of the entity in a dispute with other parties then in such cases, an entity need not disclose the
information.

In the given situation, the auditor should assess whether he agrees with the management’s point of view in the light of the
above guideline. If the auditor does not agree, he should qualify the audit report. However, if the auditor agrees, he needs
to ensure that the management discloses the general nature of the dispute, together with the fact, and reason why, the
information has not been disclosed, as is further provided in the IFRS. If the directors do not agree to disclose the general
nature of the dispute together with the fact and reason why the information has not been disclosed, the auditor would
need to express a qualified opinion. In case of either type of disagreement, the auditor needs to describe the nature of the
omitted information in the basis for opinion section.

Moreover, unless prohibited by law or regulation, include the omitted disclosures, provided it is practicable to do so and
the auditor has obtained sufficient appropriate audit evidence about the omitted litigation.

If proper disclosures are made in the financial statements, auditor should consider including it in the key audit matter
section of the audit report.

Q.5 (a)
• Although the amount of Rs. 20 million is not individually material, but, we will need to discuss the values reported in
the draft report with the management and the valuer and why and on what basis the value was changed.
• We will have to consider the independence of the management’s expert due to the long association with VL.
• We may consider hiring our own expert for assessing the value.
• If the value assigned by our expert is different from the value assigned by the management’s expert, we will strive to
resolve the differences through discussions with both experts and the management.
• We will have to reassess the risk of material misstatement due to fraud and its impact on the nature, timing and
extent of audit procedures.
• If the adjustment would result in breach of loan covenants the consequence may be qualitatively material due to
conversion of long term loan into short term.
• If we are unable to 1qresolve the differences, it will cause disagreement with the management and although the
amount is not material, however, due to qualitative materiality, we may have to issue a qualified report. Moreover,
we will have to determine whether uncorrected misstatements are material, in aggregate.
• If the changes in the valuer's report creates doubts as to the integrity' of the management, we may consider
appropriate action which may include withdrawing from engagement, disclaiming an opinion, etc. depending upon
the applicable laws and regulation.

(b) These disclosures are mandatory' as they are required by the applicable financial reporting framework.

The misstatement in qualitative disclosure could be material, because the disclosure of events that lead to impairment
could influence the economic decision of the users of the financial statements
Since non-disclosure would lead to a material misstatement of the financial statements that relates to qualitative
disclosures, we shall discuss the non-disclosure with those charged with governance. If the disagreement persists, we
shall qualify' our audit report and

• Describe in the Basis for Opinion section the nature of the omitted information; and
• Unless prohibited by law or regulation, include the omitted disclosures, provided it is practicable to do so
provided we are able to obtain sufficient appropriate audit evidence about the omitted information.
However, if the CFO agrees to disclose the circumstances that led to the impairment of plant and machinery, then we
would need to include a key audit matter paragraph in our audit report.

Q.6 Warranty claims:

(i) As the company has been historically recording its warranty claims on cash basis, a restatement under IAS 8 is
required, if material.
(ii) The auditor should obtain an understanding of the entity’s assumptions on which the estimate is based.
(iii) If the basis is considered inappropriate, the auditor should make a revised estimate either on his own or by using
expert opinion. The revised estimate should be based on:
 Industry practice and trend of warranty claims
 company’s terms of warranties

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(iv) Own estimate prepared on the above assumptions will be compared with management’s estimate. If the difference is
material, the management will be asked to explain.
(v) Subsequent sales return upto the date of authorization will also provide an evidence about the reasonableness or
otherwise of the management’s estimate.

Examiners’ Comments:
This was a simple question in respect of verification of provision for warranty claims. The overall performance was average
as the students wrote many correct steps but generally missed the following points:
 The policy during the previous year to recognize the warranty expense on cash basis was not appropriate and hence
a re-statement of last year’s figures was required.
 If the management’s basis of making the estimate was considered inappropriate, the auditor should make a revised
estimate, either on his own or by using an expert.
Q.7
Suggested Solution:
(a) As per IAS 16, if an item of property, plant and equipment is revalued, the entire class of property, plant and
equipment to which that asset belongs shall be revalued.
It is not appropriate to incorporate the revised value of only three properties out of eight as the effect of revaluation of
entire class of properties has not been incorporated in the financial statements.
Impact on audit report
(i) The auditor would need to mention that the recording of impairment restricted to only 3 properties instead of entire
class of assets is not in accordance with the IAS. Moreover, since the valuation of the other properties has not been
completed it represents scope limitation and therefore the auditor would be required to give a qualified opinion or a
disclaimer, depending upon the materiality of the issue.
(ii) The auditor will need to report that the value of three properties at the valuation date is impaired and to report the
amount of impairment. Moreover, since the valuation of the other properties has not been completed it represents scope
limitation and therefore the auditor would be required to give a qualified opinion or a disclaimer, depending upon the
materiality of the issue.
(b) Auditor will ask the management for justification for change in accounting policy from fair value to cost method.
The auditor shall mention the exception to the consistent application of accounting policy and a statement that whether
they concur with the change in accounting policy or not.
Moreover, the auditor would need to evaluate whether all the accounting treatment/ disclosures related to the change
have been appropriately recorded in accordance with IAS -8.
If the management is unable to provide reasonable justification for change in accounting policy than the auditor will issue
a qualified or adverse opinion, depending upon the materiality and pervasiveness of the matter

Examiners’ Comments:
(a)An interesting situation was given in this question whereby the company’s policy was to value the buildings at revalued
amount but the valuation of only 3 out of 8 buildings had been completed. Moreover, according to these valuations, the
carrying amounts exceeded the re-valued amounts by Rs. 12 million.
The candidates were required to discuss the impact on the audit report if the impairment was recognized and also if the
impairment was not recognized.
The students were generally able to identify that revaluing only 3 out 8 properties would not be in accordance with IAS. Most
of them also mentioned correctly that inability to have all the properties revalued represents a scope limitation. However,
very few could go any further i.e. they were unable to specify as to how the auditor would deal with the two possible
situations, in his audit report.
(b)In the given situation, the client had changed an accounting policy. The candidates were required to discuss the matters
that the auditor needed to consider and the impact on audit report. Most student failed to highlight the fact that the auditor
needed to report whether he concurs with the change or not. Consequently, they were also unable to specify as to what the
auditor would do if he does not concur with the change. Most students made suggestions regarding the correct accounting
policy which was not required.

Q.8 (a)
Two significant uncertainties exist for ZTL i.e. recoverability of balance due from SEL and whether the going concern
assumption is appropriate in light of the possible termination of the contract by SEL.
The Accounts receivable balance is material to the financial statements as it is 12.48% of profit after tax.
The possible loss of contract from SEL is material to the financial statements as the revenue from SEL contributes about
25% of total revenue.
It appears that the uncertainty relating amount receivable balance and termination of contract will not be resolved till
the time of signing off the financial statements and audit report.

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If uncertainties are adequately disclosed in the financial statements then an unqualified opinion can be given, however
an emphasis of matter paragraph is to be included in the auditor’s report to draw user’s attention to the significant
uncertainties. In case appropriate disclosure is not given a qualified opinion or adverse opinion as appropriate.
(b)
If there are material inconsistencies in the other information presented with the financial statements the auditor should
discuss the reasons thereof with the management and ask them to revise the other information.
In case of disagreement, the auditor shall communicate the matter to those charged with governance.
Include in the auditor’s report an ‘other matter paragraph’ describing the material inconsistencies.
(c)
A provision of Rs. 30 million has been made in the financial statements and it represents 37.5% of the profit after tax and
is material to the financial statements.
A constructive obligation to restructure arises only when an entity has a detailed formal plan for the restructuring
identifying at least the principal locations affected.
In this case it is unlikely that a constructive obligation exists in respect of third factory because the factory which is to be
closed is not identified.
The auditor shall determine whether provision of Rs. 30 million pertains to two factories which are identified or it
pertains to three factories (including one which is not identified).
If the provision relates to three factories, auditor will ask the management to adjust the amount of provision to reflect
the provision for two factories Moreover, the plan for closure of the third factory should be disclosed.
If the management refuses to do so, a qualified or adverse opinion may be issued depending upon the materiality and
pervasiveness.

Examiners’ Comments:
The question required the students to discuss the matters that an auditor would need to consider in three different situations
and the impact thereof on the auditor’s report. A significant number of students were not even able to identify the core issues.
As a result, they were not able to assess the consequences and likely impact thereof on the auditors’ report. Each situation is
discussed below:
(a)Surprisingly, many students could not identify the two risks viz the risk of uncollectibility of the amount and the possibility
of creating a going concern or at least a liquidity issue on account of possible loss of a major customer.
Many candidates started discussing modification of audit report without discussing the materiality of the amounts involved.
Majority of the students emphasized on booking a provision and in case of disagreement suggested a qualified opinion,
whereas the question was clear that the result of the arbitration is not yet known. Hence, only a disclosure was required and
in case of adequate disclosure emphasis of matter paragraph was to be given whereas in case of inadequate disclosure,
qualified or adverse opinion as appropriate was to be given.
(b)Students were required to describe the audit steps to deal with the material inconsistencies between the financial
statements and the Directors’ report. Most of the candidates attempted the answer in right direction and thereby gained high
marks. However, many candidates did not know that if the inconsistency persists, an “other matter paragraph” would have to
be included in the auditor’s report.
(c)In the given situation, a company named IPL had closed two of its seven factories and had decided to close another factory
but the factory to be closed had not been identified at the time of finalization of the accounts. IPL had made a provision of Rs.
30 million to cover the costs of redundancies and restructuring. The profit for the year amounted to Rs. 80 million.
The students were expected to identify the following aspects:
• The provision of Rs. 30 million is material.
• A constructive obligation existed in respect of the two factories which have been identified but not for the third
factory.
• The auditor would need to see whether the provision pertains to the two factories for which the constructive
obligation exists. If provision had also been made in respect of the third factory, the related amount would have to
be reversed.
• The fact that a third factory would be closed in due course would need to be disclosed in the financial statements.
• In case of disagreement with the client, a qualified or adverse opinion would be required.
Most of the student could not answer this part in proper sequence and related the answer to the going concern issue which
did not exist. More than 50% of the students could not identify the 2nd point i.e. the one related to constructive obligation.

Q.9 (a)
(i)Significant matter
In view of the decline in production capacity, it has become necessary to recalculate the value in use and recoverable
amount in order to assess the impairment in the value of plant.
The value of plant is material to the financial statements in terms of total assets as well as profit before tax of the
company.
Impact on audit report

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If the impairment test indicates a decline in the value of plant, the management should be advised to make appropriate
adjustments.
In case of disagreement with the management, the auditor should give a qualified opinion.
(ii)Significant matter
Amount claimed by the customer is material to the financial statements in terms of total assets as well as profit before
tax of the company.
Impact on audit report
If management agrees to explain the issue in the note on contingent liabilities, the report will not be qualified but in view
of the material uncertainty an emphasis of matter paragraph would have to be added to the auditor¡¦s report to draw the
user¡¦s attention to the note in the financial statements.
In case of disagreement on making appropriate disclosure, the auditor should give a qualified opinion.
(iii)Significant matter
It is a fundamental error within the meaning of IAS-8 and its effect should be taken into account retrospectively. All
comparatives figures should be restated accordingly.
The management¡¦s decision to adjust the short amortization in the future years is in contravention to the requirements
of IAS-8.
Impact on audit report
Since the error is material in terms of profit after tax, it should be discussed with the management. They should be
advised to make appropriate adjustment and disclosure in accordance with the requirements of IAS-8.
In case of disagreement, the auditor should give a qualified opinion.

Examiners’ Comments:
In this question the students were supposed to give their views on three issues faced by them as auditors of a consumer goods
manufacturing company and to discuss the impact thereof on the audit report. The response on each issue is discussed below:
(i)The given situation was that a plant has been damaged resulting in a decline in its production capacity. The performance
was good as most of the students were able to identify the issue of impairment in the value of plant and the impact on audit
report in case there was a disagreement with the client, on its reporting, in the financial statements.
(ii)Majority of the students only mentioned that the contingent liabilities would need to be disclosed and in view of the fact
that a material uncertainty has arisen, an emphasis of matter paragraph would have to be added. The possibility of a
disagreement with the management, on the issue of disclosure, should have been discussed also.
(iii)This was a prior period error which was required to be corrected retrospectively in accordance with the requirements of
IAS-8. Majority of the students were unable to identify the same and discussed it as a change in accounting estimate.

Q.10 (i)Action/reasons
In order to comply with IAS 23, borrowing costs which meet its criteria should be capitalized.
The company’s policy of expensing out the borrowing costs in spite of meeting the criteria for capitalisation is not in
accordance with IAS 23 and needs to be changed.
 Costs of Rs. 15 million are material to the income statement, as reducing the expenses would increase profit by 13%.
Report implications / modification
°If management agrees to change the accounting policy, the firm should mention the concurrence statement in audit
report that accounting policies have been consistently applied except for the changes as stated in the relevant notes with
which the auditor concurs.
°If management refuses to capitalize the borrowing costs or to change the accounting policies, the firm should give a
qualified opinion (except for). Reason for the qualified opinion i:e material disagreement between management and
auditors regarding accounting for borrowing costs, will be explained in “ Basis for Qualified Opinion” paragraph placed
before opinion paragraph.
(ii)Action/reasons
The amount involved is material as Rs. 35 million is 30% of profit before tax and 8% of total assets.
The firm should request the management to:
° provide an amount which is the best estimate of the tax liability.
° include a note describing the situation in the financial statements, as the circumstances give rise to a significant
uncertainty which could have an impact on the financial statements.
Report implications / modification
If the management agree to provide for the amount and to include a note explaining the issue, the report will be
modified, but unqualified. An emphasis of matter paragraph should be added to the report after the opinion section
drawing the user’s attention to the note in the financial statements. There should be a specific statement that the opinion
is not qualified and a brief description of the circumstances.
If the management do not agree to make a provision and include a note explaining the issue, the firm should give a
qualified opinion (except for). Reason for the qualified opinion i.e. material disagreement between management and
auditors , will be explained in “ Basis for Qualified Opinion” paragraph placed before opinion paragraph.
(iii)Action/reasons

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 The inconsistency between the Directors’ Report and the financial statements is material to the financial statements.
The firm should ask the directors to amend the report in line with the financial statements.
Report implications / modification
If directors refuse to amend their report, then an unqualified opinion on the financial statements can be issued but other
matter paragraph should be included to highlight this inconsistency.
The firm may withhold its report in such case after obtaining legal advice.

Examiners’ Comments:
In this question the students were supposed to give their views on three situations. The mistakes noted in majority of the
answers are discussed hereunder:
Situation 1
Generally the students demonstrated reasonable knowledge about the action to be taken by the auditor and the implications
on the audit report. However, a vast majority missed an important point that if management agrees to change the
accounting policy, the auditor should give a concurrence statement in audit report.
Situation 2
Majority of the students could not mention that the auditor should ask the management to make a provision of Rs. 10 million
as it is the minimum amount of payment which the company would be required to pay. Further, very few could identify that
even if a provision is made and the matter is appropriately disclosed by way of a note, the auditor may add an emphasis of
matter paragraph to the report.
Situation 3
The situation was quiet simple and a large majority was able to answer correctly.

Q.11 Significant uncertainty regarding litigation

The ultimate outcome of the matter cannot presently be determined and therefore there is a significant uncertainty the
resolution of which is dependent upon future events.
Since it is not possible to reliably estimate the amount of loss accounting treatment of not recognizing the provision and
giving of disclosure is correct.
The auditor should consider modifying the auditor’s report by adding an emphasis of matter paragraph referring to the
detailed note in the financial statements.

Q.12 Auditor should perform audit procedures to further confirm this noncompliance of health/safety regulation. That is
Inquiring from the original manufacturer of the product.
Requesting assistance from the audit firm’s branches or associates in the countries where authorities have banned the
product.
If it is probable that the product is harmful or there is potential noncompliance with health and safety regulations, the
auditors should consider the following actions:
(i)Communicate with those charged with governance/ audit committee/ supervisory board about the potential
noncompliance with the safety regulations.
(ii)With the permission of client, seek legal opinion from company’s lawyer.
(iii)Encourage the management of Day Pharma Limited to announce the problem publicly. There will obviously be
reluctance to do this. However, the auditors should try to explain and hopefully convince the management that this would
be the ethically correct way to proceed.
(iv)Consider the impact of the above situation on the financial statements related audit procedures and on the auditor’s
report specially with respect to the following:
Any hazardous inventory that would need to be written off.
Provisions that may become necessary for refund of returned products, when the matter becomes known.
Disclosures relating to contingent liabilities that may need to be recognized in respect of damages that may be claimed
by the customers.
(v)If the auditor concludes that the noncompliance has a material effect on the financial statements, which has not been
properly reflected in the financial statements, the auditor should express a qualified or an adverse opinion.
(vi)If the company refuses to disclose the matter itself the auditor should consider whether it need to communicate with
regulatory and enforcement authorities. While making such a decision, the auditor should consider the requirements of
the code of ethics according to which information discovered while performing a professional engagement must not be
disclosed without proper and specific authority to do so, or unless there is a legal or professional right or duty to disclose.
(vii)The auditor may need to seek legal advice in such circumstances, giving due consideration to the auditor’s
responsibility to the public interest.
(viii)Obtain clarification on view of parent company.

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(ix)The auditor may conclude that withdrawal from the engagement is necessary if the entity does not take the remedial
action that the auditor considers necessary in the circumstances. Factors that would affect the auditor’s decision in this
regard, include the following:
implications on the integrity of the highest authority within the entity which may affect the reliability of management
representations;
the effects on the auditor, of continuing association with the entity.
If the firm finally decides to resign, it may circularize a ‘statement of circumstances’ which would describe the reason for
the resignation. However, in reaching such a conclusion, the auditor would ordinarily seek legal advice.

Q.13 (i)
Effect on Financial Statement Effect on Audit Report
The amount due from Express represents If the management fails to provide for the
19.5% of profit before tax and is therefore outstanding debt or disclose the facts, the
material by size. Consequently, opinion would be qualified on grounds of
• provision should be made for the disagreement as the amount is material.
outstanding amount to the extent that it
is not recoverable. Or
• Disclosure should be made if there is an
uncertainty as to the outcome of the
liquidation.

Express is a major customer of BL as 35% of its The audit report will be modified in the form
revenue is earned from it. Its liquidation may of inclusion of an “emphasis of matter”
caste significant doubt on BL’s ability to paragraph.
continue as going concern. In that case a
disclosure should be made.

(ii) The amount involved is potentially material as • If the management agrees to include a
Rs. 10 million is 4% of total assets and around note explaining the issue, the report will
33% of profit before tax. A disclosure should be modified by including an emphasis of
be given describing the situation in the matter paragraph.
financial statements as the circumstances give • If the directors refuse to include a note in
rise to a significant uncertainty which could the financial statements or the note is
have an impact on the financial statements. inadequate, the opinion should be
qualified due to disagreement.

(iii) Repair and maintenance cost is a revenue • Although there is disagreement over the
expenditure and should be charged to the accounting treatment of the repairs and
profit and loss account. maintenance costs, the amount is not
material as it is only 3.6% of profit before
tax and 0.45% of total assets.
• There is no need to modify the audit
report as long as any unadjusted errors in
aggregate do not exceed the materiality
threshold.
• Matter should be reported in
Management letter.

(iv) (iv) Any tax paid at import stage under • Amount involved is 3.3% of profit before
FTR should be recognized as a tax tax and 0.4% of total assets and therefore
expense in the period in which the is not material.
related goods are sold. • There is no need to modify the audit
Accordingly, the portion of the tax paid that report as long as any unadjusted errors in
pertains to the unsold inventory should be aggregate do not exceed the materiality
carried forward in the balance sheet as threshold.
prepaid tax, subject to the following • Matter should be reported in
conditions: Management Letter unless the error is
• It is probable that the sale of imported rectified.
goods would result in sufficient future

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taxable profits;
• The carry forward of tax shall not relate
to the inventories written down to net
realizable value in accordance with IAS 2
“Inventories”;
• The tax to be carried forward as
explained above shall not constitute
value of inventories;

Q.14 (a)
 The auditor should communicate with the client and inform them about the omission.
 The auditor should also advise the client to inform the Securities and Exchange Commission of Pakistan the
relevant stock exchanges, and other regulatory bodies wherever the accounts have been submitted.
 The auditor should ensure that the management sends a corrigendum to all the shareholders before the AGM. If
due to time constraint or any other reason it is not possible, the auditor should see that the management, in
addition to sending the corrigendum, shall also inform the shareholders about the omission at the AGM.
 Under the Companies Ordinance, 1984, the auditors are entitled to attend the Annual General Meeting therefore
they should inform the shareholders themselves if management fails to do so.

