ICMA.

RISK MANAGEMENT AND AUDIT (LA-502)

SEMESTER-5

Pakistan
SPRING (AUGUST) 2014 EXAMINATIONS
Friday, the 22nd August 2014

Time Allowed: 3 Hours Maximum Marks: 100 Roll No.:

(i) Attempt all questions.

(ii) Answers must be neat, relevant and brief.
(iii) DO NOT write your Name, Reg. No. or Roll No., or any irrelevant information inside the answer script.
(iv) Read the instructions printed inside the top cover of answer script CAREFULLY before attempting the paper.
(v) In marking the question paper, the examiners take into account clarity of exposition, logic of arguments,
effective presentation and language.
(vi) Question Paper must be returned to invigilator before leaving the examination hall.
Marks
Q. 1 Suppose you are an Audit Manager with Prudent & Co., Chartered Accountants. You are in
the process of planning the audit of one of your firm’s old audit clients, M/s. Cool Electronics
Limited (Cool) for the year ended June 30, 2014. In this regard, you conducted preliminary
planning meetings with the management of the company and met the Chief Financial Officer
(CFO) and Chief Executive Officer (CEO) of the company and gathered the following
understanding/ information.
‘Cool’ has been primarily engaged in the manufacturing of high quality Air Conditioners,
Fridges/ Refrigerators for last many years. It sells its products through authorized dealers and
distributors. In the recent years, due to stiff competition the margins have squeezed and the
company faced a great challenge of selling its products. However, over the last two years the
performance of the company deteriorated. Due to continued decline in sales, the company
faced a loss in last year and took the following measures to enhance its sales:
 The company revised its credit policy by extending the credit period from 15 days to 30
days for dealers/ distributors. The company also relaxed the credit evaluation criteria/
process for dealers/ distributors. Previously, the dealers/ distributors were required to
deposit certain amount as security deposit before being allowed any credit; this condition
has now been waived off.
 The company introduced sales bonuses for its sales/ marketing teams and higher
management teams on achieving certain sales targets.
 The inventory valuation policy has also been revised and certain additional overheads
incurred during the year are considered to be part of production cost.
Due to these measures there has been an improvement in the sales revenue of the company.
However, overall financial position has been further deteriorated. Given below are the results
of the company for the last two years i.e. year 2013 (actual) and year 2014 (projected to 12
months on the basis of 10 months draft):
Rs. in million
Description 2014 2013
Revenue 250 180
Cost of sales (180) (110)
Gross profit 70 70
Operating and finance cost (100) (80)
Profit/ (loss) before taxation (30) (10)
Other balance sheet information is as follow:
Inventory 50 30
Receivables 90 30
Cash – 20
Trade payables 60 20
Bank overdraft 50 –

RMA-Aug-2014 1 of 3 PTO
 Marks
This year in the month of April, 2014 the Board of Directors of the company reviewed the
situation and after the detailed deliberations, being dissatisfied from the prevailing situation,
dismissed certain key members of the Sales and Marketing teams along with certain credit
department personnel due to gross misconduct without any redundancy and compensation
payments. The employment contracts of certain employees contain provisions for dismissal
compensations. However, these dismissed employees opted legal course of action against
the company considering this as unfair dismissal and filed legal suites against the company.
Required:
(a) Briefly comment on the measures adopted by the ‘Cool’ including changes made to
credit policy and the possible impact of these strategies. 05
(b) What are the key audit risks at ‘Cool’ for the financial statements for the year ended on
June 30, 2014? Explain each of such risks. 06
(c) What would be your key response to overcome each of the key audit risks identified as
(b) above? 06
(d) Define and briefly explain the going concern assumption used in the preparation of
financial statements. 03
(e) Identify and explain the events or conditions present in the case of ‘Cool’ which can
cause significant doubt on Cool’s ability to continue as going concern. 05
(f) Assuming the fact that due to the events or conditions identified as (e) above, exists
material uncertainty. Suggest an appropriate course of action for the management of
‘Cool’ and the actions to be taken by you as the auditor. 10
(g) Describe the audit procedures you would carry out to verify the amount of the dismissal
claims to be paid by the company to its employees dismissed on the direction of the
Board. 05

