FINAL ASSIGNMENT
AUDITING AND TAXATION
QUESTION No. 1
What are the overall objectives of an auditor?
Answer: The objective of the auditor is to design and perform audit procedures in such a way as to
enable the auditor to obtain sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the auditor’s opinion.
1. In conducting an audit of financial statements, the overall objectives of the
auditor is:
A). To obtain reasonable assurance about whether the financial statements
as a whole are free from material misstatement, whether due to fraud
or error, thereby enabling the auditor to express an opinion on whether
the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework.
B). To report on the financial statements, and communicate as required by
The ISA’s, in accordance with the auditor’s findings.
2. In all cases when reasonable assurance cannot be obtained and a qualified
opinion in the auditor’s report is insufficient in the circumstances for purposes
of reporting to the intended users of the financial statements, the ISAs require
that the auditor disclaims an opinion or withdraw (or resign)3
from the engagement, where withdrawal is possible under applicable law or regulation.
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QUESTION No. 4
What is the difference between an “assurance engagement” and an “audit engagement”?
Answer: Audit Engagement
Assurance Engagement
A process of evaluating, accounting
Process of analysing and assessing
information presented in statements.
processes, operation, procedure etc.
The aim of the audit is to present the
Assurance is to evaluate the accuracy of
financial information, reports, fairly,
accounting information and records to all
accurately and ethically accepting
stakeholders so that they can avoid any
accounting standard and principal within
sort of red flags, misrepresentations or
compliance.
irregularity in the report.
Rights and liabilities of an auditor is higher
An auditor has comparatively lesser right
than audit
The audit is in line with the International
Assurance terms may restrict the
auditing standards
practitioner only to a specific area.
The audience includes generally all
Restrict to just one type of stakeholder for
stakeholders
example management.
The Time & resources required are higher
The time and resources are required
comparatively less than an audit.
Internal control or auditing or external
Assurance is the step that follows an audit
third party helps to enhance the reliability
and usually done by a professional
of information.
auditing body or board.
Audit reveals any misuse of the fund and
Assurance follows an audit and gives true
any dishonest activity in financial
information to the stakeholders for better
statements and gives accurate
decision making.
information.
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QUESTION No. 5
Besides providing statutory audit services, auditors can also provide other assurance services
covering a broad category of services including both financial and non-financial matters. Enlist
those services.
Answer: Risk Assessment
Entities are subjected to greater risks and more precipitous changes in fortune than ever
before. Managers and investors are concerned about whether entities have identified the
full scope of these risks and taken precautions to mitigate them. This service assures that an
entity's profile of business risks is comprehensive and evaluates whether the entity has
appropriate systems in place to effectively manage those risks.
Business Performance Measurement
Investors and managers demand a more comprehensive information base than just financial
statements; they need a "balanced scorecard." This service evaluates whether an entity's
performance measurement system contains relevant and reliable measures for assessing
the degree to which the entity's goals and objectives are achieved or how its performance
compares to its competitors.
Information Systems Reliability
Managers and other employees are more dependent on good information than ever and are
increasingly demanding it online. It must be right in real-time. The focus must be on systems
that are reliable by design, not correcting the data after the fact. This service assesses
whether an entity's internal information systems (financial and non-financial) provide
reliable information for operating and financial decisions.
Electronic Commerce
The growth of electronic commerce has been hindered by a lack of confidence in the
systems. This service assesses whether systems and tools used in electronic commerce
provide appropriate data integrity, security, privacy, and reliability.
Healthcare Performance Measurement
The motivations in the $1 trillion healthcare industry have flipped 180 degrees in the last
few years. The old system (fee for service) rewarded those who delivered the most services.
The new system (managed care) rewards those who deliver the fewest services.
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QUESTION No. 6
Is an auditor responsible for the detection and disclosure of every error and fraud? Discuss.
Answer: the auditors seek to provide reasonable assurance - not absolute assurance that the
financial statements examined are not affected by material misstatement resulting from
fraud or error. However, auditors are not responsible for preventing and detecting fraud
and errors, even if annual audits can prevent mistakes and possible negligence.
Responsibility for preventing and detecting fraud and errors and for taking appropriate
action lies with the management of the audited entities. So, auditing financial statements
does not relieve management or those charged with governance with their responsibilities.
However, even in these circumstances, auditors should be alert when they notice:
weaknesses in internal control, inconsistencies in the way financial accounts, mistakes,
economic operations or unusual outcomes indicate the existence of fraud. Auditors should
have sufficient knowledge to identify indications of possible fraud, be vigilant when a
situation involves a risk of fraud, assess the need for further inquiries and inform competent
authorities.