(b) The auditor should ensure the same actions as mentioned in(a) even if the amount involved is not material

Q.15
Examiners’ Comments:
This was an easy question. A situation was given in which the client had issued the financial statements before the issuance of
audit report. Most of the students were able to list the actions that a firm will usually take in such a situation, such as taking
legal opinion, informing SECP and ICAP and taking steps to prevent reliance on the financial statements. However, very few of
the students could point out that the auditor should also communicate with the client to ascertain their point of view. The
discussion with the client was all the more important because as given in the question, the financial statements were sent to
the client, for approval of the Board of Directors which was an indication that the auditor was to a great extent satisfied with
the information depicted in the financial statements.

Q.16

Examiners’ Comments:
In this question the students were supposed to give their views on various situations arising during a limited scope review of
interim financial statements. Only about 10% of the students produced good answers. Most others did not seem to be aware
of the differences between a limited scope review and a full scope audit and consequently gave inappropriate
recommendations.
The mistakes noted in majority of the answers are discussed hereunder:
(i) Failure to observe stock count:
A large majority did not know that the auditor is not required to observe the stock count in a review engagement and
declared that the auditor should qualify his report or give a disclaimer.
(ii) Management decision regarding forward exchange contracts:
While discussing the client’s exposure to exchange rate risk, very few of the students could identify the fact that the auditor is
not supposed to give assurance on the adequacy of the management’s risk assessment procedures.
Most of them strongly recommended that the auditor should carry out detailed procedures to assess the impact of the
management’s decision of not covering foreign currency liabilities through forward contracts, on the financial results of the
company. Normally the auditor is not supposed to carry out such procedures. Only when the open position casts significant
doubt as regards the overall viability of the company’s business, the auditor may decide to draw the attention of the readers
by adding an emphasis of matter paragraph.
(iii) Sale of the company’s set-up to an associated undertaking:
Most of the answers were focused on the requirements of IAS-24 on related parties. The importance of an explanatory note
for understanding the changes in financial position of the company, was highlighted by very few of the candidates.
(iv) Discontinuation of the practice of using Age Analysis for bad debts estimation:
A large majority was able to answer correctly that age analysis was not compulsory if there are other means of assessing the
adequacy of bad debt provision. Still, about 20% of the students declared otherwise.
(v) Failure to carry out review of subsequent events:
Only about 50% of the students knew that the auditor is not responsible to consider subsequent events, in a review of interim
financial statements.

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Q.17
Examiners’ Comments:
(a) Students were required to discuss the significance of a major donation made by a company which had incurred a loss.
Instead of discussing the specific situation, a large number of students listed down the routine audit steps which the auditor
carries out in a normal situation i.e. when the amount of donation is not material enough to have a significant impact on the
results of the company.
Very few of the students considered the point that such a huge amount of donation, by a company, which has already
incurred losses, casts serious doubts about the motive behind such donation and the audit procedures designed by them did
not seem to address this important aspect.
(b) In this part however, a large number of students discussed the importance of evaluating whether the donation can be
classified as an expenditure incurred for the purpose of the company’s business and how to qualify the report if the answer to
the above was in the negative.

Q.18
Examiners’ Comments:
This was a practical question. According to the given scenario the audit client, a pharmaceutical company expected the
issuance of a show cause notice from the concerned authorities, on account of its failure to commence its own manufacturing.
Presently its products were being manufactured under non-cancellable toll manufacturing agreements.
Two aspects of the situation were examined i.e.
• Effect on financial statements
• Effect on audit report
The issues that were relevant in the above situation mainly included the following:
• possibility of imposition of fines
• incurrence of damages that may become payable due to discontinuation of contracts
• threat of forced discontinuation of operations
• concerns related to validity of going concern assumption
Most of the candidates were able to identify the above issues and assessed their impact on the financial statements and on the
audit report based on the guidance available in the auditing standards.

Q.19
Examiners’ Comments:
Very few students could identify the threat of cancellation of license by SECP due to erosion of equity and the impact of this
threat on the audit.
Q.20
Examiners’ Comments:
Most candidates suggested extreme measures such as disowning the financial statements by giving public notices in the
newspapers etc. They should have considered the fact that since the amount involved is not material the expectation is that
the omission is just on account of a mistake.
The measures to be taken by the auditor in such a situation are as follows:
(i)Informing the client and requesting it to advise the SECP and the relevant stock exchanges and if possible all the
shareholders.
(ii)Informing the shareholders in the AGM.
(iii)Finally, if the auditor feels that the client is not taking appropriate steps, he should seek legal advice.
Q.21
Examiners’ Comments:
Two accounting issues relating to lease accounting and deferred tax were discussed in the question by giving notes to the
financial statements and draft auditor’s report on such financial statements.
The students were required to evaluate the issues and to identify what further information is required to evaluate them.
Further, if the management does not agree with the contention of the auditors then its impact on the audit opinion was
required to be discussed.
Except in case of few candidates, this question was not attempted properly. Generally, candidates were able to identify the
issues in the question but were not able to identify what further information is required to form appropriate audit opinion
and did not discuss the situation if management does not agree to make adjustments in the financial statements and its effect
on the audit opinion.

Q.22
Q.23
Q.24 (a)Matters significant to the Auditor
(i) According to IAS-33, for the purpose of calculating diluted earnings per share, an entity shall assume the exercise of
dilutive options of the entity. The IAS does not allow any exception to this rule.

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(ii) Whether the share options given to the directors have been properly disclosed in the financial statements.
(iii) The exercise of share options after the close of year needs disclosure as a non-adjusting event.
Implications on the audit report
(i) If the directors do not agree to amend the diluted earnings per share, the audit report should be modified in this
respect on the ground of disagreement.
(ii) If proper disclosure relating to exercise of share option has not been made, the audit report should be modified due to
non-disclosure of material information.
(b)Matters significant to the Auditor
(i) According to IAS-16 Property, Plant and equipment, if an item of property, plant and equipment is revalued, the entire
class of property, plant and equipment to which that asset belongs shall be revalued.
(ii) The increase due to revaluation of 7 of the 10 retail shops amounts to Rs. 70 million, which represents 18.67% of total
assets and is therefore material to the statement of financial position. A disclosure will be required.
(iii) The auditor should ask the management either to defer the revaluation to a period when all information related to all
the shops is available from the valuer or revalue all the shops by requesting the valuer to submit his final report prior to
audit completion.
Implication on the Audit Report:
If the management refuses to disclose the information about the outcome of valuation exercise, the audit report should be
modified on the ground of disagreement with qualified” opinion.
(c)Matters significance to the Auditor
(i)According to IAS-38 , internally generated brands shall not be recognized as intangible assets. Hence, the capitalization
of internally generated brands is a contravention to the requirement of IAS-38 .
(ii)The intangible asset is material as it represents 2.7% of total assets.
Implications on the Auditor’s Report
If the financial statements are not revised in accordance with IAS, the audit report should be qualified on the ground of
disagreement with qualified opinion due to material misstatement.

Q.25
Q.26
Q.27 Suggested Solution:
Evaluation of the situation:
• The debts should have been shown as current debts in accordance with the terms of the loan agreements.
• The verbal confirmation from the banks cannot be a replacement to avoid showing loans as current liabilities as
nothing is in writing.

Furthermore, even if the bank confirms it even then it is a subsequent non-adjusting event as this has been done
subsequent to year-end, and on the balance sheet there was a breach of loan covenants.
• In addition to this the period of grace should be atleast of twelve months after the reporting date within which the
Naveed Limited can rectify the breach.

Basis for qualified opinion

As more fully explained in note xx to the financial statements, the debt covenants of the loans as at 30 June 20XX have
been breached by the company. Accordingly, the long term loans reflected in the statement of financial position of the
company amounting to Rs. XXX million should have been classified as “current liabilities” as the terms of the loan require
immediate repayment of loan in case of breach of debt covenants.

Q.28 Suggested Solution:

(b) BASIS OF MODIFICATION PARAGRAPH:
As stated in Note X to the financial statements it is the company’s policy to value its investment properties at fair value.
However the value determined by the company of properties located at Lahore, Islamabad and Peshawar is Rs. 25.4
million, Rs. 30.2 million and Rs. 20.2 million respectively. The values of respective properties determined by DEF valuers
appointed by our firm are Rs. 16.2, 19.4 and 15.4 million respectively.
Management and its experts are unable to explain the differences in values and has stated the properties at values
determined by the company. Had the said properties stated at values determined by DEF Valuers, profit before taxation
would have been decreased by Rs. 24.8 million and income tax, net income/shareholders’ equity would have been
reduced by Rs. 7.44 million and Rs. 17.36 million respectively.

Examiners’ Comments:
In this part of the question the candidates were required to draft a basis of modification paragraph. The overall response was
average. Many candidates produced the opinion paragraph instead of basis of modification paragraph. Many candidates took
the view that the situation gave rise to limitation of scope which was not correct because according to the situation, the

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auditor had carried out the necessary audit steps. Further, reference to the note to the financial statements was missing in
many cases.

Q.29 On September 30, 2007, the inventory of a subsidiary was overvalued by Rs. 5.7 million. The overvaluation was adjusted
to the extent of Rs. 1.9 million during each of the years ended September 30, 2008 and 2009. Consequently the inventory
as appearing in the consolidated financial statements for the year ended September 30, 2009 has been overstated by Rs.
1.9 million. In our opinion, the above adjustment is not in accordance with the International Accounting Standards which
requires that the overstatement should be rectified retrospectively. Accordingly, the inventory should be reduced by Rs.
1.9 million in the year 2009 and by Rs. 3.8 million in the year 2008, profit for the year should be increased by Rs. 1.9
million in the year 2009 and by Rs. 0.475 million in 2008, accumulated retained earnings should be increased by Rs.
2.1375 million in the year 2009 and by Rs. 0.4275 million in the year 2008, goodwill should be increased by Rs. 3.8475
million in both the years i.e. 2009 and 2008 and minority interest should be reduced by Rs. 0.19 million in the year 2009
and by Rs. 0.38 million in the year 2008.
In our opinion, except for the effect on the consolidated financial statements of the matter referred to in the preceding
paragraph, the consolidated financial statements present fairly the financial position of Blue Sky Limited and its
subsidiary as at September 30, 2009 and the result of their operation for the year then ended.

Q.30
Examiners’ Comments:
(a)(i)This again was an easy question. Obviously, since the provision that the company had made was not in accordance with
the law applicable at that time it was imperative for the company to give a comprehensive note explaining the reasons for
making the provision on the basis of FTR. Almost all students were able to explain this.
(ii)Here again the obvious answer was that a qualifying paragraph was required to be inserted in the audit report. The
students were mostly able to mention this. However, most of them were lacking when it came to drafting the modification.
(b)Candidates were required to draft suitable opinion paragraph if zakat has been deducted during the year on dividend but
the same has not been deposited till the date of audit report.
Some candidates did not attempt this part
Some candidates were not able to draft proper opinion paragraph
Certain candidates drafted the opinion reasonably well but stated that this paragraph should be inserted in the audit report
before the opinion paragraph on true and fair view of the financial position.

Q.31
Examiners’ Comments:
(a)This part was attempted properly. However, some candidates did not mention the risk addressed by each audit procedure.
For example while mentioning that creditors shall be verified by obtaining confirmation (specially in respect of old creditors)
and checking subsequent payments, they did not mention that it will reduce the risk of hidden reserves and the risk that no
revenues are hidden as liabilities.
(b)Generally, candidates did not understand the situation given in the question termed it as disagreement with management
instead of scope limitation.
(c)Candidates were not able to state proper modification paragraph. They drafted it in a very general language.
Most candidates considered it a situation where there is disagreement with management and stated that its impact is not so
material. Therefore, they drafted qualification paragraph “except for” accordingly. Whereas the situation given in the
question was related to scope limitation.

Q.32
Q.33
Q.34
Examiners’ Comments:
In this question candidates were required to draft two qualifications in the audit report of Insurance Company. The
performance in the question was disappointing as candidates were not able to draft straight forward qualifications and did
not pay attention to basic requirements like quantification of the financial impact, proper drafting of the opinion para, full
details of the matter on which the report is being qualified etc.
Q.35
Examiners’ Comments:
(a) Students were able to draft qualification with regard to the departure from the International accounting standard and
method of depreciation but were not able to draft effects of the departure on the P & L and accumulated depreciation which
is an integral part of the qualification.
(b) Students on the average were able to identify the scope limitation situation and drafted the scope limitation paragraph
well.

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Q.36
Examiners’ Comments:
This question was like a short case study with specific questions asked in the end. The candidates were required to
identify the type of opinion to be expressed on the financial statements under given circumstances and to justify their
viewpoint. In part (b), the candidates were required to draft the modification and its effect on the Auditors Report.
(a) was well attempted as majority of the candidates was able to identify that an adverse opinion was required because
the non-consolidation of the subsidiary’s financial statements into its own was (a) a material and significant matter and
(b) pervasive as the same had an effect on the entire financial statements (almost all account balances included therein).
(b)The performance of the candidates in part (b) was, on an average, unsatisfactory. The modification was drafted badly
wherein most of the candidates did not include (a) the reason for the modification and (b) the effect of the modification
on the financial statements, as required by ISA – 13.
This question, which again dealt with the drafting of auditor’s opinion, was directed towards testing the mix of theoretical
and practical knowledge of the candidates. Here, again the candidate’s ability to draft an opinion on the financial
statements was tested. Although quite a number of candidates were able to identify that a qualified (‘except for’) opinion
was the most expedient under the circumstances, very few included the reasons and effects of modification in the auditors
report. The other reason for the candidates not scoring high in this question was that only a handful of candidates were
able to realize the fact that the auditor also needs to include his reservation in the scope paragraph of the auditors report.
Hence, the marks reserved for this paragraph were lost altogether by a large number of candidates.
In a nutshell, as a result of the fact that not too many candidates were able to correlate their practical experience with the
theoretical knowledge gathered from the relevant ISA, the candidates failed to secure good marks in this question.

Q.37
Q.38
Q.39
Examiners’ Comments:
Almost all the students attempted this question however very few could:
a. Answer Part ‘c’ correctly and showing it as “ the failure of the management for adequate disclosures”
b. Prepare the opinion paragraphs in a professional way
c. Clearly express views
On the average students scored around 55 % marks only as marks were lost due to the above mention problems. The students
lacked knowledge of IAS 37. Although students were able to understand the reason for modifying the report they were not
able to draft reservations as per the relevant IAS.

Q.40
(i) TYPE OF OPINION
If adequate disclosure is made in the financial statements, the auditor should ordinarily express an
unqualified opinion.

(ii) MODIFICATION OF REPORT

Auditor should modify the auditor’s report by adding an emphasis of a matter paragraph that
highlights the going concern problem by drawing attention to the note in the financial statements that
discloses the required matters .

However, the auditor is not precluded from expressing a disclaimer of opinion for a going concern
uncertainty.

(iii) DISCLOSURE
If, in the auditor’s judgment, the going concern question is not satisfactorily resolved, the auditor
would consider whether the financial statements:
(a) adequately describe the principal conditions that raise substantial doubt about the entity’s
ability to continue in operation for the foreseeable future;
(b) state that there is significant uncertainty that the entity will be able to continue as a going
concern and, therefore, as appropriate may be unable to realize its assets and discharge its
liabilities in the normal course of business; and
(c) state that the financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or to amounts and classification of
liabilities that may be necessary if the entity is unable to continue as a going concern.

(iv) DRAFT MODIFICATION

“Without qualifying our opinion we draw attention to Note X in the financial statements. The company
incurred a net loss of XXX during the year ended June 30, 2000 and, as of that date, the Company’s

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current liabilities exceeded its current assets by XXX. These factors, along with the facts that operations
of the company have been substantially reduced in the recants past, company’s ability to operate
profitably is uncertain and the availability of necessary financing is doubtful raise substantial doubt
that the Company will be able to continue as a going concern”.

Q.41
Q.42

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 ISAs – Application Guide ISA 706

ISA 706
EMPHASIS OF MATTER AND
OTHER MATTER PARAGRAPHS

QUESTIONS

CONCEPT CHECKERS

Q.1 (i) Are the following statements true or false?

1. The inclusion of an 'emphasis of matter' paragraph or an 'other matter' paragraph is not a type of modification of the
opinion.
2. 'Emphasis of matter' paragraphs and 'other matter' paragraphs are always presented before the audit opinion.

(a) 1. True 2. True

(b) 1. False 2. False
(c) 1. True 2. False
(d) 1. False 2. True

(ii) Which TWO of the following statements are true?

(a) The inclusion of an ‘emphasis of matter’ paragraph is a type of modification to the opinion.
(b) The inclusion of an ‘other matter’ paragraph is not a type of modification to the opinion.
(c) ‘Other matter’ paragraphs can be used to elaborate planning and scoping matters.
(d) Emphasis of matter paragraphs can be used to draw users’ attention to material uncertainties in relation to
going concern that have been disclosed properly.
(e) ‘Other matter’ paragraphs can be used to elaborate on modifications made to the audit opinion.

(iii) Which TWO of the following statements are true?

(a) Emphasis of matter paragraphs are used to draw users' attentions to matters that are not already disclosed in
the financial statements.
(b) Other matter paragraphs may be used to refer to a matter other than those presented or disclosed in the
financial statements that, in the auditor's judgment, is relevant to users' understanding of the audit.
(c) Other matter paragraphs are not used to draw attention to auditor's responsibilities.
(d) Emphasis of matter paragraphs draw users' attention to matters that are fundamental to users' understanding
of the financial statements.

CONCEPT REVIEW QUESTIONS

Q.1 If adequate disclosure is made in the financial statements the auditor should ordinarily express an unqualified opinion
and modify the auditor’s report by adding on Emphasis of a Matter paragraph.
(a) What is the objective of adding a paragraph, as referred to above? (01)
(b) Prepare a draft of ‘Matter of Emphasis’ paragraph. (04)
(c) Would you modify your audit opinion by giving a ‘Matter of Emphasis’ paragraph in case adequate disclosure is not
made in the financial statements of the fact that the company has been unable to renegotiate its significant borrowings?
Discuss. (04)
(ICAP, CFAP 06 Level – Winter 2001)

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Q.2 Describe the implications on the audit report where the prior year’s audit has been conducted by another auditor. (04)
(ICAP, CFAP 06 Level – Winter 2012)

CONCEPT APPLICATION QUESTIONS

Q.1 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)
(ICAP, CFAP 06 Level – Winter 2019)

Q.2 Identify and explain the shortcomings in the following paragraph of the draft audit report of Javed Limited:

Emphasis of Matter:
We draw attention to the fact that the company has accumulated losses of Rs. 115,436,540 (2011: Rs. 85,365,479) and
certain payments against long term loans were overdue as at the reporting date. As at 30 September 2012, its total
liabilities exceeded its total assets by Rs. 15,450,300 (2011: Rs. 11,542,200). These conditions indicate the existence of a
material uncertainty that the company may be unable to continue as a going concern. (04)
(ICAP, CFAP 06 Level – Winter 2012)

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SUGGESTED SOLUTIONS

CONCEPT CHECKERS

Q.1
MCQ
Correct Option
#
(i) (b)
(ii) (b) and (c)
(iii) (b) and (d)

CONCEPT REVIEW QUESTIONS

Q.1
Q.2
The auditor will include other matter paragraph in the auditor’s report stating that:
The financial statements of the prior period were audited by the predecessor auditor
The type of opinion expressed by the predecessor auditor
The date of that report

Examiners’ Comments:
This part of the question required students to simply mention the extra contents of the audit report where prior year audit
was performed by another auditor. Most of the students mentioned the requirements correctly. However, some students
seemed confused and unnecessarily gave detailed steps regarding audit of opening balances.

CONCEPT APPLICATION QUESTIONS

Q.1
Q.2 The emphasis of matter paragraph should indicate that auditor’s opinion is not qualified in respect of the matter
referred.
The audit report should refer to all relevant notes including the note where material uncertainty has been described. If
there is no such note than the opinion should be qualified.
The phrase “that the company may be unable to continue as a going concern” is to be replaced with the phrase “which
may cast significant doubt on the company’s ability to continue as a going concern”.