Q. 2 Suppose you are working as a Group Chief Financial Officer (CFO) with new growing group
of companies, M/s. Global Revolution Limited (GRL), engaged in diversified business
activities under the visionary leadership of Mr. Asim, (Chairman), a business graduate from
Harvard University. The group intends to set up coal based power production unit at one of
the sites in Punjab, indicated by the Government of Punjab under its recently announced
power projects development policy. The project will require a heavy investment and will be
financed by a consortium of banks and financial institutions. Considering relatively new
business area the banks are reluctant to offer fixed interest rate for the financing and
proposed the interest rates as KIBOR (Karachi Inter Bank Offered Rate) + BPS (Basis
Points). The GRL is not used to fluctuating rate borrowings as all of its existing financing are
based on fixed interest rates. Considering the reluctance on the part of the banks to offer
fixed interest rates, the group is considering to enter into “Interest Rate Swaps”
arrangements. The Chairman has advised you to prepare a presentation for the Board of
Directors to explain such arrangements.
Required:
Prepare relevant details for a presentation outlining the following:
(a) Define ‘interest rate swaps’ and discuss how ‘interest rate swaps’ may be arranged. 03
(b) Describe the effect of ‘interest rate swaps’ on the borrowings. 02
(c) Discuss the key advantages of ‘interest rate swaps’. 06
(d) Explain the challenges or the problems associated with ‘swaps’ arrangements. 04

RMA-Aug.2014 2 of 3
 Marks
Q. 3 (a) An auditor is required to prepare and retain written documentation in the form of audit
files which should be completed within the appropriate period of time after the date of
auditor’s report.
Required:
In view of the requirements of audit documentation, explain the following:
(i) appropriate period for the auditor to complete audit files from the date of audit
report and the period for which such audit files may be retained. 02
(ii) types of audit working paper files generally maintained by the auditor indicating
few contents of each such file. 04

(b) Describe the following methods used to obtain audit evidence by providing at least two
examples of each:
(i) Tests of controls 05
(ii) Substantive procedures 05

Q. 4 Suppose you are an Audit Manager in Faisal and Co., Chartered Accountants, which has
recently been appointed as the auditor of the Safa Group, a well-recognized group of
companies. The group comprises of one holding company, Safa (Private) Limited having
three subsidiaries and one associate. The three subsidiary companies: Alpha, Bravo and
Charlie are engaged in textile, sugar processing and beverage sectors respectively. The
associate company, Delta, is engaged in pharmaceutical business. Faisal and Co., Chartered
Accountants is the statutory auditor of Safa (Private) Limited and Alpha, whereas Bravo,
Charlie and Delta are audited by other firms of Chartered Accountants. The audited financial
statements of Bravo, Charlie and Delta is available to you for the purpose of group audit.
Required:
(a) Explain the main features of a group audit which differentiate it from an audit of
individual separate financial statements. 04
(b) State the procedures you would perform to express an opinion on the truth and
fairness of the consolidated financial statements of Safa Group. 10

Q. 5 (a) Suppose you are an Audit Manager in an audit firm, M/s. Elite and Co., Cost
Accountants. The firm has assigned you a task to conduct the cost audit of one of its
clients, M/s. Chitral Cement Limited. You deployed Mr. Abdullah, the Audit Senior to
carry out the Cost Audit of the company. During the audit, Abdullah raised many
queries to seek your advice regarding cost audit.
Required:
Being an Audit Manager guide Mr. Abdullah with regard to the following queries:
(i) In relation to wages and salaries of Chitral Cement Limited, what particular items
Mr. Abdullah need to include in the Cost Auditor Report? 07
(ii) The Accounts Manager of the company has remarked that he thinks cost audit
and financial audit appear to be similar in nature. What should Mr. Abdullah state
to Accounts Manager to make him aware about the differences between cost
audit and financial audit? 04

(b) List down the industries which are required to maintain cost accounting records as per
the Companies Cost accounting records orders issued by Securities and Exchange
Commission of Pakistan (SECP) through official gazette notifications. 04

THE END .

RMA-Aug-2014 3 of 3 PTO