The auditor's opinion really increases the credibility of the financial statements, but the user
does not have to assume the audit opinion as a guarantee of the future viability of the entity
or of the efficiency or productivity with which the management has led the entity's
activities. Therefore, an audit engagement is not a guarantee that the financial statements
are free from material misstatement resulting from fraud or error. A solution to this
problem is the development of software based on theoretical probabilistic models to
provide easy-to-use solutions to practitioners and providing a fair assessment of risks in
financial audit and beyond that would lead to overcoming the subjectivity that Is currently
characterized by many audit engagements and would, to some extent, release the risk
assessor's task solely on the basis of experience and knowledge.
Therefore, the interpretation and representation of audit risks by probabilistic methods
provides another perspective on how this problem can be addressed, objectively and more
precisely, and involves many specialists in the field.
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QUESTION No. 7
Your audit firm has been appointed to conduct a full scope audit of the financial statements
covering a period of three months of Clever Limited. Clever Limited needs the audit report for
obtaining a bank loan. While verifying certain account heads you identify certain problems
for which you are not provided satisfactory replies by the client. At the same time Clever
Limited approaches, you and asks you to change the scope of assignment from a full scope
audit to a review assignment. They give you the reason that they have misunderstood the
scope of assignment earlier. What course of action you would adopt in this situation?
Answer: A request from the client for the auditor to change the engagement may result from a
change in circumstances affecting the need for the service, a misunderstanding as to the
nature of an audit or related services originally requested or a restriction on the scope of
the engagement, whether imposed by the management or caused by the circumstances.
A change in circumstances that affects the entity’s requirements or misunderstanding
concerning nature of service originally requested would ordinarily be considered as
reasonable basis for requesting a change in the engagement. However, a change would not
be considered reasonable if it appeared that the change relates to information that
is incorrect, incomplete or otherwise unsatisfactory.
The auditor should also consider legal or contractual implications of the change. In view of
above, it would not be appropriate to accept the change in the assignment as the reason for
change seems to be lack of availability of audit evidences.
Audit engagement should not be accepted under following circumstances:
1. Serious limitations on scope.
2. Financial reporting framework is unacceptable.
3. Management refuses to provide agreement that it acknowledges its responsibility as
regards financial statements.
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QUESTION No. 8
(a) Explain the difference between “The Overall Audit Strategy” and the “Audit Plan”.
(b) Identify the matters which are usually discussed / explained in each of the above
documents
Answer: A.
Overall Audit Strategy
Audit Plan
An audit strategy sets the direction, timing, and
scope of an audit. The strategy is then used as a
guideline when developing an audit plan. By
developing an audit strategy, it is easier to
create a more targeted audit plan, thereby
wasting less time in total during the planning
phase of an audit. The strategy document
usually includes a statement of the key
decisions needed to properly plan the audit. The
audit strategy is based on the following
considerations:
1.The scope of the engagement
The characteristics of the engagement
2.Reporting objectives
3.Timing of the audit
4.Nature of communications
5.Significant factors in directing 6. engagement
team efforts
7.The results of preliminary engagement
activities
8.The knowledge gained on other engagements
9.The nature, timing, and extent of resources
available for the engagement
Audit planning is a major part of audit
works for both internal and external
audits. A good audit planning will help
the auditor to minimize its risks,
improve audit efficiency, and meet its
objective at the minimum effort.
Auditors are required to prepare a
proper audit plan to ensure that
all audit risks are identified and
correct audit strategies are deployed to
detect all concerning risk areas.
It is essential for the auditor to prepare
a good strategic audit plan. If the plan
is well prepared, all kind of audit risks is
identified and detected.
This will help the auditor to minimize
the audits risks of issuing the incorrect
opinion to financial statements.
B.
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QUESTION No. 9
Describe the relationship between Materiality and Audit Risk.
Answer: There is an inverse relationship between levels of audit risks and materiality. That is, the
higher the audit risk, the lower the materiality level required and vice versa.
Audit Risk is basically the risk that an Auditor may not be able to identify a “material
misstatement” in financial statements of a business and may resultantly present a wrong
decision in terms of financial health of a business.
Now materiality depends upon many factors including nature of business, nature of
business sector, size of business, size of the firm performing audit etc.
A level of materiality is set because a firm has to provide a “Reasonable Assurance” about
the matters of a business and not a “100% or Absolute Assurance”, and so therefore
Auditors cannot and do not detect each and every single error in the financial statements
and just focus upon “MATERIAL Misstatements or ERRORS”.