Examiners’ Comments:
This part of the question required students to identify errors in the given emphasis of matter paragraph. Most of the students
seemed well versed on this issue and were able to secure full marks.

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 ISAs – Application Guide ISA 710

ISA 710
COMPARATIVE INFORMATION
QUESTIONS

CONCEPT CHECKERS

Q.1 (i) Which TWO of the following statements are correct if comparative financial statements have not been audited?
(a) State that the comparative financial statements are unaudited in an ‘emphasis of matter paragraph’
(b) State that the comparative financial statements are unaudited in an ‘other matter’ paragraph
(c) Audit the comparative financial statements
(d) Obtain sufficient appropriate audit evidence that the opening figures do not contain material misstatements that
affect the current period.

(ii) Which TWO of the following are types of comparative information as defined by the relevant ISA?
(a) Corresponding figures
(b) Comparative figures
(c) Corresponding financial statements
(d) Comparative financial statements

(iii) Which TWO of the following statements are TRUE if corresponding figures have not been audited?
(a) The auditor should state that the corresponding figures are unaudited in an 'emphasis of matter paragraph'
(b) The auditor should state that the corresponding figures are unaudited in an 'other matter' paragraph
(c) The auditor should audit the corresponding figures
(d) The auditor should obtain sufficient appropriate audit evidence that the opening figures don't contain material
misstatements that affect the current period

(iv)
Which ONE of the following statements is TRUE if:
1. comparative financial statements have been audited by another auditor; AND
2. the other auditor's audit report has not been included with the current period auditor's report?

(a) The auditor should state that the comparative financial statements were audited by a different firm in an
'emphasis of matter paragraph'
(b) The auditor should state that the comparative financial statements were audited by a different firm in an 'other
matter paragraph'
(c) The auditor should audit the comparative financial statements
(d) The auditor should not refer to the fact that the comparative financial statements were audited by a different
firm

(v) Are the following statements true or false?

1. Corresponding figures are amounts and other disclosures for the prior period included as an integral part of the current
period financial statements.
2. When corresponding figures are included the auditor's report refers to each period (current and prior) separately.

(a) 1. True 2. True

(b) 1. False 2. False
(c) 1. True 2. False
(d) 1. False 2. True

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(vi) Which TWO of the following are types of comparative information as defined by the relevant ISA?
(a) Corresponding figures
(b) Comparative figures
(c) Corresponding financial statements
(d) Comparative financial statements

CONCEPT REVIEW QUESTIONS

Q.1 Explain the difference between corresponding figures and comparative financial statements. (04)
(ICAP, CFAP 06 Level – Winter 2007)

Q.2 State the essential reporting differences with regard to Corresponding figures and the Comparative financial statements.
(02)
(ICAP, CFAP 06 Level – Summer 2001)

Q.3 What is included in the auditor’s assessment in deciding about the extent of audit procedures with respect to the
Corresponding figures ? (04)
(ICAP, CFAP 06 Level – Summer 2001)

Q.4 Discuss the reporting requirements for the auditor when his report on the prior period is modified. (04)
(ICAP, CFAP 06 Level – Summer 2001)

Q.5 You are carrying out the audit of Akhtar Autos Limited (AAL) for the year ended 31 March 2015, a listed company,
engaged in the business of manufacture of spare parts for trucks, buses and tractors
Previous year’s audit report was qualified on account of inability to obtain sufficient and appropriate audit evidence with
respect to stores and spares, as ledger of stores and spares contained many negative balances.
Required:
Discuss the possible implications on audit report with respect to previous year’s modification. (05)
(ICAP, CFAP 06 Level – Summer 2015)

Q.6 Sukoon Limited is engaged in manufacturing and sale of office equipments. It has appointed you in place of XYZ &
Company for the audit of financial statements for the year ended June 30, 2007.

During the last year (ended on June 30, 2006), the middle management in connivance with lower staff booked a sale of
material amount which actually pertained to the current year. XYZ & Company has given an unmodified report on the
previous year’s financial statements.
Required:
As a result of material misstatement in sales of previous year, management has agreed on restatement of the
corresponding figures in current year’s financial statements. What would be the impact on the auditors’ report in this
case? (03)
(ICAP, CFAP 06 Level – Winter 2007)

Q.7 Describe the implications on the audit report where the prior year’s audit has been conducted by another auditor. (04)
(ICAP, CFAP 06 Level – Winter 2012)

Q.8 (a) State the essential reporting differences with regard to Corresponding figures and the Comparative financial
statements. (02)
(b) What is included in the auditor’s assessment in deciding about the extent of audit procedures with respect to the
Corresponding figures ? (04)
(c) Discuss the reporting requirements for the auditor when his report on the prior period is modified. (04)
(ICAP, CFAP 06 Level – Summer 2001)

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Q.9 Discuss the responsibilities of the auditor when during the audit of the current period’s financial statements, he becomes
aware a material misstatement that affects the prior period financial statements on which an unmodified report has been
previously issued. (10)
(ICAP, CFAP 06 Level – Winter 2000)

Q.10 (a) Explain the difference between corresponding figures and comparative financial statements. (04)
(b) As a result of material misstatement in sales of previous year, management has agreed on restatement of the
corresponding figures in current year’s financial statements. What would be the impact on the auditors’ report in this
case? (03)
(ICAP, CFAP 06 Level – Winter 2007)

CONCEPT APPLICATION QUESTIONS

Q.1 Mr. Burhan is working as audit manager in a firm of Chartered Accountants. The audit teams have brought the following
matters to his attention:
On the first audit of Nasir Limited (NL), the Chief Finance Officer of NL has revealed that due to an error, a material
liability was understated in the preceding financial year.
Required:
Explain how the audit teams should deal with the above situations. (08)
(ICAP, CFAP 06 Level – Summer 2016)

Q.2 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 December
2019.

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:

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.
(ICAP, CFAP 06 Level – Winter 2019)

Q.3 You are carrying out the audit of Akhtar Autos Limited (AAL) for the year ended 31 March 2015, a listed company,
engaged in the business of manufacture of spare parts for trucks, buses and tractors.
Previous year’s audit report was qualified on account of inability to obtain sufficient and appropriate audit evidence with
respect to stores and spares, as ledger of stores and spares contained many negative balances.
Required:
Discuss the possible implications on audit report with respect to previous year’s modification. (05)
(ICAP, CFAP 06 Level – Summer 2015)

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Q.4 You are the engagement partner on the audit of Mars Limited, for the year ended 30 September 2014.
On commencement of the review of working paper file, the audit manager has informed you that the audit report would
need modification. The following draft modification is available in the file:
“We draw attention to note 10 to the financial statements that fully explains that amount of Rs. 70 million due from
Utopia Limited (UL), that is outstanding since September 2013, is not recoverable as UL is in the process of winding up
from 20 December 2013. Therefore, the said amount has been fully provided for in the financial statements of the current
year due to which the company has incurred loss during the year. As the revenue from UL amounts to 40% of total
revenue of 2013, we are of the view that it is fundamental to users’ understanding of the financial statements. Our opinion
is not qualified in respect of this matter.
The financial statements for the year ended 30 September 2013 were audited by another auditor who expressed an
unmodified opinion on those statements on 25 December 2013.”
The draft financial statements show a loss of Rs. 92.4 million (2013: Profit of Rs. 16.4 million) and total assets of Rs. 395
million (2013: Rs. 410 million).
Required:
(a) Evaluate all the facts from the information available above and state the actions the auditor needs to take on the basis
of evaluation. (12)
(b) Making necessary assumptions on the basis of the above information, draft an appropriate modification on any one
matter, to be included in the audit report. (05)
(ICAP, CFAP 06 Level – Winter 2014)

Q.5 ABC and Company, Chartered Accountants, have been requested to give their consent for appointment as the auditor of
Sindh Limited (SL), in place of XYZ and Company, Chartered Accountants.
XYZ and Company had qualified the previous year’s audit report because it was unable to physically verify the factory
building and to observe physical inventory count, due to law and order situation. However, during the course of current
year’s audit, ABC and Company was able to observe the physical inventory count and also carry out physical verification
of the factory building as the law and order situation has improved.
Required:
Discuss the matters which you would consider in the above situation and the possible impact thereof on the audit report.
(09)
(ICAP, CFAP 06 Level – Winter 2013)

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SUGGESTED SOLUTIONS

CONCEPT CHECKERS

Q.1 (i)
(ii)
(iii)
If prior period figures have not been audited, then the auditor should state in an 'other matter' paragraph that the
corresponding figures are unaudited but will still need to obtain sufficient appropriate audit evidence that the opening
figures don't contain material misstatements that affect the current period.

(iv)
The auditor should state that the comparative financial statements were audited by a different firm in an 'other matter
paragraph'. In addition the auditor should include the nature of the opinion expressed by the previous auditor, the date of
the previous audit report and if modified the reasons for modification.

(v)
Statement 1
Corresponding figures are amounts and other disclosures for the prior period included as an integral part of the current
period financial statements.
Statement 2
When corresponding figures are included, the auditor's report refers to the current period only unless there is a prior
period unresolved modification.

(vi)
ISA 710 explains various requirements in relation to corresponding figures and comparative financial statements.

CONCEPT REVIEW QUESTIONS

Q.1
Q.2
Q.3
Q.4
Q.5
Q.6
Q.7
Q.8
Examiners’ Comments:
This question dealing with the Corresponding figures and requiring only theoretical knowledge was, on an average, handled
well by the candidates.
The first part of the question dealt with the reporting differences between the Corresponding figures and Comparative
financial statements. Although quite a large number of candidates were able to score good marks in this part, a number of
candidates failed to realize that the question required reporting differences and not the fundamental difference and/or
distinction between the two terms and, hence, their answers failed to yield any marks for them.
By and large, the second part of the question was well attempted by the candidates who were able to identify the factors
which an auditor should consider before deciding about the extent of audit procedures to be applied in respect of
Corresponding figures.
The candidates appeared to have a bit of problem coming to terms with the final part of the question which dealt with the
reporting requirements when the prior period auditors’ report is modified. Although anyone who had thoroughly read the
relevant ISA would have been able to answer it to perfection, the candidates did not appear confident in their answers to this
part and instead of giving the specific answer as provided in the ISA tried to mention everything under the sun in an attempt
to gain marks.

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Q.9 In these circumstances, the auditor should:

(a) Inform the directors and ascertain how the directors intend to deal with the situation.
(b) Take legal advice on his position.
(c) Consider public withdrawal of the audit report.
When management revises the financial statements, the auditor should:
(i) Carry out the audit procedures necessary in the circumstances.
(ii) Review the steps taken by management to ensure that anyone in receipt of the previously
issued financial statements together with the auditor's report thereon is informed of the
situation.
(iii) Issue a new report on the revised financial statements.
The new auditor's report should include an emphasis of a matter paragraph referring to a note to the
financial statements that more extensively discusses the reason for the revision of the previously
issued financial statements and to the earlier report issued by the auditor.
In this regard the following points are relevant:
(i) The new auditor's report would be dated not earlier than the date the revised financial
statements are approved.
(ii) Audit procedures on subsequent events would be extended to that date.
Where the management does not revise the financial statements but the auditors feel they should be
revised, or if the management does not intend to take steps to ensure anyone in receipt of the
previously issued financial statements is informed of the situation, then the auditor should consider
steps to take, on a timely basis, to prevent reliance on their report. The actions taken will depend on
the auditor’s legal rights and obligations (e.g. to contact the shareholder; directly and legal advice
received.

However, it may not be necessary to revise or withdraw any audit report when issuance of financial
statements for later period is imminent, provided,management agrees that appropriate disclosure will
be made in such statements.

Q.10
Examiners’ Comments:
(a) In this part the majority was able to differentiate correctly that corresponding figures form an integral part of the
financial statements whereas prior year’s figures contained in comparative financial statements do not form part of the
current period financial statements.
(b) In this part the majority was able to identify that the auditor will give an emphasis of the matter paragraph in which he
shall describe the circumstances that required the change in corresponding figures alongwith reference to appropriate
disclosure in the financial statements.

CONCEPT APPLICATION QUESTIONS

Q.1 The procedure adopted would be as follows:

 Discuss the reasons of understatement with the client’s management and assess whether reasonable grounds exist to
assume that it was an error.
 If it was an error or due to control weaknesses then consider the impact on overall risk assessment and nature, timing
and extent of audit procedures.
 Obtain the working for re-statement from the client along with the relevant disclosure in the financial statements.
 Identify impact, if any, for the current year as well.
 If it appears that the understatement was intentional, then consider the impact on the assessment on integrity of
management.
 If the integrity is doubtful, then consider withdrawing from engagement, if possible.
 If considered appropriate, discuss the matter with the previous auditor.
 Ensure proper accounting and disclosure of the restatements i.e. the re-statement will have to be made in accordance
with the requirements of IAS-8 pertaining to accounting and disclosures
 Highlight the matter of re-statements to those charged with governance.
Examiners’ Comments:
(a)According to the situation, on the first audit of an entity, the CFO informed the auditors about an error in the previous
year’s financial statements. Most of the candidates only covered the accounting treatment under IAS – 8 and the implications
on the financial statements. Very few of them raised the key issue i.e. ascertaining whether it was actually an error and the
related implications if it was an intentional misreporting rather than an error.

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Q.2

Q.3 If the matter related to previous years modification is still unresolved, the auditor shall modify the auditor’s opinion on
the current period financial statements, and in the basis for modification paragraph, the auditor shall refer to both the
current period’s figures and the corresponding figures in the description of the matter giving rise to the modification
when the effects or possible effects of the matter on the current period’s figures are material.
If the previous years’ matter is resolved and properly accounted for or disclosed in accordance with the applicable
financial reporting framework, the auditor’s opinion on the current period need not refer to the previous modification.
If the previous years’ matter is not relevant to the current period figures, it may still be appropriate for the auditor to
qualify the opinion on current period financial statements because of the effects or possible effects of the unresolved
matter on the comparability of the current and corresponding figures.

Examiners’ Comments:
In this part, the candidates were required to discuss the possible implications on current year’s audit report with respect to
issues which formed the basis of qualification in previous year’s audit report. The performance was good as most of the
candidates were able to identify the possible implications on the audit report in case the matter was resolved and also in case
the matter remained unresolved. However, very few students could clarify that even if issues related to previous year are not
relevant with regard to current period, the auditor may still have to qualify the report because of the effect of the unresolved
issues on the comparability of current and corresponding figures.

Q.4 (a)
 The inclusion of emphasis matter paragraph in the audit report for explaining the irrecoverability of amount due from
UL is not appropriate.
 As the amount is outstanding since last September, it needs to be provided in the financial statements of September
2013.
 The auditor will ask the management to restate the prior period figures in the current financial statements and make
appropriate disclosures thereof.
 If the management agrees to restate the figures and make appropriate disclosures in the financial statements, the
auditor report may include an emphasis of matter paragraph describing the circumstances and referring to the note in the
financial statements.
 If the management refuses to restate the financial statements or make appropriate disclosures, the auditor shall express
a qualified opinion or an adverse opinion on the current period financial statements, modified with respect to the
corresponding figures included therein.
 Furthermore, UL is a major customer of ML as 40% of its revenue is earned from it, as the company has incurred a loss
of Rs. 22.4 million in the absence of sales to UL. The appointment of a liquidator at UL is an event which (alone or
aggregated with other events) may cast significant doubt on ML’s ability to continue as going concern.
 If the management has not yet performed an assessment of the entity’s ability to continue as a going concern, requesting
management to make its assessment.
 Evaluating management’s plans for future actions in relation to its going concern assessment, whether the outcome is
likely to improve the situation and whether management’s plans are feasible in the circumstances.
 If after reviewing management’s plan and performing procedures, it is concluded that material uncertainty exists as
regards the going concern assumption, a note should be given in financial statements describing the liquidation of UL,
which may cast significant doubt on the company’s ability to continue as a going concern and management’s plan to deal
with the situation and therefore, that it may be unable to realize its assets and discharge its liabilities in the normal course
of business.
 The audit report will be modified in the form of inclusion of an emphasis of matter paragraph which will explain the
uncertainty and draw the shareholders’ attention to the note in the financial statements.
 If the management do not agree to disclose a note, a qualified or adverse opinion should be considered.
 It shall also be stated in the audit report that there is a material uncertainty that may cast significant doubt about the
company’s ability to continue as a going concern.
 If the financial statements have been prepared on a going concern basis but, in the auditor’s judgment, management use
of going concern assumption is inappropriate, the auditor shall express an adverse opinion.
 If the use of going concern assumption is not appropriate, and the management prepares the financial statements on
alternative basis, the auditor will express an unmodified opinion, provided adequate disclosure is made in the financial
statements, but may consider it appropriate or necessary to include an Emphasis of matter paragraph in the auditor’s
report, to draw user’s attention to that alternate basis and the reasons for its use.
 If management is unwilling to make or extend its assessment, a qualified or disclaimer of opinion may be appropriate,
because it may not be possible for the auditor to obtain sufficient appropriate audit evidence regarding the use of the
going concern assumption in the preparation of financial statements.

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 ISAs – Application Guide ISA 710

(b) As described in note X to the financial statements, the company has recognized the provision of Rs. 70 million against
amount due from Utopia Limited in the current year. We consider that the said provision should have been recognized in
the year 2013. Had a provision been made of the amount receivable from Utopia Limited, the profit after taxation of year
2013 would have been reduced by Rs. 70 million and loss after taxation of year 2014 would have been reduced by Rs. 70
million.
In our opinion, except for the effect on the financial statements of the matter referred to in the preceding paragraph, the
financial statements present fairly the financial position of Mars Limited as at 30 September 2013 and the results of their
operation for the year then ended.

Examiners’ Comments:
(a)A draft emphasis of matter paragraph was given in the question which had been prepared by an audit manager along
with certain other information. The candidates were required to state what actions they would take under the given situation
and to redraft an appropriate modification paragraph.
The performance was below average. Majority of the students were able to raise the issue of going concern correctly but very
few could realize that the provision that was made in the current year should have been made in the prior year and hence
there was a need for restatement of figures. Consequently, a modification paragraph would only be appropriate if the client
agreed to the restatement; otherwise a qualified report would be required. Some students who correctly noted the error in
previous year’s financial statements could not recommend the proper approach. Some of them even mentioned that previous
year’s auditors should be asked to give a revised report or report on the corrected financial statements, which could have
been relevant in case of comparative financial statements approach which was not the case.
(b)While drafting the required modification paragraph using necessary assumptions, most students were aware how to start
and end the modification i.e. by using appropriate reference to the note whilst introducing the issue and ending the same with
the opinion. However, many of them did not explain the reasons for their opinions and the monetary effect of the same. Some
of them drew conclusions which were not in line with their assumptions. Some students also made entirely unrelated
assumptions.

Q.5 The matters that would be considered in the above situation are as follows:
 Whether auditors are in a position to obtain sufficient appropriate audit evidence with respect to quantities of inventory
at the beginning of the year by means of other operating procedures.
 If auditors are unable to obtain sufficient appropriate audit evidence with respect to quantities of last year through
other audit procedures, it will imply that the matter giving rise to modification is still unresolved, and the auditor shall
modify the auditor’s opinion on the current period’s financial statements.
Impact on the audit report would be as follows:
 Auditor shall explain in the audit report that the audit opinion has been modified because of the effects or possible
effects of the unresolved matter on the comparability of the current period’s figures and the corresponding figures,
although the matter is not relevant to the current period figures.
 Even if the above matters are resolved auditor shall be required to include in the audit report, an other matter
paragraph stating that:
 The financial statements of the prior period were audited by the predecessor auditor, who has issued a qualified
opinion due to non-observance of inventory count and date of prior year’s audit report.
 The qualification related to non-verification of building of last year is not relevant as the auditor is able to physically
verify the building.

