(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
AUDIT RISK PAST PAPERS customers depending upon which option they choose.
(v) The balcony of one of the apartments constructed in
2012 fell off, severely injuring three persons. The news
23 Marks December 2018 surfaced in the media and caused severe criticism on
FL and a show- cause notice was also received by FL
You are the engagement manager in Hasan Abdali and Company, Chartered Accountants. from a regulatory authority. FL’s management is of
One of your clients is Falcon Limited (FL) which owns six shopping malls and four office the view that the construction was up to the required
building complexes in different cities for rental purposes. FL also constructs and sells standards and the residents had made some
residential apartments in major cities of Pakistan. modifications which caused this incident.
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.
AUDIT RISK PAST PAPERS
RISK Therefore there is a risk of PROCEDURES
Classification of The shopping malls and Therefore there is a risk of • Inquire with the management
shopping malls building complexes are for classification of assets whether there Is any land or
and building rental purposes. because it should be building which is held for
complexes classified as IP and undetermined use or for rental
management may not have purpose.
classified it IP instead as OOP. • Inspect the rental agreement to
identify and land or building that
has been rented.
• Inspect the Minutes of the
meeting of those charged with
Governance to evaluate
business decision of acquiring
land and building.
Impairment of Shopping mall located in Therefore there is a risk • Obtain an understanding of
Investment Multan witnessed low turnout of overstatement of IP management process
Property If cost of customers and some of the Because IP may have been • Check / inspect that assumptions
model customers are vacating the impaired and no impairment used by the management such as
shops. or adequate impairment may discount rate and future cash
have been recorded by the flows are reasonable
management as per IAS 36. • Perform subsequent event
procedures such as subsequent
interim FS to compare the
projected result with the actual
result
AUDIT RISK PAST PAPERS
RISK Therefore there is a risk of PROCEDURES
Fair value of IP The shopping malls and Therefore there is a risk of • Evaluate the competence,
– If FV model building complexes are for classification of assets capabilities and objectivity of
used rental purposes. because it should be management expert
classified as IP and • Evaluate the adequacy of the
management may not have expert work:
classified it IP instead as OOP. • Relevance and reasonableness
of the expert finding
• Relevance and reasonableness
of the assumption and
methodology used
• The relevance, completeness
and accuracy of source data
Therefore there is a risk of • Inspect sales agreement to
Revenue The customer has accepted
overstatement of revenue understand the terms and
recognition as management offer and agreed
Because as per contract condition with respect
per IFRS 15 to pay 50% of the rent and the
remaining amount after there is variable consideration recoverability
2 years if conditions improve. and management may not • Assess the reasonableness of
have estimate the variable assumptions used and estimates
consideration accurately as made by the management to
per IFRS 15 recognize revenue considering
variable consideration
AUDIT RISK PAST PAPERS
RISK Therefore there is a risk of PROCEDURES
Classification of The customer has accepted Therefore there is a • Obtain the breakup of receivable
Receivable management offer and risk of classification of bifurcated between current asset
agreed to pay 50% of the rent receivable Because and non-current asset
and the remaining amount receivable shall be classified • Inspect the agreement to assess
after 2 years if conditions as non- current asset as per the timings and amounts of cash
improve. IAS 01 and management flows and recalculate the current
may have classified it as and non-current assets amount
current asset
Valuation of The customer has accepted Therefore there is a • Inspect the agreement to assess
Receivable management offer and risk of valuation of receivable the timing and amount of cash
agreed to pay 50% of the rent Because it includes flows
and the remaining amount significant financing • Evaluate the assumption used by
after 2 years if conditions component and shall be the management to such as
improve. discounted using an discount rate and timing and
appropriate discount rate as amount of cash flows
per IFRS 15 and management
may not have discount.
AUDIT RISK PAST PAPERS
RISK Therefore there is a risk of PROCEDURES
Classification of Two floor from the head office Therefore there is a risk of • If any land or building has been
Head office building has been rented out. classification of Building used for both purpose, ensure
building Because building is used for that whether it can be
more than 1 purposes and separable by inspecting the
both the parts shall be agreement to assess terms and
classified separately (subject condition
to certain condition) and • Inspect the expert report that is
management may not have engaged by the management to
classified it separately ensure that both properties can
be separately identifiable and
can be sold separately
• If separable ensure that amount
allocated to IP and OOP is
accurate by ensuring that
assumptions are reasonable
Related party Two floors has been rented Therefore there is a risk • Confirming or discussing
disclosure out to the Company who that RP transaction may specific aspects of the
have common director have not been adequately transactions with
disclosed in FS as per intermediaries such as banks,
IAS 24 law firms, guarantors, or agents,
AUDIT RISK PAST PAPERS
PLANNING COMPLETENESS OF ALL RP
IR + SHR + MoM of BoD If new related party or new
} IDENTIFY & DIRECTOR’S CONFLICT STATEMENT transaction with existing
RISK INVOLVE + LEGAL CONFIRMATION related party identified.
ASSESS Communicate new related party
to engagement team.
OUTSIDE THE NORMAL
RISK ASSESSMENT PROCEDURES COURSE OF BUSINESS Request management to identify
INSPECT THE AGREEMENT TO EVALUATE all transactions with new
related party.
INQUIRY WITH MANAGEMENT Business rationale.
Inquire why internal controls
Terms & conditions are consistent are ineffective.
with management explanation.
Related Party name Transaction is appropriately
Performed audit procedures on new
related party.
accounted for & disclosed.
Relationship Transaction is appropriately Revise the risk assessment.
Transaction authorized & approved.
If intentionally, consider fraud.
RELATED PARTY TRANSACTION
INTERNAL CONTROL MAY NOT BE DISCLOSED
Confirmation with related party.
RP IDENTIFY
A/C FOR & DISCLOSED Confirm with intermediaries such
as banks.
AUTHORIZE & APPROVE
If applicable, inspect the audited
ONCOB AUTHORIZE financial statments of related
& APPROVE party.
SHARING RP INFORMATION FRAUD
TO ENGAGEMENT TEAM Inquiry with MGT, TCWG, and RP.
Inspection of significant contracts.
AUDIT RISK PAST PAPERS
RISK Therefore there is a risk of PROCEDURES
Revenue The Company offers different Therefore there is a risk of • Inspect the sale agreement to
recognition as terms to its customers misstatement of revenue identify terms and condition to
per IFRS 15 depending upon which option Because each contract may evaluate performance
they choose for the sale of have different performance obligation
residential projects. obligation and consequently
• Obtain an understanding of
may have different revenue
management process to
recognition criteria
recognized revenue and ensure
(Point of time of Over
that it is consistent with the
the Time) and management
requirement of IFRS 15
may not have recorded the
• Evaluate the accounting policy
revenue as per IFRS 15.
such point of time or over the
time and ensure that it is
consistent with the
requirement of IFRS 15
AUDIT RISK PAST PAPERS
RISK Therefore there is a risk of PROCEDURES
Provision or The accident in the balcony Therefore there is a • Inquiry of management
contingent of one of the apartment risk that Provision may not including in-house legal
liability severely injured 3 persons have been recorded or if it is counsel to obtain an
and show because notice was a contingent liability may understanding of the legal
also received from the not have been adequately cases
regulator. disclosed as per IAS 37. • Inspect correspondence
between the entity and its
external legal counsel
• Send direct confirmation to the
external legal counsel to know
the outcome of the case