The level of Materiality is set according to the area of business and severity of audit risk,
which is of course assessed by the auditors.
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QUESTION No. 10
During the external audit of Indic Ltd, which provides industrial maintenance services, the
audit senior discovered that the operations director, with the approval of the other directors
of Indic, had instructed employees to breach statutory health and safety regulations so that
the company would benefit from cost savings. Explain the audit senior’s and the audit firm’s
responsibilities in respect of this matter.
Answer: RESPONSIBILITIES:
Audit senior
In accordance with ISA 200, the auditor shall maintain professional scepticism throughout
the audit, recognizing the possibility that a material misstatement due to fraud could exist,
notwithstanding the auditor’s past experience of the honesty and integrity of the entity’s
management and those charged with governance.
Unless the auditor has reason to believe the contrary, the auditor may accept records and
documents as genuine. If conditions identified during the audit cause the auditor to believe
that a document may not be authentic or that terms in a document have been modified but
not disclosed to the auditor, the auditor shall investigate further. Where responses to
inquiries of management or those charged with governance are inconsistent, the auditor
shall investigate the inconsistencies.
Audit firm
The auditor should analyse the situation and report to the entity about future problem
which entity will face. Designs and performs audit procedures responsive to those risks.
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QUESTION No. 11
List ten conditions or events that may indicate the risk of existence of material misstatement.
Answer: 1. Industry developments (a potential related business risk might be, e.g., that the
company does not have the personnel or expertise to deal with the changes in the
industry.)
2. New products and services (a potential related business risk might be, e.g., that the
new product or service will not be successful.)
3. Use of information technology ("IT") (a potential related business risk might be, e.g.,
that systems and processes are incompatible.)
4. New accounting requirements (a potential related business risk might be, e.g.,
incomplete or improper implementation of a new accounting requirement.)
5. Expansion of the business (a potential related business risk might be, e.g., that the
demand for the company's products or services has not been accurately estimated.)
6. The effects of implementing a strategy, particularly any effects that will lead to new
accounting requirements (a potential related business risk might be, e.g., incomplete
or improper implementation of the strategy.)
7. Current and prospective financing requirements (a potential related business risk
might be, e.g., the loss of financing due to the company's inability to meet financing
requirements.)
8. Regulatory requirements (a potential related business risk might be, e.g., that there
is increased legal exposure.)
9. Business risks could affect risks of material misstatement at the financial statement
level, which would affect many accounts and disclosures in the financial statements.
10. treatment of capital and revenue expenditure – the risk here could relate to
existence of property plant and equipment if revenue expenditure has been
capitalised rather than charged as an expense in the income statement
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QUESTION No. 12
For each illustration given below, identify the component of audit risk which is most directly
related to the illustration.
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
A client fails to discover employee fraud on a timely basis because bank accounts
are not reconciled monthly.
Cash is more susceptible to theft than an item of fixed assets.
Confirmation of receivable by an auditor fails to detect a material misstatement.
Disbursements have occurred without proper approval.
Inadequate segregation of duties.
Omission of a necessary substantive audit procedure.
Susceptibility of loan receivable to material misstatement, assuming there are no
related controls.
Technological developments make a major product obsolete.
For stock-in-trade perpetual inventory count system has not been established.
ABC company, a client, lacks sufficient working capital to continue operations.
Answer: I.
II.
III.
IV.
V.
VI.
VII.
VIII.
IX.
X.
Control risk
Inherent risk
Detection risk
Control Risk
Control Risk
Detective Risk
Inherent Risk
Inherent Risk
Control Risk
Control Risk
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QUESTION No. 13
Describe the criteria given in the International Standards on Auditing, to evaluate the
reliability of audit evidence.
Answer: 1. Inspection
Inspection involves examining records or documents, whether internal or external, in paper
form, electronic form, or other media, or a physical examination of an asset. Inspection of
records and documents provides audit evidence of varying degrees of reliability, depending
on their nature and source and, in the case of internal records and documents, on the
effectiveness of the controls over their production.
2. Observation
Observation consists of looking at a process or procedure being performed by others, for
example, the auditor’s observation of inventory counting by the entity’s personnel, or of the
performance of control activities.
3. External Confirmation
An external confirmation represents audit evidence obtained by the auditor as a direct
written response to the auditor from a third party (the confirming party), in paper form, or by
electronic or other medium.
4. Recalculation
Recalculation consists of checking the mathematical accuracy of documents or records.
Recalculation may be performed manually or electronically.