Examiners’ Comments:
(b)According to the situation given in this part, the previous auditor had qualified the audit report on account of his inability
to physically verify a building and observe stock taking because of poor law and order situation whereas the situation had
improved this year and the current auditor was not subject to such limitations. The requirement was to discuss the above
situation and the impact thereof on the audit report.
The performance in this part was average. Most candidates identified the need to include an “other matter paragraph” in the
audit report as the previous audit was conducted by another auditor. However, there was lot of confusion as regards the
impact of previous year’s qualifications. Very few candidates were able to identify that the impact on current year’s audit
report would depend on whether the current auditor is able to obtain sufficient appropriate audit evidence in respect of
opening balances of inventory, by other operating procedures and the impact on the audit report in either case. Many
students concluded incorrectly that as the matter has been resolved this year, so there is no impact thereof on the current
year’s audit report. On the other hand, some candidates went to the other extreme and concluded that the previous auditor
shall be asked to re-issue last year’s report.
Many candidates did not seem to appreciate the difference between the qualification related to non-verification of building
and the qualification related to non-verification of inventory balances.

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 ISAs – Application Guide ISA 720

ISA 720
THE AUDITOR’S RESPONSIBILITIES
RELATING TO OTHER
INFORMATION
QUESTIONS

CONCEPT APPLICATION QUESTIONS

Q.1 While reviewing the directors’ report of Bay Limited, at the conclusion stage of your audit, you noted that;

 Contingent liabilities reported in directors’ report were Rs. 250 million, whereas the directors have previously
agreed to report it in the financial statements as Rs. 525 million. On inquiry, the CFO informed that the directors
had agreed with the view of the auditors to avoid qualification although they still believe that contingent
liabilities should be reported at Rs. 250 million.
 A new plant was reported to be operative only for the half year while you have sufficient appropriate evidence
that the said plant remained in operation for almost the whole year. However, financial statements do not
contain any information about duration of plant’s operation as it was not required under the law.

What course of action would you take to resolve the issues? (06)
(ICAP, CFAP 06 Level – Winter 2006)

Q.2 On reviewing the published financial statements of RRK Limited, their auditors, Ahmad Mobeen and Company, Chartered
Accountants, noted the following:

(i) It has been mentioned in the directors’ report that a material amount which was provided as a bad debt had been
recovered after year end.
(ii)Director’s report states that decline in sales, was due to general economic conditions. However, the auditors’ feel that
it was due to inappropriate strategies adopted by the management.
(iii) A graph in the published report depicted the value of last year’s inventory at Rs. 326 million, which according to the
corresponding figures given in audited financial statements amounted to Rs. 250 million.
(iv) Directors’ report stated that negotiations for expansion of production facilities by acquiring a sick unit had been
finalized, whereas the auditors have definite information that the company could not strike the deal.

Required:
Explain how the auditor should resolve each of the above issues. What steps would the auditor need to take in case the
client does not agree with his recommendations? (10)
(ICAP, CFAP 06 Level – Summer 2008)

Q.3 Your firm has issued an audit report on the financial statements of Earth Limited. In the published annual report which
was received along with the notice of annual general meeting, you noted that certain disclosures that were agreed to be
included in the directors’ report were missing. (07)
Required:
Discuss the matters which the auditor should consider and the steps that he may need to take, in each of the above
situations.
(ICAP, CFAP 06 Level – Winter 2014)

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 ISAs – Application Guide ISA 720

Q.4 While reviewing the draft of the director’s report of NPL you have observed that projections of future profitability in the
director’s report with respect to the Health Care Division show much higher amounts as compared to the amounts shown
in the working related to the impairment of patents. The CFO has explained that on the basis of prudence and to avoid any
overstatement of intangible assets, projections in the working related to impairment have been kept on the lower side.
Required:
Evaluate the above scenario and explain how the auditor should deal with the above situation. (07)
(ICAP, CFAP 06 Level – Summer 2016)

Q.5 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)
(ICAP, CFAP 06 Level – Summer 2018)

Q.6 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 December
2019.

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.

Required:
Evaluate the above matters and discuss your firm’s course of action along with implications on the audit report, if any.
(ICAP, CFAP 06 Level – Winter 2019)

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 ISAs – Application Guide ISA 720

SUGGESTED SOLUTIONS

CONCEPT APPLICATION QUESTIONS

Q.1
Examiners’ Comments:
The auditors are required to review all other information included in the document containing the financial statements
audited by them. With the adoption of ISA-720 for practicing chartered accountants, it was expected that the topics of
material inconsistency and material misstatements of facts would have been among the issues under discussion of the trainee
students. However, there was considerable misunderstanding regarding nature of the auditors’ reports in case of
inconsistency and material misstatement of facts. The candidates were unable to distinguish between the basic conditions of
inconsistency and misstatement of fact.

Q.2
Examiners’ Comments:
In this question the students were required to discuss four different situations and explain how an auditor should resolve
them.
A large number of students replied without considering the fact that the given matters have arisen after the publication of
financial statements and the auditors’s report. Consequently in many cases they suggested totally irrelevant procedures.
The performance of students other than those referred to in the preceding paragraph, is discussed below:
(i) Most of the students answered this sub-part in accordance with the recommendations contained in ISA 560 “Subsequent
Events”.
(ii) Very few of the students could explain that the reason for decline in sales is a matter of opinion and will have no impact
on the audit.
(iii) The error referred to in this sub-part could have been on account of
• Typographical error; or
• error in last years financial statements
In the case of a typographical error the auditor should ask the management to convey the correction to the users. On the
other hand, in case of error in the previous years financial statements, the error needed to be rectified retrospectively.
In case of disagreement with the management the auditor needed to take necessary steps to re-communicate the audit report
after adding:
• emphasis of the matter paragraph, in the former case; and
• appropriate qualification, in the latter case.
Very few of the students were able to produce comprehensive replies as suggested above.
(iv) The mis-statement regarding acquisition of a sick unit, in the director’s report, is a material mis-statement of fact
although it may not have any affect on the financial statements. The auditor need to discuss it with the management and in
case of disagreement, should seek legal opinion.
Most of the replies revolved around the above points and secured reasonable marks.

Q.3 Earth Limited:

 The auditor should communicate with the client and inform them about the omission.
 After discussion with the management the auditor will consider the nature of omission, whether the omission in
director’s report results in:
 material inconsistencies between the financial statements and director’s report;
 material misstatements of facts
 If revision of the other information is necessary and management agrees to make the revision, the auditor shall review
the steps taken by management to ensure that individuals in receipt of the previously issued financial statements, the
auditor’s report thereon and the other information are informed of the revision.
 If, following such discussions, the auditor still considers that there is an apparent material misstatement of fact, the
auditor shall request management to consult with a qualified third party, such as the entity’s legal counsel, and the
auditor shall consider the advice received.
 If management refuses to make the revision of such other information either in case of material inconsistencies or
material misstatement of fact and the auditor concludes that revision is necessary, the auditor shall notify those charged
with the governance, but if all of those charged with governance are involved in managing the entity the auditor may
obtain advice from the auditor’s legal counsel.

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 ISAs – Application Guide ISA 720

 If the management does not take corrective action to the satisfaction of the auditor, then under the Companies
Ordinance, 1984, the auditors are entitled to attend the Annual General Meeting where they should inform the
shareholders themselves.
 The auditor should also seek other means of communication to inform the issue to shareholders who could not attend
the Annual General Meeting.

Examiners’ Comments:
(c) According to this part, the directors’ report in the published financial statement did not contain certain disclosures which
were agreed with the auditor. This was attempted well as majority of the students discussed both possibilities i.e. where
management agrees to a revision and where it does not agree to the revision.

Q.4 Procedures to deal with the situation:

Discuss the matter with management and inquire the reason for keeping the projections on lower side for computing the
impairment on patents.
Convince the management that prudence does not allow deliberate understatement of assets of the company, therefore
the management argument that they have kept the projections on lower side to avoid any overstatement of patent is not
correct.
However, as the different projection provided in the directors’ report creates doubt as to reliability of projections
provided earlier, therefore the auditor is required to verify the correctness of both the projections.
Determine whether revision is required in the financial statements (impairment) or in the directors’ report.
If impact on the financial statements is material then discuss the matter with the management to adjust the financial
statements.
If the management refuses to amend the financial statements, the auditor shall modify the opinion in the auditor’s
report.
If the impact on financial statements is not material, the matter may be reported in the management letter.
If revision of directors’ report is necessary and management refuses to make the revision, the auditor shall communicate
this matter to those charged with governance and include in the audit report an Other Matter paragraph describing the
material inconsistency.
Examiners’ Comments:
(b)The performance in this part of the question was above average. However, there were many students who seemed quite
satisfied with the client’s policy of making over provision on the basis of prudence and only covered one aspect of the
situation i.e. the difference between the information on which the provision was based and the information provided in the
directors’ reports whereas the issue of over provisioning was completely ignored. Some of the students who did discuss the
provisioning issue confined themselves to matters such as qualifying the report or withdrawing from the audit without
considering any efforts to resolve the situation amicably.

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 Auditing – The Case Book ISA 800

ISA 800
AUDIT OF SPECIAL PURPOSE F/S
QUESTIONS

Q.1 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)
(ICAP, CAF 03 Level – Winter 2019, Q.# 4)

Q.2 You are the manager responsible for the audit of Hafiz Limited (HL), a listed company, whose fieldwork in respect of the
statutory audit is in progress. You are reviewing the following issues which were brought to your attention by the audit
team:
HL’s parent company is registered in a foreign country and has asked your firm to also provide an audit report on a
separate set of financial statements which have been prepared under the accounting framework prevalent in that country.
Required:
Discuss how would you deal with each of the above issues and what may be the implications thereof on your audit report.
(ICAP, CFAP 06 Level – Winter 2011)

Q.3 You are the statutory auditor of Critical Limited. The company has asked you to submit a special purpose audit report for
onward submission to a regulatory authority. The report has to be submitted on a format prescribed by the regulatory
authority, the substance and wording of which does not conform to the requirements of International Standards on
Auditing.
Required:
(a) Describe the essential contents of a special purpose audit report as required by the International Standards on
Auditing.
(b) Explain how you would respond to the above situation. (08)
(ICAP, CFAP 06 Level – Summer 2007)

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 Auditing – The Case Book ISA 800

SUGGESTED SOLUTIONS

Q.1 Suggested Solution by ICAP

The audit report may include the following additional matters:
(i) The auditor will include an Other Matter paragraph in the auditor’s report, referring to the facts that another set
of financial statements has been prepared by the same entity in accordance with general purpose framework
and that the auditor has issued a report on those financial statements.
(ii) The auditor’s report on special purpose financial statements 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’s report is intended solely for the intended users, and should not be distributed to or used
by other parties.

Examiner Comments
Good performance was observed in this question. However, some of the examinees did not mention that other matter
paragraph should be included in the audit report to refer the fact that another set of financial statements has been prepared
by the same entity in accordance with general purpose framework and that the auditor has issued a report on those financial
statements.

Marking Scheme

Marking Scheme: Mark(s)

Up to 2.5 marks for discussing each additional matter to be added in the audit 6.0
report

Passing Percentage
48%
Q.2 Hints:
There are two issues in the given case:
1. Financial statements have been prepared under framework of another country.
2. Auditor has to report on separate set of financial statements.

Financial statements prepared under framework of another country:

Auditor shall evaluate whether AFRF is acceptable, considering whether:
1. framework is prescribed/established by Law/regulations or an authorized body, or
2. framework shows characteristics as described in ISA 210 i.e. Relevance, Completeness, Reliability, Neutrality,
and Understandability.

Auditor has to report on separate set of financial statements:

Auditor shall include in report “Other Matter” paragraph in which auditor shall state that he has also issued an audit
report on another set financial statements which has been prepared under different framework.

Examiners’ Comments:
Most students were not able to highlight the need to determine whether the reporting requirements of other framework are
acceptable to the auditor in the prevailing circumstances. Some also failed to specify that if the framework was acceptable,
the auditor would need to include an “other matter paragraph” in the audit report.

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 Auditing – The Case Book ISA 800

Q.3 (a)
Contents of an audit report under Special purpose framework:
Contents are stated in LO # 3.

(b)
If laws or regulations have specified the format of audit report:
ISA 210 provides guidance on how to deal with a situation if a report is to be submitted on a format other than the one
advised by the International Standards on Auditing. (this guidance is reproduced below)

If layout/wording of local audit report is significantly different from ISAs (particularly opinion), auditor shall evaluate
whether users may misunderstand assurance obtained from audit and whether additional explanation in auditor’s report
can mitigate this misunderstanding.

If additional explanation cannot mitigate misunderstanding:

 If engagement is not required by law, auditor shall not accept audit engagement.
 If engagement is required by law, auditor shall not state compliance with ISAs in report.

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 Auditing – The Case Book ISA 805

ISA 805
AUDIT OF SINGLE F/S OR ELEMENT
QUESTIONS

Q.1 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)
(ICAP, CAF 03 Level – Winter 2020, Q.# 7b)

Q.2 The statutory auditor of Mighty Limited (ML) has expressed an adverse opinion in the audit report on the financial
statements of ML for the year ended 30 June 2012. After the issuance of the annual report, ML has approached the auditor
for reporting on the trade debts of the company as on 30 June 2012. This report is required for submission to the bank
which has provided financing facilities to ML. The audit working papers reveal that the trade debts have been reported
correctly in the financial statements.
Required:
Discuss what may be the auditor’s response in the above situation. (06)
(ICAP, CFAP 06 Level – Winter 2012)

Q.3 Give your comments as senior in-charge of the audit engagement on the following issues to the engagement partner.

Your firm has been appointed to carry out the audit of the trade debts as at interim period i.e. 31 December 2004 in
accordance with International Standards on Auditing. It was agreed with the management that opinion on the trade debts
should be based on International Accounting Standards as applicable in Pakistan.
During the start up meeting, the senior management restricted you from sending request letter for balance confirmation
to one of its major customers because of some serious disputes. The amount receivable from such customer is Rs. 280
million representing 25 percent of total trade debts. However, you have been provided the agreements and memorandum
of understanding made with the customer and other relevant documents. (05)
(ICAP, CFAP 06 Level – Winter 2005)

Q.4 Your firm was engaged by ABC & Company to express an opinion on a Component, that is, on a Schedule of Trade debts of
the company. Necessary field work has just been completed and as a result thereof, the Engagement Partner has
requested you to prepare a draft of your Report for his review.
Required:
Prepare a draft of your Report on the trade debts of the company, assuming that an unmodified report is warranted. (10)
(ICAP, CFAP 06 Level – Winter 2001)

Q.5 Your firm has been requested by NP Corporation, a local manufacturer, to express an opinion on Accounts Payable, which
is a component of financial statements, In this respect, the Engagement Partner expects you to draft the auditor’s report
on the special purpose audit engagement.
Required
Draft the auditor’s report on the above referred special purpose Audit Engagement, assuming that there are no
reservations. (06)
(ICAP, CFAP 06 Level – Summer 1998)

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 Auditing – The Case Book ISA 805

SUGGESTED SOLUTIONS

Q.1 Suggested Solution by ICAP

Following matters will be considered before accepting the assignment:
(i) If we are not engaged in the audit of entity’s complete set of financial statements, then we shall
determine whether the audit of a specific element of those financial statements in accordance with ISAs
is practicable because 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 .
(ii) We might 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.
(iii) We do 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, we may need further evidence to corroborate audit evidence acquired from
the accounting record.
(iv) 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.
(v) If we conclude 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, then we may discuss with management
whether another type of engagement might be more practicable.

Examiner Comments

• Despite being mentioned in the requirement for ignoring the ethical considerations, some of the examinees
discussed ethical requirements.
• Examinees did not mention that 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.
• Examinees also failed to mention that if it is concluded 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, then the auditor may
discuss with management whether another type of engagement might be more practicable.

Marking Scheme
Mark(s)
• Discussing that it may not be practicable to accept the assignment 1.0
• 01 mark for mentioning each reason that why it might not be 3.0
practicable

Passing Percentage
21%
Q.2 Suggested Solution:
There are two issues in the question:
1. Opinion on single element when there is adverse opinion on complete set of F/S.
2. Audit report is prepared specifically for banker.

Opinion on single element when there is adverse opinion on complete set of F/S:
Auditor can issue unmodified opinion if:
1. The auditor is not prohibited by law or regulation from issuing separate opinion on specific element of financial
statements.
2. The opinion expressed on specific element is not to be published with the auditor’s report containing the
adverse opinion
3. The trade debts balance does not constitute major portion of the entity’s complete set of financial statements.

The auditor may refer to the adverse opinion on the complete set of financial statements in the Other matter paragraph
in the audit report on trade receivables.

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 Auditing – The Case Book ISA 805

Audit report is prepared specifically for banker:

In the other matter paragraph it is also to be stated that the report is intended solely for the Bankers of ML and should not
be distributed to parties other than bankers of ML.

Examiners’ Comments:
Generally the students knew that there is no bar on issuing an unmodified opinion on a specific element of a financial
statement even when an adverse opinion had been given on the same financial statements. However, they were not aware of
all the conditions which the auditor would be subject to while expressing such an opinion. Specially the restriction that the
report on the specific element shall not be published alongwith the report on the financial statements and the requirement
regarding disclosure about the adverse opinion, in the other matter paragraph of the report on the specific element, were
rarely mentioned.

Q.3
Examiners’ Comments:
Many candidates were of the view that the assignment was to be carried out as an “Agreed Upon Procedure”. They overlooked
that an audit opinion was sought by the management on one of the components of the financial statements and therefore it
was a special purpose audit engagement covered in ISA-800 ‘The Auditor’s Report on Special Purpose Audit Engagement’.
This omission distracted the students and many of them based their answers on ISRS 4400 related to Agreed Upon
Procedures.

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 Auditing – The Case Book ISA 800

ISA 810
ENGAGEMENTS TO REPORT ON
SUMMARY FINANCIAL
STATEMENTS
QUESTIONS

CONCEPT CHECKERS

Q.1 (i) Indicate whether each of the following statements is respect of engagements to report on summary financial
statements is true or false.

Statement 1
Summary financial statements must be accompanied by audited financial statements
Statement 2
The date of the auditor’s report on summary financial statements must never be earlier than the date of the auditor’s
report on audited financial statements

Statement-1 Statement-2
(a) True True
(b) False False
(c) True False
(d) False True

(ii) Indicate whether each of the following statements is respect of engagements to report on summary financial
statements is true or false.

Statement 1
An auditor must not accept an engagement to report on summary financial statements if the applied criteria is
unacceptable, unless required by law or regulation to do so
Statement 2
The criteria applied in the preparation of the summary financial statements may be set by management

Statement-1 Statement-2
(a) True True
(b) False False
(c) True False
(d) False True

(iii) The auditor concludes that the summary financial statements are not consistent, in all material respects, with the
audited financial statements and management refuses to make the necessary adjustments.

Identify which type of audit opinion should be expressed on the summary financial statements.
(a) Unmodified opinion with emphasis of matter paragraph
(b) Qualified opinion

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 Auditing – The Case Book ISA 800

(c) Adverse opinion

(d) Disclaimer of opinion

(iv) Identify which ONE of the following statements relating to the auditor's responsibilities in respect of reporting on
summary financial statements is false.

The auditor is required to evaluate whether the summary financial statements:

(a)give a true and fair view of the state of the company's affairs
(b)adequately disclose their summarised nature
(c)are prepared in accordance with the applied criteria
(d)identify the audited financial statements

Hint:
ISA 810 requires the auditor to express an opinion on whether the summary financial statements are consistent in all
material respects, with the audited financial statements in accordance with (the applied criteria) or are a fair summary of
the audited financial statements in accordance with (the applied criteria)

(v) The auditor's report on summary financial statements consists of a number of elements including the responsibilities
of management and the auditor.

Identify which ONE of the following statements reflects the sequence that these elements should appear in the auditor's
report on summary financial statements.
(a)The auditor's opinion should be presented before the auditor's responsibilities and management's responsibilities
(b)Both the auditor's and management's responsibilities should be presented before the auditor's opinion
(c)The auditor's responsibilities should be presented before the auditor's opinion but management's responsibilities
should be presented after the opinion
(d)Management's responsibilities should be presented before the auditor's opinion, but the auditor's responsibilities
should be presented after the auditor's opinion

Hint:
The sequence is prescribed by ISA 810 as follows - opinion, a statement that the summary
financial statement do not include all the disclosures in the audited financial statements, a
reference to the auditor's report on the audited financial statements, management's
responsibilities followed by auditor's responsibilities.

