Winter 2021
Q.1. As a senior auditor you always prefer to perform Test of Controls
(TOCs) in accordance with ISA’s, some juniors who recently joined your firm
and have limited knowledge and experience of financial audit, consider TOCs
as waste of time and resources, they are also propagating the same
to others. You being a senior audit professional think otherwise. Test of
controls are used to obtain sufficient appropriate audit evidence as to the
operating effectiveness of the relevant controls. In the light of this statement
specify the following:
Required:
(a) What is sufficiency and appropriateness of audit evidence? 03
(b) What is meant by operating effectiveness of control? 03
(c) What is meant by control activities? 03
(d) In what circumstances the auditor shall design and perform test of
controls? 03
(e) Can the auditor use the audit evidence from a previous audit about the
operating effectiveness of specific controls in the current period ?
a. Sufficiency (of audit evidence) is The measure of the quantity of
audit evidence. The quantity of the audit evidence needed is affected
by the auditor’s assessment of the risks of material misstatement and
also by the quality of such audit evidence, whereas Appropriateness
(of audit evidence) is The measure of the quality of audit evidence;
that is, its relevance and its reliability in providing support for the
conclusions on which the auditor’s opinion is based.
b. Operating effectiveness of controls means effectiveness of a
control in preventing, or detecting and correcting, material
misstatements at the assertion level.
c. Those policies and procedures that help ensure that management
directives are carried out. Control activities are a component of
internal control.
d. The auditor shall design and perform tests of controls if:
The auditor’s assessment of risks of material misstatement at
the assertion level includes an expectation that the controls
are operating effectively(that is, the auditor intends to rely
on the operating effectiveness of controls in determining
the nature, timing and extent of substantive procedures); or
Substantive procedures alone cannot provide sufficient appropriate
audit evidence at the assertion level
E. The auditor shall design and perform tests of controls if:
The auditor’s assessment of risks of material misstatement at
the assertion level includes an expectation that the controls
are operating effectively(that is, the auditor intends to rely
on the operating effectiveness of controls in determining
the nature, timing and extent of substantive procedures);
or
Substantive procedures alone cannot provide sufficient
appropriate audit evidence at the assertion level
Q.2. During the course of the audit, an auditor uses different sources and
techniques to collect audit evidences. Written representations are important
sources of audit evidence, in the light of this statement appraise that if
management does not provide one or more of the requested written
representations, what course of action the auditor shall take?
Q.3. With reference to “Code of Ethics for Professional Accountants”,
define the FIVE categories of threats to compliance by a professional
accountant with the fundamental principles.
Q.2 If management does not provide one or more of the
requested written representations, the auditor shall:
(i) Discuss the matter with management.
(ii) Reevaluate the integrity of management and
evaluate the effect that this may have on the
reliability of representations (oral or written) and
audit evidence in general; and
(iii) Take appropriate actions, including
determining the possible effect on the opinion
in the auditor’s report, if management does not
provide a written representation that:
(a) It has fulfilled its responsibility for the
preparation of the financial statements in
accordance with the applicable financial
reporting framework, including, where
relevant, their fair presentation; or that
(b) It has provided the auditor with all
relevant information and access as agreed
in the terms of the audit engagement; or that
(c) All transactions have been recorded and
are reflected in the financial statements, the
auditor shall disclaim an opinion on the
financial statements.
The auditor shall disclaim an opinion on the financial
statements.
Q.3 (a) Self-interest threats, which may occur as a
result of the financial or other interests of a
professional accountant or of an immediate or close
family member;
(b) Self-review threats, which may occur when a
previous judgment needs to be re-evaluated by
the professional accountant responsible for that
judgment;
(c) Advocacy threats, which may occur when a
professional accountant promotes a position or
opinion to the point that subsequent objectivity may
be compromised;
(d) Familiarity threats, which may occur when,
because of a close relationship, a professional
accountant becomes too sympathetic to the interests
of others; and
(e) Intimidation threats, which may occur when a
professional accountant may be deterred from
acting objectively by threats, actual or perceived
Q.4 (a) According to “Code of Ethics for Chartered Accountants” when
complying with one fundamental principle conflicts with complying with one
or more other fundamental principles, a Chartered Accountant shall take
what course of action.
(b) What are the circumstances where Chartered Accountants are or might
be required to disclose confidential information or when such disclosure
might be appropriate?
(a) A chartered accountant might face a situation in which complying
with one fundamental principle conflicts with complying with one or
more other fundamental principles. In such a situation, the accountant
might consider consulting, on an anonymous basis if necessary, with:
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Others within the firm or employing organization.
Those charged with governance.
