AUDITING
Suggested Answers
Intermediate Examinations – Spring 2014
Ans.1
(a)
Preliminary Engagement Activities:
These are the activities undertaken by the auditor at the beginning of the audit
engagement, and include:
(i)
(ii)
(iii)
Performing procedures regarding the continuance of the client relationship
and the specific audit engagement;
Evaluating compliance with the relevant ethical requirements, including
independence; and
Establishing an understanding of the terms of the engagement.
Planning Activities:
Planning activities includes establishing an overall audit strategy that sets the scope,
timing and direction of the audit, and that guides the development of the audit plan.
(b)
(i)
Information that Alamgir & Co. Chartered Accountants needs to obtain in
deciding whether or not to accept the audit of GL:
Following matters may be considered in deciding about the acceptance of
audit:

The integrity of the principal owners, key management and those
charged with governance of the entity;

Whether the engagement team is competent to perform the audit
engagement and has the necessary capabilities, including time and
resources;

Whether the firm and the engagement team can comply with relevant
ethical requirements;
(ii)
Matters that may be considered in establishing the overall audit strategy:
In establishing the overall audit strategy, the auditor shall:
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Identify the characteristics of the engagement that define its scope;
Ascertain the reporting objectives of the engagement to plan the timing
of the audit and the nature of the communications required;
Consider the factors that, in auditor’s professional judgment, are
significant in directing the engagement team’s efforts;
Consider the results of the preliminary engagement activities and, where
applicable, whether knowledge gained on other engagement performed
by the engagement partner for the entity is relevant; and
Ascertain the nature, timing and extent of resources necessary to perform
the engagement.
Being the initial audit engagement following matters should also be
considered in establishing the overall audit strategy:
 Arrangements to be made with the predecessor auditor.
 Communicate major issues identified during discussion with the
management, to those charged with governance and consider that how
these matters will 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 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).
Page 1 of 6
AUDITING
Suggested Answers
Intermediate Examinations – Spring 2014
Ans.2
Ans.3
(a)
Since Mateen presently is not a partner in the firm, his firm can be the auditor of the
company. However, the firm at the time of admitting him as a partner, would need
to ensure that:
— the period of three years has lapsed from the date when Mateen resigned from
the directorship of SL.
— The shareholding of Mateen in SL is disposed off.
(b)
Appointment of Khawar’s firm is valid because he is not an employee of Financial
Press Limited, and writes as a free lancer in the newspaper published by the
company.
(c)
There is no restriction in the Companies Ordinance, 1984 on holding the Term
Finance Certificates issued by the audit client. Therefore, the appointment of
Hamid’s firm as an auditor of SFL is valid.
(i)




(ii)






Bank confirmation contains details such as facilities, securities, additional
banking relationships, trade finance, derivative and commodity trading and
custodian arrangements. These information are not available in bank
statement. Moreover, the bank confirmation is supposed to be received directly
from the bank whereas the bank statement has been received through the client.
We need to determine whether a response to a positive confirmation is
necessary to obtain sufficient appropriate audit evidence related to bank
balance as at December 31, 2013.
If it is concluded that the response to bank confirmation is not necessary then
we would perform alternate audit procedures to obtain sufficient appropriate
audit evidence relating to details not provided by the bank.
If we are unable to obtain sufficient appropriate audit evidence from alternative
audit procedures or if we conclude that the response to the bank confirmation is
necessary and we are unable to obtain bank confirmation , then it will
constitute a scope limitation. Accordingly, we would qualify the audit report or
issue a disclaimer of opinion depending on the materiality and pervasiveness of
the matter.
The request by management for sending negative confirmation requests is not
appropriate as these are usually sent when population comprises of large
number of small account balances.
The reason provided by the management for not sending confirmation request
to three debtors is not appropriate.
In view of the above, we would ask the client to send positive confirmation
request.
If the client refuses to send positive confirmation, we would evaluate the
implications of the refusal on the risk of material misstatement, including the
risk of fraud and on the nature timing and extent of other audit procedures.
Perform alternative audit procedures designed to obtain relevant and reliable
audit evidence.
If we are unable to obtain sufficient appropriate audit evidence form alternative
audit procedures or if we conclude that the confirmation is necessary and we
are unable to obtain confirmation from the debtors, then it will constitute scope
limitation. Based on the materiality and pervasiveness of the matter, we would
issue a qualified or disclaimer of opinion as appropriate.
Page 2 of 6
AUDITING
Suggested Answers
Intermediate Examinations – Spring 2014
Ans.4
(a)
Factors to be considered by auditor in exercising judgment relating to the
significance of audit risks:
In exercising judgment as to which risks are significant risks, the auditor shall
consider at least the following:




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(b)
Documentation Required for Risk Identification and Risk Assessment
procedures:
The auditor shall include in the audit documentation:




Ans.5
(a)
Whether the risk is a risk of fraud;
Whether the risk is related to recent significant economic, accounting or other
developments and, therefore, requires specific attention;
The complexity of transactions;
Whether the risk involves significant transactions with related parties;
The degree of subjectivity in the measurement of financial information related
to the risk; and
Whether the risk involves significant transactions that are outside the normal
course of business for the entity, or that otherwise appear to be unusual.
The discussion among the engagement team about the susceptibility of the
entity’s financial statements to material misstatement and decisions reached.
Key elements of the understanding obtained regarding each aspect of the entity
and its environment and each internal control component; the sources of
information from which the understanding was obtained; and the risk
assessment procedures performed;
The identified and assessed risks of material misstatement; and
The risks identified, and related controls about which the auditor has obtained
an understanding.
Threats:
Self interest threat is created as the auditor would like to recover the previous year’s
audit fee.
Safeguards:
Generally the payment of previous year audit fees should be received before the
report is issued. However, if the fee is not paid additional safeguards may be
applied, which may include:


(b)
Discussing the outstanding fees with the audit committee and those charged
with governance.
Involving an additional chartered accountant who did not take part in the
assurance engagement, to provide advice or review the work performed.
Threats:
Self interest threat is created as the shares are held by a close relative of the
engagement partner.
As the engagement partner has promptly notified the firm about the interest of his
brother, hence it is likely that it would not impair the independence of the
engagement partner.
Page 3 of 6
AUDITING
Suggested Answers
Intermediate Examinations – Spring 2014
Safeguards:
Significance of threat should be evaluated and if the threat is other than clearly
insignificant, safeguards should be considered and applied as necessary to reduce
the threat to an acceptable level. Such safeguards might include:



If possible the engagement partner may convince his brother to dispose of the
shares;
If the disposal does not occur at the earliest practical date, the engagement
partner may be changed.
An additional chartered accountant who did not take part in the assurance
engagement may review the work done or otherwise advise as necessary.
Ans.6
Substantive Procedures for verification of Long Term Bank Loan:
 Check approval of board of directors.
 Study loan agreement and make relevant extracts.
 Check calculation of interest paid/ accrued.
 Obtain bank confirmation and confirm the particulars of security deposited with the
bank as security for the loans or charge created on an asset or assets of the client.
 Ensure that the particulars mentioned in the bank confirmation are same as
mentioned in the loan agreement.
 If the loan is secured against mortgage or charge, check the mortgage deed or any
other related document.
 If there is any default in the payment of installments, check the related implications
of the default and ensure they are properly reflected in the financial statements.
 Prepare a movement schedule during the year and match the opening and closing
balances, and also confirm that loan balance is appropriately reduced by the amount
paid during the year.
 Ensure proper disclosure is made in the financial statements.
Ans.7
(i)
Since related party relationship/ transactions have been identified which were not
previously identified or disclosed to the auditor, the auditor shall:


Promptly communicate the relevant information to the other members of the
engagement team;
Where the applicable financial reporting framework establishes related party
requirements:
— Request management to identify all transactions with FL for the auditor’s
further evaluation; and
— Perform appropriate substantive audit procedures relating to significant
related party transactions with FL;
— 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 as
necessary; and
— If the non-disclosure by management appears intentional (and therefore
indicative of a risk of material misstatement due to fraud), evaluate the
implications for the audit.
Page 4 of 6
AUDITING
Suggested Answers
Intermediate Examinations – Spring 2014
(ii)
For identified significant related party transactions outside the entity’s normal
course of business, the auditor shall:


Ans.8
(i)
(ii)
(iii)
(iv)
Ans.9
Inspect the underlying contracts or agreements, if any, and evaluate whether:
— The business rationale (or lack thereof) of the transactions suggests that
they may have been entered into to engage in fraudulent financial reporting
or to conceal misappropriation of assets;
— The terms of the transactions are consistent with management’s
explanations; and
— The transactions have been appropriately accounted for and disclosed in
accordance with the applicable financial reporting framework; and
Obtain audit evidence that the transactions have been appropriately authorized
and approved.
Exception to the consistent application of accounting policies will be mentioned in
the audit report along with the note reference where disclosure is made about
change in accounting policy and statement whether the auditor concurs with it or
not.
 The auditor will issue a disclaimer of opinion on account of limitation of scope
and as the matter is material and pervasive in nature.
 It is also to be mentioned that proper books of accounts as required by the
Companies Ordinance, 1984 have not been kept by the company.
The responsibility of management regarding establishing and maintenance of
system of internal controls is mentioned in the Audit Report, however, no opinion
is required regarding operating effectiveness of internal controls. There would be no
impact on audit report.
If in the auditor judgement, the matter of destruction of plant is fundamental to
users understanding of the financial statement then an emphasis of matter
paragraph is required to be given in the audit report referring to a note in the
financial statements where the relevant disclosure is made in the financial
statement.
Shortcomings in the audit report:
 Auditor’s report is addressed to the directors, whereas it is required to be addressed
to the members.
 The responsibility regarding the establishing and maintenance of internal control is
missing from the scope paragraph.
 With respect to trade debtors, the auditors need to mentioned that how the trade
debts should be accounted for and the resultant impact on the profit or loss for the
period.
 The phrase “as required by the Companies Ordinance, 1984” is missing from the
opinion related to maintenance of proper books of accounts.
 The auditor has neither qualified the opinion/nor issued an adverse opinion with
respect to trade debtors.
 There is no need to mention 4th schedule in point # (d).
 Opinion relation to zakat deduction and its deposit is missing.
 It should also be mentioned in the emphasis of matter paragraph that our opinion is
not qualified in respect of this matter.
 Name of the engagement partner is missing.
Page 5 of 6
AUDITING
Suggested Answers
Intermediate Examinations – Spring 2014
Ans.10 Course of action:
Irrespective of the auditor’s assessment of the risks of management override of controls,
the auditor shall design and perform audit procedures to:
(i)
Test the appropriateness of journal entries recorded in the general ledger and other
adjustments made in the preparation of the financial statements.
In designing and performing audit procedures for such tests, the auditor shall:
 Make inquiries of individuals in the accounts department about inappropriate
or unusual activity they have noticed during processing of journal entries and
other adjustments;
 Select journal entries and other adjustments made near the yearend; and
 Consider the need to test journal entries and other adjustments throughout the
period.
(ii)
Review accounting estimates for biases and evaluate whether the circumstances
producing the bias, if any, represent a risk of material misstatement due to fraud.
In performing this review, the auditor shall:
 Evaluate whether the judgments and decisions made by management in
making the accounting estimates, even if they are individually reasonable,
indicate a possible bias on the part of the management that may represent a risk
of material misstatement due to fraud. If so, the auditor shall reevaluate the
accounting estimates taken as a whole; and
 Evaluate the results of the accounting estimates and judgments made in the
prior years.
(iii)
For significant transactions that are outside the normal course of business for the
entity, or that otherwise appear to be unusual, the auditor shall evaluate whether the
business rationale (or the lack thereof) of the transactions suggests that they may
have been entered into to engage in fraudulent financial reporting or to conceal
misappropriation of assets.
(THE END)
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