(vi) Identify which ONE of the following statements relating to summary financial statements is false.
(a)Summary financial statements are derived from the audited financial statements
(b)Summary financial statements contain less detail than the audited financial statements
(c)The criteria applied in the preparation of summary financial statements may be determined by management
(d)The criteria applied in the preparation of the summary financial statements may be determined by the auditor

Hint:
ISA 810 defines summary financial statements as historical financial information that is derived from the financial
statements but that contains less detail than the financial statements
The criteria may be established by an authorised or recognised standards setting organisation or by law or regulation or
management

PAST PAPER QUESTIONS

Q.1 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)
(ICAP, CAF 03 Level – Summer 2021, Q.# 4b)

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 Auditing – The Case Book ISA 800

Q.2 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)
(ICAP, CFAP 06 Level – Summer 2019)

Q.3 You are the engagement partner of Ghalib Limited (GL) whose audit report for the year ended 31 December 2015 was
issued on 20 February 2016. The management of GL has now approached your firm to report on summary financial
statements pertaining to the same period.
Required:
Discuss the nature of risks involved in carrying out/reporting on such assignment. (07)
(ICAP, CFAP 06 Level – Summer 2016)

Q.4 Ghulam Limited (GL) is a listed company. You have issued an audit report on GL’s financial statements for the year ended
30 June 2011. In November 2011, the management of GL has approached your firm to provide a report on their summary
financial statements for the year ended 30 June 2011.

Following information is available:

(i) The audit report on the annual financial statements had been qualified on account of management’s failure to
capitalize borrowing costs of Rs. 15 million, on the construction of a building for GL’s own use. The building is in use of the
company since January 2011.
(ii) Under a local regulation which has recently been introduced, you are required to issue a report on the summary
financial statements. However, there are no established criteria for the preparation of summary financial statements. The
management has developed the criteria but which is not acceptable to you.
(iii) The summary financial statements include a note which explains the reasons for decline in the profitability of the
company. You concur with the reasons given in the note but it did not form part of the annual audited financial
statements.

Required:
Evaluate each of the above situations considering them to be independent of each other and discuss what measures would
you take in each case. (09)
(ICAP, CFAP 06 Level – Winter 2011)

Q.5 Zay (Pvt.) Limited engaged in construction of industrial buildings has been asked by a prospective customer to attach
summarized financial statements of the company duly certified by a practicing chartered accountant, with the tender
documents.
The Chief Financial Officer (CFO) contacted Abdul Qadir & Company, Chartered Accountants, who had recently been
appointed by the company in place of another firm of chartered accountants and requested them to issue the required
certificate. For the said purpose, CFO also sent a set of summarized financial statements extracted from audited financial
statements on which previous auditor had issued his audit report.
(a) Explain whether the firm can accept the engagement. (03)
(b) Briefly describe the main elements of auditor’s report on summarized financial statements? (07)
(ICAP, CFAP 06 Level – Winter 2006)

Q.6 What basic elements should be included by the auditor in his report on summarized financial statements? (06)
(ICAP, CFAP 06 Level – Winter 1999)

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 Auditing – The Case Book ISA 800

SUGGESTED SOLUTIONS

Q.1 Suggested Solution by ICAP

Yes, the client may make such a statement in the summary financial statements. But since the auditor was not engaged to
report on the summary financial statements, the auditor should be satisfied that:
• the reference to the auditor is made in the context of the auditor’s report on the audited financial
statements; and
• the statement does not give the impression that the auditor has reported on the summary financial
statements.
If the above requirements are not met, the auditor shall ask the management to change the statement to meet
the requirement or not to refer the auditor in the document.
If the management does not take the requested action, the auditor may:
• consider informing the intended users and other known third parties about the in-appropriate
reference.
• consider seeking legal advice regarding the firm’s rights and obligations in this regard.

Examiner Comments
Some of the examinees did not mention the following:
• Consider informing the intended users and other known third parties users about the in-appropriate
reference.
• Consider seeking legal advice regarding the firm’s rights and obligations.

Marking Scheme

Marking Scheme: Mark(s)

(b) • Discussing whether the mentioned statement can be included 3.0
in the summary financial statement
• Discussing course of action 3.0

Passing Percentage
49%
Q.2 Suggested Solution by ICAP
When the auditor reports on the summary financial statements after the completion of the audit of the financial
statements, the auditor is not required to obtain additional audit evidence on the audited financial statements, or report
on the effects of events that occurred subsequent to the date of the auditor’s report on the audited financial statements
since the summary financial statements are derived from the audited financial statements and do not require updation.

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 that may require adjustment of, or
disclosure in, the audited financial statements.

Examiner Comments
Examinees discussed whether it was an adjusting event or non-adjusting event and how to amend the original financial
statements. They did not discuss or had little discussion on the requirement of ISA 810.

Marking Scheme

Marking Scheme: Mark(s)

• Discussion on auditor’s responsibility on obtaining the audit evidence 1.0
• Discussion on auditor’s responsibility regarding the reporting on 2.0
effects of subsequent event

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 Auditing – The Case Book ISA 800

• Implications on the audit report 2.0

Passing Percentage
16%

Q.3 Suggested Solution:

Summary financial statements are prepared to criteria and there is a risk that criteria applied may not be adequately
disclosed or financial statements may not be prepared as per the criteria.
Because summary financial statements by their nature contain aggregated information and limited disclosure, there is an
increased risk that they may not contain the information necessary so as not to be misleading in the circumstances.
The summary financial statements may be used for purposes other then the stated purpose.
As the summary financial statements are dated later than the audited financial statements there is a risk of non-inclusion
of effects of events subsequent to the date of auditor’s report on the audited financial statements.
The unaudited supplementary information presented with summary financial statements may not be clearly
differentiated from the summary financial statements.
Risk of inconsistency in other information presented in documents containing summary financial statements.
The risk that documents containing the summary financial statements may not contain the auditor’s report on the
summary financial statements.

Examiners’ Comments:
According to the situation given in this question, the statutory auditor of a company had been requested to report on the
summary financial statements of the same period. The candidates were required to specify the risks involved in carrying the
assignment.
The overall performance was very poor as very few students seemed prepared for such a question. A variety of incorrect
points were observed such as:
1 The assignment cannot be undertaken because of restrictions imposed by code of ethics, listing regulations, etc.
2 It involves conflict of interest.
3 It involves self-review threat.
The candidates are advised to refer to ICAP’s suggested answer for guidance on this question.

Q.4 Suggested Solution:

(i)If audit report on the audited financial statements contains a qualified opinion but the summary financial statements
are consistent with the audited financial statements, the audit report on the summary financial statements shall:
state that the audit report on the audited financial statements contains a qualified opinion;
describe the basis for the qualified opinion on the audited financial statements and that qualified opinion.
describe the effect of the qualification in the audited financial statements, on the summary financial statements.
(ii)Since it is necessary under the local regulation to report on the summary financial statements, but the applied criteria
is not acceptable, we would:
Make appropriate reference of this fact in the terms of engagement.
Indicate in the audit reports that the engagement was not conducted in accordance with the International Standard on
Auditing.
Reconsider whether the firm may continue to accept the engagement to audit the statutory financial statements.
(iii)We would ask the management to change the presentation of the note explaining the reasons for decline in
profitability, in such a way that it is clearly differentiated from the summary financial statements.
If the management does not agree to change the presentation, the audit report on the summary financial statements shall
disclose the fact that the said information is not covered by that report.

Examiners’ Comments:
This question was based on audit of summary financial statements. The candidates were required to evaluate three
independent situations and specify the measures that the auditor should take in each case. It was a straightforward question
based on ISA. Being an open book examination most students performed well. However, poor performance was also seen in
many cases, which meant that such students had not touched this topic at all.

Q.5
Examiners’ Comments:
(a)This part was a direct question regarding acceptance of an assurance engagement relating to summarized financial
statements. Many candidates were able to reply correctly that auditor should not accept the engagement to certify

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 Auditing – The Case Book ISA 800

summarized financial statements if it has not audited the detailed financial statements, unless they are in a position to audit
the detailed financial statements again.
(b)This was a relatively simple question. Each student was able to reproduce at least some basic elements of audit report and
gained valuable marks.

Q.6 N/A

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 Auditing – The Case Book ISAE 3000

ISAE 3000

QUESTIONS

Q.1 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)
(ICAP, CFAP 06 Level – Winter 2017)
Suggested Solution:
(a)Our firm shall only accept the engagement if we are satisfied that relevant ethical requirements including
those related to independence have been met. We need to ensure that the basis upon which the engagement is to be
performed has been agreed i.e. there is a common understanding between our firm and ATL of the terms of
engagement. We would also need to ensure that our team have the appropriate competence and capabilities.
One of the precondition for accepting an engagement is that the standard that will be applied to evaluate the disposal of
waste should be suitable for the engagement circumstances i.e. it should exhibit the following characteristics.
(i)Relevance
(ii)Completeness
(iii)Reliability
(iv)Neutrality
(v)Understandability
Although the standards have been developed internally, it exhibits the characteristics of relevance, completeness and
neutrality since these are agreed by all the intended users.
The reliability of the criteria would have to be assessed by considering whether the criteria is such that it would lead to a
reasonably consistent measurement or evaluation of the underlying subject matter when used in similar circumstances
by different practitioners. The understandability criteria would be considered to have been met if it results in information
that can be understood by the intended users.
Whether the criteria meet the requirement of reliability and understandability is a matter of professional judgement and
we would need to assess it accordingly.
It may be noted that the relevant auditing standard allow the use of internally developed criteria for the purpose of
preparing the subject matter information in the particular circumstances of the engagement despite the existence of a
different criteria embodied in the law or regulation. However, we should seek acknowledgement from all the intended
users that the said criteria are suitable for their purpose.

(b) Though all the intended users agree on the use of internally developed standards, the existence of more
comprehensive standards issued by the government requires that our assurance report:
(i)States that the criteria are not embodied in law or regulation, or issued by authorized or recognized bodies of experts.
(ii)Alerts readers that the subject matter information is prepared in accordance with special purpose criteria and as a
result, the subject matter information may not be suitable for other purposes; and
(iii)Indicates that the assurance report is intended solely for specific users and is not to be distributed to any other parties
other than the engaging parties.

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 Auditing – The Case Book ISAE 3000

Q.2 Dawood Limited (DL), a listed company, has approached your firm to provide a limited assurance on sustainability report
of the company and presently you are verifying the following statement related to carbon emissions:
“Carbon emissions were within the limits allowed by the regulator.”
Required:
Determine how you would verify the above claim. (06)
(ICAP, CFAP 06 Level – Winter 2016)
Suggested Solution:
Steps for verification of the claim “Carbon emissions were within the limits allowed by the regulator”:
 Inspection of relevant guidelines and benchmarks related to carbon emissions, as may be allowed/ specified by the
regulator.
 Review the company’s processes for collecting, analyzing and aggregating data on the carbon emissions. Assess the use
of work of an expert with reference to compliance with environmental regulations and standards.
 Interview management and employees of relevant departments.
 Compare the weekly/monthly / yearly carbon emission report and analyze and discuss the reason for major variations,
if any.

Examiners’ Comments:
The overall performance was quite poor. Most of the students laid all their emphasis on appointment and evaluation of the
expert, which was just one of the many procedures that needed to be performed. For other relevant points, the candidates are
advised to refer to ICAP’s suggested answers.

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 Auditing – The Case Book ISAE 3000

Q.3 Your firm has been hired by Sensitive Products Limited (SPL), for an assurance engagement regarding compliance with
regulatory requirements. SPL is engaged in the production of highly sensitive products and is required to comply with
strict regulatory requirements. In this regard a report is submitted by SPL to the regulatory authority which contains
certain information.
Required:
Draft a limited assurance report to be issued to the regulatory authority regarding the information provided to the
authority by SPL. The report should contain a qualification and mention at least three procedures performed by your firm.
(14)
(You may assume necessary details, however any annexures to the report are not required)
(ICAP, CFAP 06 Level – Winter 2016)

Suggested Solution:
Independent Limited Assurance Report
To the Director Compliance of Nuclear Drug Control Authority:
We have been engaged by Sensitive Products Limited (SPL) to perform a limited assurance engagement in respect of the
following information (said information) presented in the 2016 Report to the Director Compliance, Nuclear Drug Control
Authority, for the year ended December 31, 2016:
 The type and number of nuclear medicines produced during the year;
 The details of machinery and equipment used to manufacture nuclear medicines;
 Details of safety and quality control measures adopted by SPL during the year.
Inherent Limitations
Non- financial information, such as that included in the SPL’s report to the Nuclear Drug Control Authority, is subject to
more inherent limitations than financial information, given the more qualitative characteristics of the said information
and the methods used for determining said information. Management’s Responsibilities: Preparation and fair
presentation of the said information in accordance with the specified regulations is the responsibility of the SPL’s
management. Management is also responsible for such internal control as management determines is necessary to enable
the preparation of the said information such that it is free from material misstatement.
Practitioner’s Responsibility:
We are responsible for:
 Planning and performing the engagement to obtain limited assurance about whether the said information is is free from
material misstatement, whether due to fraud or error;
 Forming an independent conclusion, based on the procedurse we have performed and the evidence we have obtained;
and
 Reporting Our Conclusion To The Director Compliance, Nuclear Drug Control Authority.
Professional Standards applied and level of assurance:
We conducted our limited assurance engagement in accordance with the International Standard on Assurance
Engagements 3000 (ISAE 3000), “Assurance Engagements other than Audits or Reviews of Historical Financial
Information” published by the International Federation of Accountants. A limited assurance engagement is substantially
less in scope than a reasonable assurance engagement in relation to both the risk assessment procedures, including an
understanding of internal control, and the procedures performed in response to the assessed risks.
Independence, quality control and competency statement:
We have complied with the Code of Ethics for Professional Accountants issued by the International Ethics Standards
Board for Accountants, which includes independence and other requirements founded on fundamental principles of
integrity, objectivity, professional competence and due care, confidentiality and professional behavior. In accordance with
International Standard on Quality Control 1, we maintain a comprehensive system of quality control including
documented policies and procedures regarding compliance with ethical requirements, professional standards and
applicable legal and regulatory requirements. Work Done We are required to plan and perform our work to obtain limited
assurance about whether the said information is free from material misstatements In doing so we:
 Make enquiries of SPL’s management.
 Evaluate the design of the key structures, systems, processes and controls for managing, recording and reporting the
said information.
 Perform limited substantive testing on a selected basis and access the records and discussion with the relevant staff to
check that data had been appropriately measures, recorded, collated and reported; and
 Evaluate the disclosure and presentation of the said information.

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Auditing – The Case Book ISAE 3000

Basis for qualified opinion

As per Nuclear Drug Control Regulations, SPL is required to get approval of the updated list of suppliers from NDCA on
yearly basis, however during the year no such approval was obtained and we observed that the raw materials were
purchased from suppliers who were not in the list of suppliers of last year. Therefore we are unable to determine whether
the raw material procured by SPL comply with the minimum safety requirements as specified by NDCA.
Qualified opinion
Based on our limited assurance procedures performed, as described above and the evidence we have obtained, except for
the possible effects of the matter described in the basis for qualified opinion paragraph, nothing has come to our attention
that causes us to believe that the selected information for the 2015 reporting year has not been prepared, in all material
respects, in accordance with the Nuclear Drug Control Regulations.
Other Matters
Our report has been prepared solely for the purposes of SPL’s compliance with the reporting requirements relating to
Sections XXX of the NDCR and is not intended to be and should not be used for any other purpose. Our duties in relation to
this report are owed solely to NDCA, and accordingly, we do not accept any responsibility for loss occasioned to any other
party acting or refraining from acting based on this report.
XYZ Chartered Accountants
Engagement partner: ABC
Dated: 08 December 2016
Karachi

Examiners’ Comments:
This was the worst answered question of the attempt as only 16% of the students could secure passing marks whereas more
than 50% of the students could not secure any mark. The requirement was quite straight forward because drafting of the
report is usually considered easy at this level but utter lack of knowledge resulted in poor performance. The candidates are
advised to seek guidance in respect of this question from ICAP’s suggested answers.

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 Auditing – The Case Book ISAE 3000

Q.4 (a) You are a partner in a firm of chartered accountants, looking after the audit and advisory services department. One of
your clients has approached you for services in relation to certification of compliance with a specific control framework,
with regard to their production process.
Required:
What are the different types of reports that you can offer to the client, clearly specifying the key characteristics of each
form of report. (08)
(b) Your manager has identified that the client should prepare a statement of compliance with the said control framework
and your firm can only issue a report on that statement.
Required:
Identify the type of assurance engagement to which the manager is referring to and the key characteristics of such
engagement. (03)
(ICAP, CFAP 06 Level – Summer 2014)

Suggested Solution:
(a) The services may be provided either as an Agreed Upon Procedures Engagement or as an Assurance Engagement
other than Audit of Historical Financial Information.
In case of Agreed Upon Procedures, the report In case of assurance engagement, the report
will contain the procedures performed and the may take two different forms i.e. a reasonable
results of such procedures in the form of assurance report or a limited assurance report.
factual findings.
In a reasonable assurance report the auditor
will provide a positive assurance on the
compliance of the entity with the framework.
In the limited assurance report the auditor will
provide negative assurance on the compliance
of entity with the framework.

(b) The manager is referring to assertion based engagement , in which:

the evaluation or measurement of the subject matter is performed by the responsible party; and
the subject matter information is in the form of an assertion by the responsible party that is made available to the
intended users.

Examiners’ Comments:
(a)According to the situation given in this question, an audit firm had been approached to provide certification of compliance
with a specific control framework with regard to the production process. The candidates were required to specify the
different forms of reports that the auditor may issue in this case and the key characteristics of these reports.
This question required good conceptual understanding of the various types of assurance engagements but unfortunately this
was lacking. A number of candidates did not attempt this question. A significant number of candidates mentioned report
under Agreed Upon Procedures whereas few students mentioned report under Assurance Engagement. Only a limited number
of students could correctly identify that both types of reports were possible. Moreover, only few could specify that in case of
assurance engagement, the auditor may either issue a Reasonable Assurance Report or a Limited Assurance Report.
(b)Most of the candidates mentioned about reasonable assurance report or limited assurance report whereas the correct
answer was assertion based engagement.

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 Auditing – The Case Book ISAE 3400

ISAE 3400
EXAMINATION OF PROSPECTIVE
FINANCIAL INFORMATION
QUESTIONS

Q.1 (a) What is Prospective Financial Information? Identify some of its forms. (03)
(b) Can an auditor express an opinion as to whether the results shown in the prospective financial information will be
achieved? (03)
(c) When reporting on the reasonableness of management’s assumptions, what level of assurance the auditor provides?
(04)
(ICAP, CFAP 06 Level – Winter 1997)

Q.2 Your firm has been approached by a large trading company to carry out a review of its prospective financial information:
(a) What factors should be kept in mind while determining the extent of examination procedures for such a review. (05)
(b) What will be the key contents of your report on this information? (10)
(ICAP, CFAP 06 Level – Winter 2003)

Q.3 ABC & Co. Chartered Accountants have been offered an appointment as the auditor of prospective financial statements of
Alif Limited, which have been prepared in the form of a projection. These prospective financial statements are prepared
to help the directors of the company to make certain strategic decisions for the expansion of the company. The volume of
sale projected in the said financial statements had never been achieved by the company in the past.
ABC & Co., Chartered Accountants are also the external auditors of the company. You, as audit manger, of the firm, are
required to prepare a memorandum for the partner in-charge containing the following:
(a) The matters that need to be considered before accepting this engagement. (02)
(b) The information to be contained in an unmodified audit report on the prospective financial statements. (08)
(ICAP, CFAP 06 Level – Winter 2006)

Examiners’ Comments:
(a)The acceptance of engagement to examine the prospective financial statements, in the context of their intended use,
validity of assumptions and their relevance to the present performance levels were mainly required. However, the answers
were based on general considerations of engagements instead of specific nature of the proposed engagement.
(b)The candidates were able to score marks on the contents of audit report on prospective financial statements which are
similar to a typical audit report based on historical financial statements. However, very few students were able to describe
the essential contents like level of assurance given and a specific mention that financial statements and the auditor’s report
pertain to the future projected results.