A professional body.
A regulatory body.
Legal counsel.
However, such consultation does not relieve the accountant from the
responsibility to exercise professional judgment to resolve the conflict
or, if necessary, and unless prohibited by law or regulation, disassociate
from the matter creating the conflict.
(b)
Following are circumstances where chartered accountants are or
might be required to disclose confidential information or when
such disclosure might be appropriate:
a) Disclosure is required by law, for example:
(i)
Production of documents or other
provision of evidence in the course
of legal proceedings; or
(ii)
Disclosure to the appropriate public
authorities of infringements of the
law that come to light; (2)
b) Disclosure is permitted by law and is
authorized by the client or the employing
organization; and (1)
c) There is a professional duty or right to disclose, when not
prohibited by law:
(i)
To comply with the quality review of a professional
body;
(ii)
To respond to an inquiry or
investigation by a professional or
regulatory body; (2)
(iii)
To protect the professional
interests of a chartered
accountant in legal proceedings;
or (1)
(iv)
To comply with technical and
professional standards, including
ethics requirements.
Q.5 You are audit senior in an audit firm, the firm consisted of 5 partners,
three of whom are looking after assurance services. Though the firm is a new
one, it is set to comply with all the quality control requirements of IFAC and
ICAP. The firm is being approached by businesses for different
kind of assignments, and though it is renowned for its quality Tax related
work, it is getting assignments related to statutory audit also. A new client
has been assigned to you, which would be audited 1st time by your firm, this
client is big retail store chain, and though unlisted got a turnover of more
than Rs.20 billion yearly, with stores in all big cities of Pakistan. All the
individual stores are earning handsome profits except a few, which are either
new or bought from another retails store chain. Such a big client definitely
needs proper planning.
Your firm has never done audit related work of a retail store chain, however
a senior partner of your firm has such experience at his previous employer.
Required:
A Junior asked you the following questions and you want to answer him
precisely. With respect to planning and audit of financial statements, specify:
(a) Adequate planning benefits the audit of financial statements in several
ways, list down any five of such benefits. 05
(b) In what circumstances the auditor may need to modify the overall audit
strategy and audit plan during the course of the audit. 05
(c) What factors affect the nature, timing and extent of direction and
supervision of engagement team members and review of their work? 05
(d) In an initial audit engagement, what additional matters the auditor may
consider in establishing the overall audit strategy and plan.
(a)
Adequate planning benefits the audit of financial statements in
several ways, including the
following: (Any five from the below got 1 mark each)
(a) Helping the auditor to devote appropriate attention to
important areas of the audit.
(b) Helping the auditor identify and resolve potential problems
on a timely basis.
(c) Helping the auditor properly organize and
manage the audit engagement so that it is
performed in an effective and efficient manner.
(d) Assisting in the selection of engagement team
members with appropriate levels of capabilities and
competence to respond to anticipated risks, and the
proper assignment of work to them.
(e) Facilitating the direction and supervision of
engagement team members and the review of
their work.
(f) Assisting, where applicable, in coordination of work
done by auditors of components and experts.
(b) As a result of unexpected events, changes in conditions, or the
audit evidence obtained from the results of audit procedures, the auditor
may need to modify the overall audit strategy and audit plan and thereby
the resulting planned nature, timing and extent of further audit procedures,
based on the revised consideration of assessed risks. This may be the
case when information comes to the auditor’s attention that differs
significantly from the information available when the auditor planned
the audit procedures. For example, audit evidence obtained through the
performance of substantive procedures may contradict the audit evidence
obtained through tests of controls.
(c) The nature, timing and extent of the direction and supervision of
engagement team members and review of their work vary depending on
many factors, including:
• The size and complexity of the entity.
• The area of the audit.
• The
assessed risks of material misstatement (for
example, an increase in the assessed risk of material
misstatement for a given area of the audit ordinarily
requires a corresponding increase in the extent and
timeliness of direction and supervision of engagement
team members, and a more detailed review of their
work).
• The capabilities and competence of the individual team
members performing the audit work.
(d) For an initial audit engagement, additional matters the auditor may
consider in establishing the
overall audit strategy and audit plan include the following:
• Unless prohibited by law or regulation, arrangements
to be made with the predecessor auditor, for example,
to review the predecessor auditor’s working papers.
• Any major issues (including the application of
accounting principles or of auditing and reporting
standards) discussed with management in connection
with the initial selection as
auditor, the
communication of these matters to those charged with
governance and how these matters affect the overall
audit strategy and audit plan.
• The audit procedures necessary to obtain sufficient
appropriate audit evidence regarding opening
balances.