5. Reperformance
Reperformance involves the auditor’s independent execution of procedures or controls that
were originally performed as part of the entity’s internal control.
6. Analytical Procedures
Analytical procedures consist of evaluations of financial information through analysis of
plausible relationships among both financial and non-financial data. Analytical procedures
also encompass such investigation as is necessary of identified fluctuations or relationships
that are inconsistent with other relevant information or that differ from expected values by a
significant amount.
7. Inquiry
Inquiry consists of seeking information of knowledgeable persons, both financial and nonfinancial, within the entity or outside the entity. Inquiry is used extensively throughout the
audit in addition to other audit procedures.
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QUESTION No. 14
You had assisted management in strengthening the internal control system for a medium size
limited company about a year ago. The management has recently pointed out that the
occurrences of frauds and errors have reduced significantly but could not be eliminated
altogether. You are required to offer your comments on the above situation with reference
to limitations of any system of internal control.
Answer: Internal Control and final judgement: The process designed, implemented and maintained by those charged with
governance, management and other personnel to provide reasonable assurance about the
achievement of an entity’s objectives with regard to reliability of financial reporting,
effectiveness and efficiency of operations, and compliance with applicable laws and
regulations. The term “controls” refers to any aspects of one or more of the components
of internal control.
Internal control of the organization is not capable to provide 100% assurance that
assurance called REASONABLE ASSURANCE.
Extra enrolment of the higher authority is also the cause of internal risk graph going
upward as there is possible chances if misleading the situation by utilizing the
authority and take decisions on the basis of personal liking and disliking.
If we have to control internal risk it is compulsory of us to take action against misusing
the authority of higher management along with the finance department of the
company to reduce the risk or fraud
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QUESTION No. 15
You are audit in-charge of Marble Limited. The company has established an internal audit
function, which is headed by a Chartered Accountant, who has significant internal audit
experience. The head of internal audit also reports functionally to audit committee and
administratively to the Chief Executive. Based on your preliminary review of the internal audit
function, you consider that internal auditing activities are relevant to the risk assessment, and
therefore, you are planning to obtain understanding and perform an assessment of internal
audit. What are the important criteria that you would consider for assessment of internal
audit function?
Answer: Important criteria to be considered for assessment of the specific work of internal auditor:
1. The work was performed by a knowledgeable person
2. Work was adequate planned, supervised and reviewed
3. Sufficient and appropriate audit evidences have been obtained
4. Conclusion are consistent with the results of work performed
5. Differences between internal auditor and management have been resolved
6. Testing items already verified by internal auditor
7. Testing items not verified by internal auditor
If the auditor concludes that the work of internal auditor can be relied upon, following
matters should be discussed advance with internal auditor:
(a) Timings of audit procedures
(b) Population
(c) Basis for selection
(d) Materiality
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QUESTION No. 16
What is meant by “Income from property” of the income tax ordinance 2001. Explain in detail.
Answer: Income property is property that the owner rents to others. Rather than occupying the
property, the owner uses the property to produce income.
A. The rent received by any person in a tax year shall be chargeable to tax in year under
B.
C.
D.
E.
F.
income from property.
Rent means any amount received or receivable by owner of land or building together
as consideration of use is also included n the tax chargeable circumference.
Any rent received or receivable under the lease of any building along with plant and
machinery shall not included in income from property it will be included in income
from other source.
Where any amount is included in rent received or receivable by any person for the
provision of amenities, utilities or any other service connected with the renting of
the building, such amount shall be chargeable to tax under the head “Income from
Other Sources”.
Where the rent received or receivable by a person is less than the fair market rent
for the property, the person shall be treated as having derived the fair market rent
for the period the property is let on rent in the tax year.
The point (A), shall not apply in respect of a taxpayer who.
 is an individual or association of persons.
 derives income chargeable to tax under this section not exceeding Rs.
150,000 in a tax year; and
 does not derive taxable income under any other head.
RATES ON INCOME FROM PROPERTY FOR TAX YEAR 2019:
Time period
Where Annual Rent is less than or
equal to 200,000
Where Annual Rent is more than
200,000 but less than 600,000
Where Annual Rent is more than
600,000 but less than 1,000,000
Where Annual Rent is more than
1,000,000 but less than 2,000,000
Where Annual Rent is more than
2,000,000
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Charges
0.00%
5% of the amount above 200,000
20,000 + 15% of the amount above
600,000
60,000 + 15% of the amount
above 1,000,000
210,000 + 20% of the amount above
2,000,000
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QUESTION No. 17, 18, 19 and 20
Above questions will be posted on google classroom till 10 January 2021.
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