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 Auditing – The Case Book ISAE 3400

Q.4 (a) XYZ Company Limited intends to seek a financing of Rs. 250 million from their bankers in order to implement the
board’s latest expansion proposal. The company’s CFO has prepared a five years ‘cash flow forecast’ based on
management’s estimates for presentation to the bankers. The company has requested your firm to review the forecast
and furnish a report thereon.
Required:
Explain the matters which your firm would consider before accepting the above engagement. (10)

(b) Assuming that your firm has accepted the above engagement and during the course of the review, a significant
reduction in the cash outflows on account of income tax has been noted in the years 3, 4 and 5. The management has
informed that the taxation authorities have principally agreed to reduce tax rates for companies operating in the
‘industrial zone’ in which the company is situated and the announcement of the reduction in tax rates will be made in the
next budget. However, the management has not provided any evidence to support their claim. The impact of this
assumption is Rs. 5 million for each year.
The management has justified its stance by stressing that the assumption related to the tax rates has been clearly
disclosed in the prospective financial information.

Required:
Evaluate the above situation and briefly discuss the steps that your firm should take. (06)
(ICAP, CFAP 06 Level – Summer 2012)

Suggested Solution:
(a)Before accepting the engagement, I would consider the following matters:
Period covered by the information: The business plan covers the five year. Assumptions normally become more
speculative as the length of period covered increases. The final conclusion in this regard would however depend on the
nature of business and other conditions affecting the business.
Reliability of the information: This will depend on management’s expertise and integrity. Past experience with the
company may help in assessing this aspect. Otherwise the reputation of the company in the market and business risks
may have to be considered.
Access to Information and personnel: I would seek assurance from the client that all relevant information and personnel
would be accessible during the audit. This matter may be clarified in the engagement letter, in order to avoid any
misunderstanding at a later stage.
Nature of assumptions: I would ensure that the assumptions are realistic and assess whether I would be able to obtain a
sufficient level of knowledge of XYZ’s business to evaluate all significant assumptions.
The assumptions involved in projections of revenue on account of expansion could be difficult as compared to
assumptions related to normal business operations.
Similarly the I may consider hiring the services of an expert to assess the assumptions pertaining to the costs of expansion
(i.e. new plant, building etc)
General or Limited Distribution: I would consider the extent of my responsibility as an auditor towards the intended
users.
Elements to be included in the Prospective Financial Information (PFI) and their appropriateness for the intended use: I
would determine through review of the elements included in the PFI that whether a opinion can be formed and issued on
the PFI’s and whether these are appropriate for the intended use. Too much detailed analysis of each item would increase
the risk and consequently the auditor’s responsibility.

(b)
It is a best estimate assumption and the auditor is required to obtain sufficient appropriate evidence from internal and
external sources.
Preferably the management should provide the correspondence/ confirmation from the Federal Board of Revenue
relating to the reduced tax rates.
If the correspondence/ confirmation from FBR is not available the auditor may discuss the matter with the management
of other companies in the same Industrial Zone or their representative association to assess the validity of XYZ’z claim.
If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor will conclude that the assumption
related to the taxation rates does not provide a reasonable basis for the prospective financial information and will either
express an adverse opinion or withdraw from the engagement.

Examiners’ Comments:
(a)This was a straightforward question based on ISAE 3400. The requirement was to explain the matters that a firm should
consider before accepting an engagement to review prospective financial information. Though many candidates were able to
list all the points yet the explanations were not upto the mark.

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 Auditing – The Case Book ISAE 3400

(b)In this part an interesting situation was given whereby an organization had prepared its financial projections on the
assumption that income tax rates would be reduced as had been agreed informally by the taxation authorities, for companies
operating in a particular trade zone. However, as is usual in such circumstances, no apparent evidence was available to
support this assumption.
While evaluating the above situation most of the students simply concluded that the opinion should be modified. It was
expected that the students would discuss some measures that the auditor can adopt in such situations like, studying the
related correspondence with FBR, discussions with management of other companies in the same zone and correspondence
with relevant trade associations etc. However, very few students discussed such alternative sources of audit evidence.
Moreover, many of them did not identify the possible types of modification, in case the evidence was considered to be
insufficient.

Q.5 Delicacy Foods Limited (DFL) produces and sells ice cream and juices. It’s ice cream plant is quite old and the
management is planning to invest in an advanced technology for manufacturing ice cream, which would result in lowering
the costs and would also enable the company to launch a new range of premium flavours. DFL has sufficient cash to fund
50% of the necessary capital expenditure and has approached its bank for a loan of Rs. 400 million to finance the
remaining amount.
To meet the banks requirement DFL has prepared a forecast comprising of statement of comprehensive income for the
next three years. It has asked your firm to provide a report on the forecast.
The following information is available to you in respect of the above:
(i) The machinery is expected to be available for commercial production from 1 January 2018.
(ii) DFL is expecting a decrease in production cost by 20% and plans to sell the new premium flavours at 30% above the
price of regular flavours.
(iii) Operating expenses mainly include staff cost, depreciation, repairs and maintenance.
Required:
State the examination procedures to be used in respect of the above forecast. (12)
(ICAP, CFAP 06 Level – Summer 2017)

Suggested Solution:
Examination procedures should include the following:
• Obtain an understanding of the business of DFL.
• Discuss how the management has developed the significant assumptions and assess the reasonableness thereof.
• Inquire about the process of making the prospective information and the internal controls over the system used to
prepare prospective financial information.
• Inquiry about the expertise and experience of those preparing the information.
• Inquire about accuracy of previous prospective information made by the management and the estimates and basis
used.
• Ensure that accounting policies used in preparing the prospective financial information are consistent with those
used in historical financial information and comply with the applicable financial reporting framework
• Confirm expected timeframe for the import and installation of machinery by referring to vendor
quotations/communication.
• Confirm that the sales of new flavours have been assumed from the date the machine is ready for commercial
production.
• Verify the production capacity of the new plant to corroborate the projected revenue.
• Review market research documents to assess the reasonableness of projected sales quantities and review prices
charged by competitors for the premium flavors.
• Assess the reasonableness of staff cost through average employee turnover rate and the salary growth rates.
• Discuss the expected decrease in production costs with the management and review the information on which the
projection is based.
• Obtain information from management about major ingredients and wastage percentages etc. to review the projected
cost of raw material.
• Review how cost of repairs and maintenance has been projected and whether the fact that it is a new plant has been
considered.
• Verify the cost of the new plant from supplier’s quote and bills related to import and installation costs to calculate the
depreciation expense.
• Check how the management has accounted for the gain/loss on disposal of the old plant and equipment.
• Check whether projections related to juices segment are based on past trends and discuss any major changes in the
market, processes, etc. and the effect thereof on the projections.
• Recalculate the finance cost.
• Review the tax workings.

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 Auditing – The Case Book ISAE 3400

• Carry out analytical review.

• Obtain written representations from the management regarding the assumptions used intended use of prospective
financial information and management’s acceptance of its responsibility for the prospective comprehensive income.

Examiners’ Comments:
Common errors:
1. Steps relating to audit of historical financial statements were commonly included along with steps related to report on the
forecast.
2. Important points were missed such as obtaining understanding of the business, review of market research report to assess
projected sales, tax working and management representation.

Q.6 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 the plant.
(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)
(ICAP, CFAP 06 Level – Winter 2018)

Suggested Solution:
(i) Confirm expected timeframe for the import and installation of machinery by referring to vendor
quotations/communication.
(ii) Obtain the pro forma invoice / quotation for the procurement and installation of the generators.
(iii) Confirm the cost purchase of land with agreement made with the seller.
(iv) Obtain the bids received from the contractors for estimating the amount of expenditure required for the construction
of the building in which the generator would be installed.
(v) Inquire from management whether necessary approvals have been obtained from the government for the installation
of power plant.
(vi) Assess the amount of gas available by reviewing the communication with the government, and whether it
corroborates with management’s expectations.
(vii) Review the payment terms with the government for the supply of extra electricity.
(viii) Inquire management about basis of increases in export and local sales.
(ix) Review the foreign exchange rates used for translating the exports sales.
(x) Purchase of raw material, staff cost and marketing expense corroborates with expected increase in sales.
(xi) Inquire with the marketing department whether any new campaigns would be required to meet the expected rise in
sales and its estimated cost.
(xii) Consider whether fuel costs have been revised in line with the specifications provided by the generator supplier.
(xiii) Inquire about the interest rates and the repayment terms of the loan and ensure that they have been appropriately
incorporated in the cash flow.
(xiv) Assess management competence regarding the preparation of the cash flow forecast.

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 Auditing – The Case Book ISAE 3400

Q.7 Fawad Limited (FL) is a manufacturer of personal care products. FL intends to diversify its operations by entering into the
packaged food business. For this purpose it intends to seek a financing of Rs. 2 billion from Ameen Commercial Bank
Limited (ACBL). The company’s CFO has prepared a five year cash flow forecast and has presented it to the bank. ACBL
has requested your firm to review the forecast in consultation with FL and furnish a report thereon.

On reviewing the cash flow projections, you have noted the following:
(i)
Cash sales constitute 80% of the total sales of the new business.
Debtors turnover days related to current business are projected to be reduced from 75 days to 30 days.

(ii) In the forecast, 24% of the income is under the head “Income from an associate”, which is the management’s estimate
of the company’s share of the associate income. The associated company has confirmed the amounts which are
incorporated in the forecast; however no other details are available with FL to support this assumption.

Required:
(a) Comment on the above situations and briefly discuss the steps that you would take in the given circumstances. (12)
(b) Assuming that your firm decides to modify the report on prospective financial information, draft the basis for
modification paragraph and opinion paragraph to be included in the report. (You may assume necessary details and
choose to base the modification either on para (i) or para (ii) above) (06)

(ICAP, CFAP 06 Level – Winter 2013)

Suggested Solution:
(a)
(i) It is a best estimate assumption and the auditor is required to obtain sufficient appropriate evidence from internal and
external sources that best estimate assumptions on which prospective financial information is based are not
unreasonable. The following steps may be carried out in this regard:
 Discuss and evaluate how the management plans to reduce the credit period from 75 days to 30 days.
 Consider the market norms and practices, related to credit period prevailing in personal care to assess the
reasonableness of assumptions.
 Consider whether food packaging business can expect to achieve 80% cash sales. For this purpose, the general practice
prevailing in companies which are in the same line of business may be considered.
 The auditor will need to ask the management to explain basis on which they have made the assumptions specially as
regards the assumptions which appear to be un-reasonable in comparison with market practices and norms.
 If the management is unable to provide the basis on which any of the assumption is based or the basis provided by the
management are not appropriate to conclude that the assumptions are reasonable, then the auditor will conclude that the
assumption relating to debtors turnover days or cash sales does not provide a reasonable basis for the prospective
financial information and will either express an adverse opinion or withdraw from engagement.
(ii) It is a best estimate assumption and the auditor is required to obtain sufficient appropriate evidence from internal and
external sources that best estimate assumptions on which prospective financial information is based are not
unreasonable. The following steps may be carried out in this regard:
 The confirmation provided by the associate company cannot be taken as sufficient appropriate audit evidence in
support of company’s income from the associated company.
 The auditor should check the dividend history of the associate to ascertain the reasonableness of the forecasted receipts.
 The auditor should communicate with management to prepare an investee company income forecast to support the
assumptions.
 If the forecast is prepared, the auditor would need to assess the assumptions on which it is based and to evaluate the
overall reasonableness of the forecast.
 If the forecast is not provided or the auditor is unable to obtain evidence in relation to reasonableness of assumption
then it will constitute a scope limitation.
 If the investee company do not provide forecast then the auditor should either withdraw from the engagement or
disclaim the opinion and describe the scope limitation in the report on the prospective financial information.

(b) As discussed under the caption “Debtors” in the summary of significant forecast assumptions, the debtor’s turnover
days are forecasted to be 30 days as compared to present debtors turnover days of 75 days. The debtors turnover days
forecasted are not consistent with the prevailing market practices. Further, the company has not committed any
resources or taken any steps to reduce the debtors turnover days that provide the basis for reducing debtors’ turnover
days.
The accompanying forecast is not presented fairly in accordance with the International Standard on Assurance
Engagements applicable to the examination of prospective financial information because management assumption, as
discussed in the preceding paragraph, do not provide a reasonable basis for management’s forecast.

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 Auditing – The Case Book ISAE 3400

Examiners’ Comments:
(a)According to the situation given in this question, the auditor was required to report on prospective financial information.
The students were required to comment on the assumptions on which the forecast was based.
A significant number of candidates managed to explain why the assumptions seemed unreasonable and how the auditors
should satisfy themselves in this regard. However, majority of the candidates did not mention the effect on the audit opinion
in case the basis of the assumptions was not appropriate.
In case of income from associates, most candidates correctly stated that the confirmation did not provide sufficient audit
evidence in support of the prospective income from associate but did not mention that a scope limitation could arise if
evidence was not available to support this assumption.
Some students incorrectly felt that this was a ‘related party’ issue. They did not appreciate that being prospective financial
information, disclosure of related party was not relevant in this case.
(b)In this part of the question, the requirement was to draft the basis for modification paragraph and opinion paragraph. It
was noted that in many cases, even though the candidates correctly identified the issues at hand, they were unable to draft an
appropriate audit opinion with respect to the same. Many candidates did not read the requirement properly and wasted time
in drafting modification on all three issues whereas the requirement was to choose any one issue, for this purpose. In many
cases it was noted that opinion paragraph was not framed adequately with reference to modification and general paragraph
was reproduced.

Q.8 Sigma Pakistan (Pvt.) Limited (SPPL) manufactures telecommunication accessories. The management of SPPL is
negotiating with one of its competitors to acquire a factory, at an estimated purchase price of Rs. 350 million. SPPL
intends to obtain financing from a venture capital company (VCC) for the proposed acquisition.
Your firm, Gamma & Co., has been approached by SPPL to provide a report on the following cash flow forecast, which
would be provided to VCC:
Quarter ending
Jun. 2010 Sep. 2010 Dec. 2010 Mar. 2011
--------------Rupees in million-------------
Cash inflows
Cash sales (i) 188 203 210 251
Receipts from credit sales (ii) 870 900 938 249
1,058 1,103 1,148 1,500
Cash outflows
Operating
Payments to vendors (iii) 600 635 655 803
Salaries 140 140 140 140
Factory overheads (iv) 263 263 263 263
Others - - - -
Purchase of fixed assets - - 45 54
Dividend - 120 - -
Royalty (v) - - - 53
Advance income tax 18 18 20 29
Purchase of factory - - 350 -
1,021 1,176 1,473 1,342
Cash flow for the quarter 37 (73) (325) 158
Opening cash balance 150 187 114 (211)
Closing cash balance 187 114 (211) (53)

The following information is available:

(i) Cash customers are allowed discount @ 3% when they purchase goods worth Rs. 100,000 or more.
(ii) 60% of the amount billed is collected within one month, 25% by the end of the second month and 13% by the end of
the third month. Bad debts are estimated at 2%.
(iii) Payment against purchase of raw material is made within 30 days, in order to avail cash discount @ 5%. Payments for
other materials are made within 45 days.
(iv) Factory overheads include property rentals, utility bills, insurance premium and general office expenses.
(v) Royalty is paid to a foreign company, for availing the right to manufacture certain accessories.
Required:
(a) Outline the key procedures that your firm should undertake in order to provide a report on the cash flow forecast.(16)
(b) Draft an unmodified report for submission to the Board of Directors. (06)
(ICAP, CFAP 06 Level – Summer 2010)

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Auditing – The Case Book ISAE 3400

Suggested Solution:
(a)Cash receipts:
(i)Assess whether the assumption related to total sales and its bifurcation between cash and credit sales is reasonable by
considering whether it is in line with the known norms of the business. Historical data of the company may also provide
some useful information.
(ii)Assess the reasonableness of the pattern of receipts from credit customers by applying the credit terms allowed to
different categories of customers.
(iii)Review the latest age analysis of the receivables to assess the reasonableness of the pattern of payment by credit
customers.
(iv)Check whether the 3% discount on sales allowed to cash customers is in accordance with the market norms.
(v)Check whether the increase in sales in 3rd quarter is in accordance with the production capacity of the new factory.

Payment to vendors
(i) Review norms of business and historical data to assess the reasonableness of the pattern of payments forecasted.
(ii)Check whether the 5% discount on raw material purchases is in accordance with terms and conditions prevailing in
the market.

Other operating cash outflows:

(i)Discuss with the management why operating expenses and salaries are not increasing in line with sales.
(ii)Compare forecasted outflows on account of salary with latest available payroll.
(iii)Obtain a breakdown of the outflow on account of overheads and ensure that:
All expense categories have been included.
Non cash items such as depreciation, amortization, provisions, etc have been excluded.
(iv)For cash flows in respect of each main component of the overheads, review existing actual documentation such as
invoices and utility bills etc to ascertain the reasonableness of the pattern of payments included in the forecast.

Non-recurring cash flows:

(i)Review the capital budget to assess requirement related to capital expenditure.
(ii)Review the pattern of dividend payment and obtain representation letter if necessary.
(iii)Check amount of royalty and payment schedule as per agreement.
(iv)Check calculation of advance tax with profit forecast, working submitted by the client and relevant tax laws.
(v) Review the documents relating to purchase of factory and ensure that cash outflow given in the forecast is reasonable.

General:
(i)Enquire as to the competence and experience of the preparer of the forecast.
(ii)Ascertain why financial cost is not included.
(iii)Are there any other costs to be incurred in relation to the new factory in the period of cash flow forecast? e.g.
recruitment costs of new staff, any additional working capital requirements, installation of plant and fixtures to the new
factory etc.
(iv)Ensure that timing of outflows for purchase of factory is correct by carrying out discussion with management and
review of minutes of Board of Directors etc.
(v)Compare the forecast with actual cash flows of prior period and investigate unusual variations, if any
(vi)Compare assumptions made with general industry data and trends and investigate any unusual variations.

(b)AUDITOR’S REPORT TO THE BOARD OF DIRECTORS

We have examined the quarterly cash flow forecast of Sigma Pakistan (Pvt.) Limited for the year ending March 31, 2011 in
accordance with the International Standards on Assurance Engagements applicable to the examination of prospective
financial information. Management is responsible for the forecast including the assumptions set out in Note A on which it
is based.
Based on our examination of the evidence supporting the assumptions, nothing has come to our attention which causes us
to believe that these assumptions do not provide a reasonable basis for the forecast. Further, in our opinion the forecast is
properly prepared on the basis of the assumptions and is presented in accordance with IFRS / applicable financial
reporting framework.
Actual results are likely to be different from the forecast since anticipated events frequently do not occur as expected and
the variation may be material.
Gamma & Co.
Chartered Accountants

Karachi
June 11, 2010

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 Auditing – The Case Book ISAE 3400

Q.9 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 for review.

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 sales target.
(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)
(ICAP, CFAP 06 Level – Winter 2019)

(i) Contract with AB

1. Examine the contract with AB to confirm the specified volume and the profit forecast.
2. A bonus payable to AB should be included in the cash flow forecast at the end of the contract only if the specified
volume of spices is forecasted to be sold by AB.
3. Ensure that cash flows of 45 day credit period has been appropriately accounted for in the cash flow forecast.
4. Discuss with the management about the renewal of the contract with AB.
 If the contract is not renewed, then how the final settlement would be worked out and check that it is
appropriately reflected in the forecast.
 If the contract is renewed, then what would be new terms and check that it is appropriately reflected in the
forecast.
(ii) Contract for distribution ship in other cities within Pakistan and UAE
1. Examine the status of new distribution ship contract for other cities of Pakistan and Dubai and confirm the
forecast volume from the agreement.
2. Inquire from the management regarding likelihood of obtaining five-year contracts with new distributors at a
credit term of 30 days.
3. Review that receipts from new distributor(s) should commence after February 2020 with a credit period of 30
days.
4. Supply of stock to other distributors should be reconciled with the existing capacity as well as revised capacity
(i.e. after new plant). In any point of time, it should not exceed the maximum capacity.
5. For sales transacted in foreign currencies, discuss with the management regarding the assumptions used for the
exchange rates.
6. Check whether the new distributors have the capacity to hold the forecast inventory levels in their warehouses.

(iii) Set up of new manufacturing facility

1. Obtain the quote obtained by MPL to assess the cost of the plant to be set up in Karachi.
2. Check the time by when the plant would be set up and when will it be available for production.
3. Obtain the payment plan for the installation of additional manufacturing facility and ensure that it is
appropriately reflected in the financial statements.