• Other procedures required by the firm’s system of
Q.6 Analytical procedures are fundamental to the auditing process, and can
be used at all stages of the audit. As a senior you informed your junior Mr.
Khalid, a semi senior who is assigned with you to a big commercial bank (one
of your clients) that your firm is performing statutory audit of the said
bank for the last 2 years.
Required:
Explain the following to Mr. Khalid:
(a) What factors influence the reliability of data? 08
(b) If controls over a particular financial statement item are deficient, the
auditor would place more reliance on Substantive analytical procedures or
Test of details?
(a)
quality control for initial audit engagements (for
example, the firm’s system of quality control may
require the involvement of another partner or senior
individual to review the overall audit strategy prior
to commencing significant audit procedures or to
review reports prior to their issuance).
The reliability of data is influenced by its source and nature and is
dependent on the circumstances under which it is obtained.
Accordingly, the following are relevant when determining whether
data is reliable for purposes of designing substantive analytical
procedures:
(a)
Source of the information available. For example,
information may be more reliable when it is obtained
from independent sources outside the entity;
(b)
Comparability of the information available. For
example, broad industry data may need to be
supplemented to be comparable to that of an entity
that produces and sells specialized products;
(c)
Nature and relevance of the information available.
For example, whether budgets have been established
as results to be expected rather than as goals to be
achieved; and
(d)
Controls over the preparation of the information that
are designed to ensure its completeness, accuracy
and validity. For example, controls over the
preparation, review and maintenance of budgets.
(b) If controls over a particular financial statement item are deficient,
the auditor would place more reliance on Test of details rather than
substantive analytical procedures.
Auditor normally uses analytical procedures to obtain
supplementary/collaborative Audit Evidence.
Analytical
procedures normally do not provide sufficient appropriate
Audit Evidence to base the Audit conclusion and the Auditor
has to apply test of Details. If the control over a particular
financial statement item are deficient the Auditor place more
reliance on Test of Details rather than substantive analytical
procedures.
Q.7 External confirmation is a source, commonly used by auditors to obtain
audit evidence from a third party in paper form or by electronic or other
medium. As it is obtained directly by the auditor from an independent source
outside the entity and is taken in documentary form, it is generally more
reliable.
Required:
Keeping all that in mind answer the following questions:
(a) With relation to ISA-505 “External Confirmation”, what are the factors
that need to be considered when designing confirmation requests? 08
(b) Define and differentiate between “Positive external Confirmation
request”, “Blank external Confirmation request”, and “Negative external
Confirmation request”.08
(c) In what conditions the auditor may use negative confirmation request as
the sole substantive audit procedure to address an assessed risk of material
misstatement at the assertion level.
(a)
Factors to consider when designing confirmation requests include: 08
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The assertions being addressed.
Specific identified risks of material misstatement,
including fraud risks.
The layout and presentation of the confirmation request.
Prior experience on the auditor similar engagements.
The method of communication (for example, in
paper form, or by electronic or other medium).
Management’s authorization or encouragement to
the confirming parties to respond to the auditor.
Confirming parties may only be willing to
respond to a confirmation request containing
management’s authorization.
The ability of the intended confirming party
to confirm or provide the requested
information (for example, individual invoice
amount versus total balance).
(b) A positive external confirmation request asks the confirming party
to reply to the auditor in all 08 cases, either by indicating the
confirming party’s agreement with the given information, or by
asking the confirming party to provide information. A response to a
positive confirmation request ordinarily is expected to provide reliable
audit evidence. There is a risk, however, that a confirming party may
reply to the confirmation request without verifying that the information is
correct.
A blank external confirmation request is a confirmation request that do
not state the amount (or other information) on the confirmation request,
and ask the confirming party to fill in the amount or furnish other
information. On the other hand, use of this type of “blank” confirmation
request may result in lower response rates because additional effort is
required of the confirming parties. (3)
A Negative confirmation request is a request that
the confirming party respond directly to the auditor
only if the confirming party disagrees with the
information provided in the request. (2)
(c)
The auditor shall use negative confirmation requests as the sole
substantive audit procedure to address an assessed risk of material
misstatement at the assertion level if all of the following are
present:
(a) The auditor has assessed the risk of material
misstatement as low and has obtained sufficient
appropriate audit evidence regarding the
operating effectiveness of controls relevant to
the assertion;
(b) The population of items subject to negative
confirmation procedures comprises a large
number of small, homogeneous account balances,
transactions or conditions;
(c) Avery low exception rate is expected; and
(d) The auditor is not aware of circumstances or
conditions that would cause recipients of
negative confirmation requests to disregard such
requests.