Examiners’ Comments:
 Despite of mentioning in the requirement of the question that examination procedures were required related to
specific three information, examinees mentioned many general procedures which were not required.
 Examination procedures related to bonus payments to distributors and the translation of foreign currency receipts
were not mentioned by many examinees.
 Some of the examinees did not mention any examination procedure for setting up the new manufacturing facility

8
 Auditing – The Case Book ISAE 3400

Q.10 In 2005 the management of Fiber Limited presented before the Board of Directors, the plan of a new business segment,
quite different from existing business of FL. The approval was granted in the same year.
In December 2007, even after over two years of operation, the bottom line of cash flow was negative. Some of the Board
members are convinced with the management’s explanation that the initial projections were correct, nevertheless, the
periodic pattern of cash flows is not according to the expectations. Others, who are in majority, feel that the initial
projections were materially misstated. The Board has therefore directed the management to submit prospective financial
statements relating to the segment for next five years.
The management submitted the projection with the following assumptions:
(i) The company will be able to sell a large piece of land in the heart of the city, in 2008, to set up a factory in a different
city on hired premises.
(ii) The factory will attain 70% capacity within six months of its establishment. Whole production will conveniently be
sold in that city and FL will not have to incur any transportation cost.
(iii) The transportation cost, which is one of the main contributors of negative cash flow, will be reduced substantially by
using cargo train in place of trucks. Negotiations with railway authorities are in final stage.
(iv) Administrative expenses will grow at 5% per annum.
After examination by an independent auditor, the board intends to publish the abridged form of such financial statements
in the news letter of the company which is circulated to shareholders each month.
ABUK Chartered Accountants have been contacted by the Board to examine the prospective financial statements and
submit their report within ten days.
Mr. Umer is a partner in the firm and has expertise in such assignments. When asked by the firm to take up the offer as
engagement partner, he informed that his wife is the daughter of the Chief Financial Officer of FL and also holds 75,000
shares of the company.
Required:
(a) Discuss the points which the firm should consider while accepting the engagement and assigning the job to Mr. Umer.
(04)
(b) Assuming that the engagement is accepted, draft an appropriate audit report. (04)
(c) Explain how the historical financial statements can be used by the auditor in performing the engagement. (04)
(ICAP, CFAP 06 Level – Summer 2008)

Examiners’ Comments:
The question pertained to an assignment related to review of prospective financial statements. It consisted of three parts,
each of which are discussed below:
(a) The performance was generally good as students were able to cover most of the points referred to in ISQC 1 (Para 28) and
ISAE-3400 (Para 10)
However, a large number of students mixed up the two different aspects of the question i.e.
• Acceptance of the audit assignment by the firm; and
• Appointment of Mr. Umer as the engagement partner.
Very few of the students could cover the above by explaining as under:
• The firm is legally allowed to accept the assignment but needs to take adequate safeguards in view of the fact that the wife
of a partner (Mr. Umer) was the CFO of the client.
• Mr. Umer should not be appointed as engagement partner because he is not expected to carry out the assignment with the
desired level of objectivity.
(b) Most of the students were able to do well as they used the format given in ISAE 3400 related to Prospective Financial
Statements. However, in this question also, some of the students tried to produce short form of the report as discussed in
Question 6 (b) and lost easy marks.
(c)The performance in this part was quiet poor as most of the students were unable to highlight the significance of historical
financial statements for the auditor, while reporting on the prospective financial statements. Some of the important matters
for which the auditor may rely on the Historical Financial Statements are as follows:
• Knowledge of Company’s business and trends.
• Relationship between various components of the financial statements.
• For assessing whether the prospective financial statements have been prepared on a basis which is consistent with those
used for historical financial statements.

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 Auditing – The Case Book ISAE 3402

ISAE 3402
ASSURANCE REPORTS ON
CONTROLS AT A SERVICE
ORGANIZATION
QUESTIONS

Q.1 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)
(ICAP, CFAP 06 Level – Winter 2018)

Suggested Solution:
(i)
Type 1 report Type 2 report
It gives reasonable assurance about the suitability of
It gives reasonable assurance about the suitability
(i) design and implementation of controls and their operating
of design and implementation of controls.
effectiveness.
(ii) Type 1 report is at a specified date. Type 2 report is for a specified period.

Type 2 report, includes the following:

 a summary of the service auditor’s procedures to obtain
reasonable assurance.
In type 1 report, service auditor mentions that the
he has not performed any procedures regarding
 A statement, that the evidence obtained is sufficient and
(iii) appropriate to provide a basis for the service auditor’s
the operating effectiveness of controls and
opinion
therefore no opinion is expressed thereon.
 a separate section after the opinion, or an attachment,
that describes the tests of controls that were performed
and the results of those tests.

(ii)
Inclusive method Carve-out method
Service organization’s description of its Service organization’s description of its system excludes
(i) system includes the control objectives and the control objectives and related controls at the sub-
related controls at the sub-service organization. service organization.

Scope of the service auditor includes the Scope of the service auditor excludes the subservice
(ii) subservice organization’s relevant control organization’s relevant control objectives and related
objectives and related controls. controls.

Service auditor mention’s in his report that his Service auditor mention’s in his report that his
(iii) procedures extend to controls at the procedures do not extend to controls at the subservice
subservice organization. organization.

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Auditing – The Case Book ISAE 3402

In the description of system, detailed In the description of system, there is no need to describe
(iv) processing or controls at the subservice detailed processing or controls at the subservice
organization shall be described. organization.

Marking Plan: Mark(s)

(a) (i) Up to 1.5 marks for each difference 3.0
(ii) Up to 01 mark for each difference 3.0

(b) Up to 01 mark for each control 5.0

Examiners’ Comments:
In sub-part (i), almost all of the students were able to point out two basic differences between type 1 report and type 2 report;
however, most of them missed an important point i.e. that in type 1 report, no opinion is expressed whereas type 2 report
includes an opinion, summary of procedures carried out and results of tests of controls also.
Same was the case in sub-part (ii) which required differentiating between inclusive method and carve out method. An
important difference i.e. in inclusive method the service auditor mentions that his procedures extend to controls at subservice
organization whereas in carve-out method it’s the opposite; was normally missed out.

2
 Auditing – The Case Book ISRE 2400

ISRE 2400

QUESTIONS

Q.1 Vulture Limited (VL) is planning to acquire 100% shares in Sparrow (Private) Limited (SPL) which is a small company
and is not required to have a statutory audit. In order to satisfy VL about the company’s financial statements, the directors
of SPL have appointed your firm, Pigeon & Company, Chartered Accountants, to undertake a review engagement.
According to the terms of engagement, your firm is required to review SPL’s financial statements for the year ended
September 30, 2010 and provide a report to the directors.
While performing the review you have observed that SPL has not carried out a physical inventory count as at September
30, 2010. SPL’s inventory records were last updated on August 31, 2010. The valuation of inventory was based on
quantities determined by the store manager using the goods receipt and despatch notes that he had kept since the last
count. However, he is not confident that all goods receipt and despatch notes have been recorded. Your firm has not been
able to verify the quantity of inventory through any other means. The carrying amount of inventory is material to SPL’s
financial statements.
Required:
Draft a review report on the financial statements, for submission to the directors of SPL. (11 marks)
(ICAP, CFAP 06 Level – Winter 2010)

Suggested Solution:
Review Report to the Directors
We have reviewed the accompanying balance sheet of Sparrow (Private) Limited at September 30, 2010, and the income
statement, statement of changes in equity and cash flow statement for the year then ended. These financial statements are
the responsibility of the Company’s management. Our responsibility is to issue a report on these financial statements
based on our review.
We conducted our review in accordance with the International Standard on Review Engagements 2400. This standard
requires that we plan and perform the review to obtain moderate assurance as to whether the financial statements are
free of material misstatement. A review is limited primarily to inquiries of company personnel and analytical procedures
applied to financial data and thus provides less assurance than an audit. We have not performed an audit, and,
accordingly, we do not express an audit opinion.
The Management did not carry out a physical stock taking of inventories which are valued at Rs. ____ in the accompanying
financial statements, as of September 30, 2010. We were unable to satisfy ourselves regarding inventory quantities by
means of other review procedures.
The financial statement of Parrot (Private) Limited for the year ended September 31, 2009 was unaudited.
Based on our review, except for the financial effects of any adjustments that might have been determined to be necessary
had the management carried out physical stock taking as of September 30, 2009 or applied appropriate alternate
procedures to account for inventory value in the financial statements, nothing has come to our attention that causes us to
believe that the accompanying financial statements are not presented fairly, in all material respects in accordance with
the International Financial Reporting Standards.
City
Date of Report Pigeon & Co.
Chartered Accountants

Examiners’ Comments:
Majority of the students were able to draft the report correctly as they adopted the format specified in ISRE 2400. However, a
large majority was not able to adequately draft the qualifications. Some of the students did not write the complete report i.e.
left some parts of the report such as title, date, place etc. and lost the related marks.
A large number of students did not mention in the review report that the financial statements of Sparrow (Private) Limited
for the year ended September 31, 2009 were unaudited.

1
 Auditing – The Case Book ISRE 2410

ISRE 2410

QUESTIONS

Q.1 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)
(ICAP, CFAP 06 Level – Summer 2019)

Suggested Solution:
(i)
Ordinarily an auditor is not required to perform the procedure of observation for obtaining evidence in a review
engagement. However, only relying on the count sheets provided by management is not sufficient and we will have to
perform analytical procedure.
Considering this, there will be no implication on review report.

(ii)
Existence of accumulated losses and adverse ratio indicates that BL may not be a going concern. Therefore, we will have
to inquire management as to its plans for future actions, feasibility of future plans and whether outcome of the plans
would improve the situation.
Consider the adequacy of the disclosures about such matters in the interim financial information.

If it is assessed that going concern assumption is not valid and adequate disclosure is made in the interim financial
information, we would include an emphasis of matter paragraph to highlight a material uncertainty to a condition that
may cast significant doubt on BL’s ability to continue as a going concern.

If adequate disclosure is not made in the interim financial information, we would express a qualified or adverse opinion
as appropriate.

If the auditor considers that going concern assumptions is not valid and the financial statements are not prepared on
other than going concern basis then an adverse opinion will be expressed.

(iii)
The auditor is required to use inquiry and analytical procedures in a review engagement and if the auditor satisfactorily
concludes that the bad debt provision is following the historical trend then no further procedures are required and there
will be no implication on review report.

1
 Auditing – The Case Book ISRE 2410

(iv)
In this case, the audit team should perform the following procedures:

 Inquired from management about the procedure it has followed to identify subsequent adjusting event and
whether all events upto the date of review report that may require disclosure or adjustment have been
identified.
 Obtain written representation that the management has disclosed to the auditor all significant events that have
occurred subsequent to the balance sheet date and through to the date of the review report.
 Ensure that all relevant adjustments and disclosure have been made in the financial statements.

There will be no implication on review report unless any material misstatement is identified in the above procedures.

Q.2 You, the Audit Manager, have been asked by the Engagement Partner to draft “Negative Assurance” in your report on the
accounts of WWF Manufacturing Company Limited for the year ended June 30, 2000, based on your Review which you
carried out as result of your firm’s engagement to review financial statements.
Required:
Draft the requested Negative Assurance. (05)
(ICAP, CFAP 06 Level – Winter 2000)

Suggested Solution:
DRAW UP THE NECESSARY NEGATIVE ASSURANCE
REVIEW REPORT TO…..

We have reviewed the accompanying balance sheet of WWF Manufacturing Company at June 30, 2000………

We conducted our review in accordance with the International Standard on Auditing practices applicable to………

Based on our review, nothing has come to our attention that causes us to believe that the accompanying financial
statements do not give a true and fair view in accordance with International Accounting Standards.

2
 Auditing – The Case Book ISRS 4400

ISRS 4400
ENGAGEMENTS TO PERFORM
AGREED-UPON PROCEDURES
QUESTIONS

Q.1 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 given
situation.
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.
(ICAP, CFAP 06 Level – Winter 2017)

Q.2 Spectrum Limited has patented a manufacturing process for the production of Product X. It has allowed Lava Company
Limited (LCL) to produce and market product X against a royalty of 4% of the sales value. LCL is a large manufacturing
concern and sells a number of products. It issues serially numbered invoices and each invoice contains a number of
products. Different prices are charged from different categories of customers, according to price lists duly approved at the
start of the year.
Spectrum Limited has engaged your firm to carry out agreed upon procedures relating to verification of the amount of
royalty.

Required:
Draft a report of factual findings in accordance with the relevant standard. The report should contain at least three
procedures and three findings. You may assume necessary details wherever required. (12)
(ICAP, CFAP 06 Level – Summer 2017)

Q.3 You have recently completed the audit of Rubi Limited (RL), a multinational company, for the year ended December 31,
2008. The Chief Financial Officer (CFO) of the company has now approached you for a report on book value per share, as
of December 31, 2008 for submission to the regulatory authorities.
Following is an extract from the audited balance sheet of RL as at December 31, 2008:
Rupees
Issued, subscribed and paid-up share capital
(400,000 ordinary shares of Rs. 10 each) 4,000,000
Accumulated profits 2,000,000
Unrealized gain on revaluation of investments 500,000
Surplus on revaluation of fixed assets – net of tax 600,000

The auditor’s opinion on the financial statements for the year ended December 31, 2008 was qualified as deferred tax
asset amounting to Rs. 5 million was not recognized in the financial statements.
Required:
Draft a report for submission to the client. Show necessary calculations related to the figures disclosed in the report. (15)
(ICAP, CFAP 06 Level – Summer 2009)

1
 Auditing – The Case Book ISRS 4400

Q.4 TFL has recently applied for listing on a Stock Exchange in Pakistan. Following information has been extracted from TFL’s
financial statements for the year ended 30 June 2012.
Rs. in 000
Issued, subscribed and paid up capital - Ordinary shares 4,000,000
Issued, subscribed and paid up capital - Non redeemable preference shares 600,000
Share deposit money- Non redeemable preference shares 3,000
Un-appropriated profit 30,000
Unrealized gain on re-measurement of available for sale investments (net of tax)
500,000
Surplus on revaluation of fixed assets 120,000
Unpaid dividend on preference shares 75,000
The face value of both types of shares is Rs. 10 each. Preference shares are convertible into ordinary shares at any time
after listing of ordinary shares. The conversion price shall be Rs. 10 per ordinary share. For the purpose of conversion,
unpaid dividend on preference shares, accumulated up to the date of announcement of conversion by the company, shall
also be taken into account for determining the number of ordinary shares to be issued upon conversion.
Required:
On behalf of the auditors of the company, draft a report on factual findings on break-up value of shares for submission to
the client (16)
(ICAP, CFAP 06 Level – Winter 2012)

Q.5 Badar & Co. are the auditors of Smart Casuals (Private) Limited for the last five years. The management of the Company
has approached the firm for a special assignment in respect of Accounts Receivables as at June 30, 2005. After the initial
discussions the firm has accepted the assignment to perform the following Agreed Upon Procedures:
• Obtain and check the addition of the trial balance of accounts receivable as at June 30, 2005 prepared by the
Company, and compare the total to the balance in the related general ledger account.
• Obtain and compare the list of all customers and the amounts owing at June 30, 2005 to the related names and
amounts in the trial balance.
• Obtain and check the details of Rs.30 Million received till August 31, 2005 from the customers against the
outstanding balances of Rs.50 Million as at June 30, 2005.
Badar & Co. has issued the engagement letter for an Agreed Upon Procedures Engagement. The audit senior has
completed the field work and performed the above procedures. You are now required to prepare the report of factual
findings in connection with ‘Accounts Receivables’ as at June 30, 2005 assuming that there is no exception noted, for the
partner’s review containing all the necessary elements applicable for the Agreed Upon Procedures Engagement. (09)
(ICAP, CFAP 06 Level – Winter 2005)

2
 Auditing – The Case Book ISRS 4400

SUGGESTED SOLUTIONS

Q.1
• The report is restricted to those parties that have agreed to the procedures to be performed.
• The reason for restricting the AUP report in this manner is to prevent readers who are unaware of the context for the
AUP from misinterpreting the results of those procedures.
• However, if BF intends to share the report with persons other than the federal government, BF should agree with the
firm, the specific donors to whom the report would be available and such parties should be disclosed in the
engagement letter.
• Furthermore, BF should ensure that the said donors are aware and understand the procedures, which will be
performed by the firm.
• If disclosure to the other parties is agreed as discussed above, the report would still include a statement to the effect
that the AUP report is restricted to the specified users and is not to be used for any other purpose.

Q.2 REPORT OF FACTUAL FINDINGS

Board of Directors,
Spectrum Limited,
Karachi.
Dear Sirs,

We have performed the procedures agreed with you and enumerated below with respect to the verification of royalty.
Our engagement was undertaken in accordance with the International Standards on Related Sendees applicable to agreed
upon procedures engagements. The procedures were carried out solely to assist you in verification of the royalty.

The procedures are summarised as follows:

(i)We obtained the list of all invoices issued by the company and agreed the total with the total sales reported in the
financial statements.
(ii)We selected every 10* invoice and traced the sales (if any) of product X, from the invoice onto the list of transactions
and checked the price charged with the rate list applicable to different customers.
(iii)For every selected invoice of product X, we checked that the royalty had been recorded as per the agreed rates.

Findings
We report our findings below:
(i)With respect to item (i) we found that the total list of all invoices was in agreement with the total sales reported in the
financial statements.
(ii)With respect to item (ii) we found that price charged was in agreement with the rate list.
(iii)With respect to item (iii) we found that royalty had been recorded as per the agreed rates.
Because the above procedures do not constitute an audit or a review in accordance with International Standards on
Auditing or International Standards on Review Engagements, we do not express any assurance on the royalty.
Had we performed additional procedures or had we performed an audit or review of financial statements in accordance
with International Standards on Auditing or International Standards on Review Engagements, other matters may have
come to our attention that would have been reported to you.
Our report is solely for the purpose set forth in the first paragraph of this report and for your information and is not to be
used for any other purpose or to be distributed to any other parties. This report relates only to the accounts and items
specified above and do not extend to financial statements of LCL, taken as a whole.

AUDITOR
NAME
ADDRESS

Examiners’ Comments:
Common errors:
1. Totally incorrect procedures were observed such as obtaining confirmation from selected customers, ensuring that credit
notes have been issued in case of sales returns, procedures to ensure that sales were not overstated, etc. Some of them even
mentioned about obtaining confirmation from Spectrum Limited who had appointed them!
2. Unrelated findings were reported i.e. which did not arise from the procedures which had been carried out.

3
 Auditing – The Case Book ISRS 4400

Q.3
The Board of Directors 08 March 2009
RL Limited (the Company)
Karachi
Dear Sirs
BOOK VALUE PER SHARE BASED ON THE AUDITED BALANCE SHEET AS AT 31 DECEMBER 2008
We have examined the annexed Statement of Book Value Per Share (the Statement) of the company as at 31 December
2008 duly initialed by us for identification purposes. The book value per share has been determined on the basis of
audited balance sheet of the company as at December 31, 2008 in accordance with the directives of the Institute of
Chartered Accountants of Pakistan contained in Technical Release 22 “Book Value Per Share” (TR-22) and we report that
The Statement is the responsibility of the Management of the Company. Our responsibility is to examine the Statement
and report thereon.
In our opinion, the Statement is presented fairly in all material respects in accordance with TR-22 of the Institute of
Chartered Accountants of Pakistan.
The book value per share of the face value of Rs. 10 each, taking into consideration, surplus on revaluation of fixed assets,
works out to Rs. 30.25 per share.
The book value per share of the face value of Rs. 10 each without taking into consideration surplus on revaluation of fixed
assets works out to Rs. 28.75 per share.
This report is being issued at the specific request of the company to meet the regulatory requirements and it should not
be used for any other purpose or circulated to any one else without our prior written consent.

Yours faithfully

ALTERNATE REPORT BASED ON AGREED UPON PROCEDURES ENGAGEMENT

REPORT OF FACTUAL FINDINGS

The Board of Directors
RL limited ( the Company)
Karachi

Dear Sirs
We have performed the procedures agreed with you and enumerated below with respect to the book value per share as of
December 31, 2008, as set forth in the accompanying statement. Our engagement was undertaken in accordance with the
International Standard on Related Services applicable to agreed-upon procedures engagements. The procedures were
performed solely to assist you in evaluating the validity of the book value per share and its submission to regulatory
authorities and are summarized as follows:
1. We obtained the statement of book value per share as prepared by management and compared the information
with the audited financial statements as at December 31, 2008.
2. We checked that the calculation of the book value per share is in accordance with the directives of the Institute
of Chartered Accountants of Pakistan contained in Technical Release 22 “Book Value Per Share”
We report our findings below:
(a) The book value per share of the face value of Rs. 10 each, taking into consideration, surplus on revaluation of
fixed assets, works out to Rs. 30.25 per share.
(b) The book value per share of the face value of Rs. 10 each without taking into consideration surplus on
revaluation of fixed assets works out to Rs. 28.75 per share.
Because the above procedures do not constitute either an audit or a review made in accordance with International
Standards on Auditing or International Standards on Review Engagements (or relevant national standards or practices),
we do not express any assurance on the book value per share as of December 31, 2008.
Had we performed additional procedures in accordance with International Standards on Auditing or International
Standards on Review Engagements (or relevant national standards or practices), other matters might have come to our
attention that would have been reported to you.

Our report is solely for the purpose set forth in the first paragraph of this report and for your information and is not to be
used for any other purpose or to be distributed to any other parties. This report relates only to the item specified above
and does not extend to any financial statements of RL Limited (the Company), taken as a whole.

AUDITOR
Date Address

4
 Auditing – The Case Book ISRS 4400

RUBY LIMITED
BOOK VALUE PER SHARE
(With and without surplus on revaluation of fixed assets)
As at December 31, 2008
With surplus Without
surplus
------ Rupees ------
Issued, subscribed and paid-up capital 4,000,000 4,000,000
Accumulated profit 2,000,000 2,000,000
Unrealized gain on revaluation of investments 500,000 500,000
Surplus on revaluation of fixed assets 600,000 -
*Deferred tax asset (not recognized in the financial statements) 5,000,000 5,000,000
12,100,000 11,500,000
Number of ordinary shares of Rs. 10 each, issued for cash 400,000 400,000

Book value per ordinary share of Rs. 10 each 30.25 28.75

(*Included in the computation because the audit report was qualified on this issue and the qualification was quantified)

Q.4 AUDIT REPORT TO BASED ON AGREED UPON PROCEDURES ENGAGEMENT REPORT ON FACTUAL FINDINGS
The Board of Directors,
TFL (the Company),
Karachi.

Dear Sirs,

We have performed the procedures agreed with you and enumerated below with respect to the book value per share as of
30 June 2012, as set forth in the accompanying statement. Our engagement was undertaken in accordance with the
International Standard on Related Services applicable to agreed-upon procedures engagements. The procedures were
performed solely to assist you in evaluating the validity of the book value per share and its submission to regulatory Stock
Exchange and are summarized as follows:
1. We obtained the statement of book value per share as prepared by management and compared the information with
the audited financial statements as at 30 June 2012.
2. We checked that the calculation of the book value per share is in accordance with the directives of the Institute of
Chartered Accountants of Pakistan contained in Technical Release 22 “Book Value Per Share”

We report our findings below:

(a) The book value per share of the face value of Rs. 10 each, taking into consideration, surplus on revaluation of fixed
assets, works out to Rs. 11.41 per share.
(b) The book value per share of the face value of Rs. 10 each without taking into consideration surplus on revaluation of
fixed assets works out to Rs. 11.15 per share.

Because the above procedures do not constitute either an audit or a review made in accordance with International
Standards on Auditing or International Standards on Review Engagements (or relevant national standards or practices),
we do not express any assurance on the book value per share as of 30 June 2012.
Had we performed additional procedures in accordance with International Standards on Auditing or International
Standards on Review Engagements, other matters might have come to our attention that would have been reported to
you.

Our report is solely for the purpose set forth in the first paragraph of this report and for your information and is not to be
used for any other purpose or to be distributed to any other parties. This report relates only to the item specified above
and does not extend to any financial statements of the Company, taken as a whole.

AUDITOR
Date Address

5
 Auditing – The Case Book ISRS 4400

TFL
BOOK VALUE PER SHARE
(With and without surplus on revaluation of fixed assets)
As at 30 June 2012
Break-up value per
Ordinary Preference Share
share share (ordinary &
preference)
-----------Rupees in thousand------------
Equity
Issued, subscribed and paid-up capital 4,000,000 600,000 4,600,000
Share deposit money (preference share related) - 3,000 3,000
Unappropriated profit 30,000 - 30,000
Unrealized gain on revaluation of available for sale
investment net 500,000 - 500,000
Surplus on revaluation of fixed assets 120,000 - 120,000
Total equity (with Surplus on revaluation of fixed assets) 4,650,000 603,000 5,253,000
Total equity (without Surplus on revaluation of fixed assets) 4,530,000 603,000 5,133,000
Number of ordinary shares is issue 400,000,000 400,000,000
Number of convertible preference share in issue 60,000,000 60,000,000
Number of convertible preference shares to be issued in
respect of share deposit money received 300,000 300,000
400,000,000 60,300,000 460,300,000
Break-up value per share (with surplus on revaluation of
fixed assets) 11.63 10.00 11.41
Break-up value per share (without surplus on revaluation of
fixed assets) 11.33 10.00 11.15

Preference Shares are non-redeemable but convertible into Ordinary Share at face value at any time after the issuance of
Ordinary shares. The conversion price shall be Rs. 10 per Ordinary Share and dividend not paid to the preference
shareholders, if any, accumulated upto the date of announcement of conversion by the Company, shall be taken into
account for determining the number of the Ordinary Shares to be issued upon conversion and therefore the number of
Ordinary Shares to be issued to the preference shareholders shall be in the ratio 1:1, plus unpaid accumulated
preferential dividends, if any. Such unpaid preferential dividend aggregated Rs. 75 million as at 30 June 2012.

Examiners’ Comments:
This question required the students to write a report based on agreed upon procedures i.e. on break-up value of shares. An
average performance was seen. Some of the common errors were as follows:
• Some students did not provide book values of ordinary and preference shares separately.
• Many students did not reproduce the correct version of the report despite being an open book examination.
• Many students did not provide break-up values inclusive of surplus on revaluation.
• Many students apportioned the unappropriated profit, surplus on revaluation of fixed assets and unrealized gain on
available for sale investments, to ordinary as well as preference shares.

Q.5
Examiners’ Comments:
Very simple question requiring a report on agreed upon procedure with no modification. It was well answered by most
students except some of them who tried to form an opinion rather than reporting on factual findings as required by ISRS
4400.

6
 Auditing – The Case Book ISRS 4410

ISRS 4410
COMPILATION ENGAGEMENT
QUESTIONS

Q.1 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)
(ICAP, CFAP 06 Level – Summer 2019)

Q.2 Rufi, a practicing member of the Institute of Chartered Accountants of Pakistan, is engaged in compilation of financial
statements of Peshawar Branch of Gamma Limited, a furniture manufacturer and supplier. These will be incorporated in
the consolidated financial statements of the company.

During the assignment he noticed the following:

(i) The management had ignored an expert’s opinion indicating impairment in value of tangible fixed assets and these
have been stated at cost less depreciation;
(ii) It was not possible to verify sales made to related parties, as management had not provided the relevant details;
Rufi is about to finish the assignment and intends to issue a report on the compiled financial statements. Management
wishes to present above financial statements to their auditors without any adjustment.

Required:
(a) How should Rufi deal with the issues referred to in para (i), and (ii) as given above? (05)
(b) Assuming that Rufi is able to resolve the above issues appropriately, prepare a draft report that Rufi may submit to the
management. (08)
(ICAP, CFAP 06 Level – Winter 2007)

1
 Auditing – The Case Book ISRS 4410

SUGGESTED SOLUTIONS

Q.1 Since the assignment involves assisting the management in preparation of financial information, it should be considered
as ‘compilation engagement’. In such an engagement, no opinion can be formed.

Considering the scenario, if your firm becomes aware that compiled financial information is misleading, appropriate
amendments in this regard should be proposed to the management.

However, if the management declines, or does not permit your firm to make the amendments to the compiled financial
information, your firm shall withdraw from the engagement and inform management and those charged with governance.

If withdrawal from the engagement is not possible, your firm shall determine the professional and legal responsibilities
applicable in the circumstances.
Q.2
Examiners’ Comments:
(a) The question was based on ISRS 4410 “Compilation Engagement”. The examinees were required to give their opinion as to
how an accountant should react if faced with certain situations, while carrying out an assignment for complication of
financial statements. Most of the examinees were not familiar with the requirement of ISRS 4410. The answers were mostly
on either side of the two extremes i.e. some examinees narrated all the steps i.e. even those which are only relevant in case of
audit assignments, whereas others gave a blanket permission to the accountant to use the information as provided by the
management. Very few of the examinees were able to form balanced opinions as recommended by ISRS 4410. The students
are advised to go through the ISRS to become aware of the responsibilities of an accountant, while carrying out an
assignment to compile financial statements.
(b) Many students gave the standard form of audit report instead of giving the report on Compilation Engagement. The
contents of such a report are listed in the above standard and examples of such reports are also available in the appendix to
the Standard.

2
ACCOUNTING TR-22 (Revised 2002)

BOOK VALUE PER SHARE

THE ISSUE

Different practices and policies are being used for computing book value
(commonly known as break-up value in Pakistan) of shares. For instance in some
cases all the assets including intangibles, deferred costs and fictitious assets are
included in considering the book value without regard to their recoverability. In
some other cases, intangibles are excluded from the shareholders’ equity.
Practices also vary regarding adjustment of contingent and other losses.

TECHNICAL COMMITTEE RECOMMENDATIONS

Book value per share in the equity capital of the company is the amount each
share is worth on the basis of carrying value per balance sheet, prepared in
accordance with a framework of recognized accounting standards. Such standards
provide that:-

(a) An asset is a resource controlled by the enterprise as a result of past events

and from which future economic benefits are expected to flow to the
enterprise.

(b) A liability is a present obligation of the enterprise arising from past

events, the settlement of which is expected to result in an outflow from the
enterprise of resources embodying economic benefits.

Computation of Book Value Per Share

Book value per share is computed by dividing shareholders’ equity with the
number of shares issued. Shareholders’ equity includes:-

a) Paid up capital

b) Revenue reserves and retained earnings, (less accumulated losses if any).

ACCOUNTING TR-22 (Revised 2002)

c) Capital reserves

Where the auditors have issued a qualified report and the qualification has
been quantified in monetary terms, that amount should be deducted from
equity.

Where the qualification is not quantified then the members issuing a

certificate regarding book value should mention this fact in the certificate.

d) Surplus created as a result of revaluation of fixed assets.

If the balance sheet of an entity includes balance of surplus on revaluation,

the book value per share should be computed separately both, including
and excluding such surplus, to enable comparability with those entities
where fixed assets have not been revalued.

The book value for any specific purposes in accordance with any statute would
have to be computed per requirements or criteria laid down in that respect by the
concerned regulatory agency or as set out in the relevant law.

(151st meeting of the Council – April 26-27, 2002)

 t
n7
lc,
TheInstitute
of
CA
PAKISTAN
Accountanls
Chartered
ol Pakistan HEAD
OFFICE

Circular
No.1/2017 January
31, 2017
ALL PRACTICING
MEMBERS
OF THEINSTITUTE

DearMember

REVISED
CSR/SUSTANIBILITY
ASSURANCE
REPORT

CSRAssurance Reportwas issuedvide ICAPCircularno. 0212015, datedFebruary9, 2015.However,

lnternational
standardon AssuranceEngagements (lsAE)3000,'Assurance Engagements other than
Auditsor Reviewsof HistoricalFinancialStatements',
has been revised,effectivefor assurancereports
datedon or after15 December 2015.TheCSR/SustainabilityAssurance Reporthasbeenrevisedby the
ICAP,in accordance withthe requirementsof ISAE3000(Revised).

In accordance with the requirements of ISAE3000 (Revised), followingadditionalkey elementshave

beenincluded in the CSR/Sustainability Assurance Report:
1. The Criteria: When preparing the report, the auditor should mention the
frameworUindicators/guidelines/methodologies used by the Company to prepare the
Sustainabilityreport.(referpara69(d)of ISAE3000(Revised);
2. The Auditor's Independence: The auditormustaffirmcompliance withthe independence and
otherethicalrequirements of Codeof Ethicsfor Chartered Accountants issuedby the ICAP.(refer
para69(j)of ISAE3000(Revised);
3. The Auditor's Quality Gontrol:The auditormust affirmcompliance to the requirements of
InternationalStandardon QualityControl1 (ISOC1), "QualitvControlfor Firmsthat Perform
Auditsand Reviewsof HistoricalFinancialInformation. and Other Assuranceand Related
Services Enoaoements". (referpara69(i)of ISAE3000(Revised);
4. The Auditor'sResponsibility: The auditormustclearlyexpressthathis responsibility js Limited
Assurance Conclusion. (referpara69(k)of ISAE3000(Revised);
5. Summaryof the Work Performed:The auditormustsummarize the assuranceprocedures
performed. However, the suggested workperformed mentioned in the CSRreportformatmaybe
modified andotherprocedures addedas relevantto the respectiveengagement conditions.(refer
para69 of 69(k)of ISAE3000(Revjsed);
6. Descriptionot the matter(s)giving riseto the exceptions:Whenapplicable, theAuditormust
noteexceptions causingthe company'sSustainability reportto be materiallymisstated. (refer
para69 (l)(v)of ISAE3000(Revised); and
7. The Auditor's Conclusion:The Auditormust expressthat LimitedAssuranceConclusion is
basedon sufficientappropriate evidence,on the mattersoutlinedin the CSR/ Sustainability
report.(referpara69(l)(i) of ISAE3000(Revised).

The Councilof the Institute

hasapproved
the enclosed
revisedCSR/Sustainability
Assurance
Reportin
Its283dmeetingheldon Januaryib, 2017.
The revisedreportformatwill supersede
the CSR/Sustainability
AssuranceReportissuedvide ICAP
Circular
No.02/20'15datedFebruary 9,2015.
areadvisedto takeguidance
Members fromtheenclosed
CSR/Sustainability
Assurance
Reportformat.

Soh
Director
Technical
Services
(Established AccountantsOrdinance.1961- x of 1961)
underthe Chartered
(Pakistan).
Avenue,Clifton,Karachi-75600
CharteredAccountants Ph: (92-21\111-000-422,
Fax:99251626
Website: www.icap.org.pk,
E-mail:info@icap.org.pk
 SUGGESTED
FORMAT

Independent
AssuranceReporton the Sustainability
Report
To the Boardof Directorsof I Companyl

1. lntroduction
We haveundertaken a limitedassurance
engagement
on the Sustainability
Reportof . . . . . . . . ( t h e
Company) for the year ended............. preparedby the Boardof Directors/
management of the Company.

Criteria
Thecriteriausedby thecompanyto prepare Reportis (identify
theSustainability frameworUbasis
of preparation), on pageX of theSustainability
as described Report(theCriteria).
3. Management's responsibility
The Company's management is responsiblefor the preparation of the Sustainability
Reportin
accordancewith the Criteria.This responsibility includesthe design,implementation and
maintenance to the preparation
of internalcontrolrelevant of the Sustainability
Reportthatis free
frommaterial
misstatement, whetherdueto fraudor error.

4. Limitation6
{Refernote 1}
5. Our independence and qualitycontrol
We havecompliedwiththe independence and otherethicalrequirements
of the Codeof Ethics
for Chartered
Accountantsissuedby the Institute
of CharteredAccountants
of Pakistan,
whichis
foundedon fundamentalprinciples
of integrity, professional
objectlvity, competence andduecare,
and professional
confidentiality behavior.

ThefirmappliesInternational
Standard on QualityControl1 "QualityControlforfirmsthatperform
Auditsand Reviewsof HistoricalFinancialInformation, and Other Assuranceand Related
ServicesEngagements" and accordlngly maintainsa comprehensive systemof qualitycontrol
including
documented policiesand proceduresregarding compliance with ethicalrequirements,
professional
standards andapplicablelegalandregulatoryrequirements.

6. Our responsibilityand summaryof work performed

Ourresponsibility
is to expressa limitedassuranceconclusion on the Sustainability
Reportbased
on the procedures we haveperformed and the evidencewe haveobtained. We conducted our
limitedassuranceengagementin accordancewith International Standardon Assurance
Engagements 3000,'Assurance Engagements otherthanauditsor reviewsof historical
financial
statements'issuedby the InternationalAuditingandAssurance Standards Board.Thisstandard
requiresthatwe planandperformthisengagement to obtainlimitedassuranceaboutwhetherthe
Sustainability
Reportis freefrommaterial misstatement.

A limitedassuranceengagementinvolvesassessingthe suitabilityin the circumstances of

Company'suse of the Criteriaas the basisfor the preparation of the SustainabilityReport,
assessingthe risks of materialmisstatement of the Reportwhetherdue to fraud or error,
respondingto the assessedrisksas necessary in the circumstances,and evaluatingthe overall
presentation
of the Report.A limitedassurance engagement is substantially
lessin scopethana
reasonableassurance engagement in relationto boththe riskassessment procedures, including
an understandingof internalcontrol,andthe procedures performedin responseto the assessed
risks.

The procedures performedin a limitedassurance

engagement
vary in natureand timingfrom,
andare lessin extentthanfor,a reasonable
assurance
engagement;
andconsequently, the level
 of assuranceobtainedin a limitedassuranceengagementis substantially lower than the
assurancethat would have been obtainedhad a reasonable assuranceengagement been
performed.Accordingly,the proceduresselectedwere based on our professionaljudgement.
Withinthe scopeof our work,we performedamongstotherthe followingprocedures:(theseare
the suggestedworkpeiormed that may be nodified and otherproceduresaddedas peiormed
andrelevantfor the respectiveengagement (Refernote 2)
conditions.)

7. Descriptionof the matter(s)giving rise to the exceptions(if any) (Refernote 3)

a)
0) ; linsertexceptions,
if anyl
8. Limitedassuranceconclusion
Our conclusion has beenformedon the basisof, and is subjectto, the mattersoutlinedin this
report.We believethat the evidencewe haveobtainedis sufficientand appropriateto providea
basisfor ourlimitedassurance conclusion.

Basedon our limitedassurance engagement, nothinghascometo our aftention(exceptfor the

effect of the matters reportedin the paragraphabove),that causes us to believethat the
SustainabilityReportis not prepared,in all materialrespects,in accordancewiththe Criteria.
o Restrictionon distribution
(Refernote 4)

DATE: STcNATURE
CHARTERED
AccoUNTANTS

IPLACE/ CIIYI

ASSURANcEENGAGEMENT
PARTNER

ZIDTS\ICAP\Circular
issuedin 2017.docx
Note 1: If the engagement was subject to any limitations, reference should be made accordingly. The
limitations may be that the assurance scope excludes:

• Aspects of the Report other than those mentioned;

• Data and information outside the defined reporting period (July1 2016 to June 30 2017);

• The Company's statements that describe expression of opinion, belief, aspiration, expectation,
aim or future intention and national or global socio-economic and environmental aspects;

• Data and information on economic and financial performance of the Company, which, we are
informed, are from the Company's audited financial records

Note 2: Procedures will depend upon the auditor's judgment and may vary with the scope of work. Following
procedures may be relevant for the engagement:

 Interview selected key senior personnel of the Company to understand the current
processes in place for capturing sustainability performance data, the Company’s
sustainability goals and the progress made during the reporting period;

 Review the Company’s approach to stakeholder engagement and processes for

determining material issues through interviews and review of associated documents;

 Review relevant documents and systems for gathering, analyzing and aggregating
sustainability performance data in the reporting period;

 Review of major anomaly within the report as well as between the report and source
data/information;

 Verification of the transcription of data internally verified by the Company;

 Execution of audit trail of selected data streams and information to determine the level of
accuracy in collection, transcription and aggregation processes followed;

 Review of the reliability of the information, assessing related controls and their operating
effectiveness;

 Review of the Company’s plans, policies and practices, pertaining to their social,
environmental and sustainable development;

 Performance of site visits as part of the inspection of processes for collecting, analyzing,
validation and aggregation of sustainability data and their documentation on a sample
basis.

Note 3: Include when it is applicable.

Note 4: Where applicable, use the wording of paragraph 69(f) of revised ISAE 3000 which states that:
‘when the applicable criteria are designed for a specific purpose, a statement alerting readers to
this fact and that, as a result, the subject matter information may not be suitable for another
purpose’.