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Audit, Assurance and Related Services

Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2016

Ans.1 (a) If one or more matters other than the matter(s) giving rise to an adverse opinion are
determined to be key audit matters, it is particularly important that the descriptions
of such other key audit matters do not imply that the financial statements as a whole
are more credible in relation to those matters than would be appropriate in the
circumstances, in view of the adverse opinion.

(b) A matter giving rise to a qualification by their nature is a key audit matter. In such
circumstances, these matters shall not be described in the Key Audit Matters section
of the auditor’s report, rather the matter is to be reported in accordance with the
requirements of related ISA. Reference to the basis for qualified opinion is to be
included in the Key Audit Matter section.

(c) The non inclusion of Key Audit Matters of prior period is appropriate as the
auditor’s determination of key audit matters is limited to those matters of most
significance in the audit of the financial statements of the current period, even when
comparative financial statements are presented (i.e., even when the auditor’s opinion
refers to each period for which financial statements are presented).

(d) The auditor can only accept the management request if:
 law or regulation precludes public disclosure about the matter; or
 the auditor determines that the matter should not be communicated in the
auditor’s report because the adverse consequences of doing so would
reasonably be expected to outweigh the public interest benefits of such
communication. This shall not apply if the entity has publicly disclosed
information about the matter.

Ans.2 (a) I would expect the following details in the plan:

 Probable date of commencement of operations.
 Measures to deal with the technical issue which is faced, either in the form of
correspondence with an expert or minutes of board of directors meeting.
 Financial effects of breach of key covenants of bank loan.
 Cost overruns due to delay in completion of project (till the estimated date of
commencement of operations).
 Negotiation with the banks and how the bank has reacted on default of the
company including information of restructuring (if any) and penalties.
 Plans of the company to recapture its lost customer ship and costs related to
unfulfilled customer orders.
 Employee’s reaction to suspension of operation e.g. employees turnover since
the suspension of operations. Calculation of redundancy payments relevant to
employee’s turnover.
 Implications on company of loan default e.g. calling of security by the bank etc.
 Form of equity injection, whether by way of right or subordinated loan. In case
of right shares, probability of subscription.
 Status of regulatory compliances in the case of equity injection e.g whether
necessary resolutions had been passed or permissions have been obtained from
relevant bodies.
 Does company have adequate number of resources other than finance to
commence operations? e.g. technical staff etc.
 Status of other liabilities, whether these had become overdue and if yes what are
the company’s plans to deal with these liabilities.
 Cash flow forecast in support of going concern assumption.
 Assumptions used in support of the cashflow forecast.
 Evidence of continuous financial support from the major shareholders/ evidence
in support of funding of working capital requirements.

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Audit, Assurance and Related Services
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2016

(b) Besides the going concern issue, the auditor should also consider the following
matters with respect to the given situation:
 As the loan covenants have been breached by the Company, the fact should be
disclosed in the financial statements.
 Proper understanding of the loan agreements need to be obtained.
 The correspondence with the banks should also be obtained / examined and
the potential contingency arising as a result of any case filed by the bank, if any
be disclosed in the financial statements.
 The classification of liabilities either “current” or “long term” should also be
assessed in the light of the loan agreements.
 The proper accrual of markup, penalties and any related charges due to non-
payment on a timely basis should be properly accounted for in the financial
 Appropriate accrual of redundancy payments and salaries with respect to
leavers should be reflected in financial statements.
 Proper adjustments in the financial statements to be ensured in respect of
Impairment of existing plant and machinery as well as Capital work in
 Treatment and bifurcation of revenue and capital nature expenditures incurred
on BMR.
 Impact of subsequent events on the financial statements of BPL.

Ans.3 (a) Evaluation of control environment:

 The Internal Audit department is headed by a Chartered Accountant whereas

the chairman of the audit committee is an independent director. These two
factors are positive and consequently are evident of strong control environment.
However, at the same time, it should also be kept in consideration that:
 NCL is a family owned enterprise and family members of the company are
actively involved in the management of the company. This may lead to the
possibility of management override of controls.
 The commitment to competence of management may appear to be weak as
the major positions in the company are assigned to the family members
instead of hiring professionals from the market.
 It seems that internal audit staff is under the influence of the family members as
their reports contain no serious issues or problems identified.
 Procurement policies and procedures appear to be weak as in the last month of
the year a supplier was hired offering 15% less rates as compared to previous
rates. The firing of senior member of the procurement department is an
indication in that direction.

Above discussed factors are indicating that NCL may lack effective and efficient
internal controls, resulting in weak control environment.

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Audit, Assurance and Related Services
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2016

(b) Risks Audit Approach

Use of going concern assumption  Obtain the management assessment /
Although the company’s equity is future projections prepared justifying
positive, NCL’s current ratio is 0.85, the use of going concern assumption
which is quite low with reference to as appropriate in the financial
acceptable benchmarks; and debt equity statements of the company
ratio is 65:35 which is very high and  Analyse the assumptions used therein.
adverse and has incurred a loss of Rs. The underlying assumptions used by
1.501 billion which has completely the management needs to be supported
wiped off the reserves of the company. by solid facts.
 Ensure that proper disclosure is given
If the debt due from government is also in the financial statements of the
classified in the non-current assets, it material uncertainty and the
will further deteriorate the current ratio. management’s assessment.
Further, if the debt due from
government bears no interest then it
would further deteriorate the position.

If NCL’s performance follows the same

track in the coming year then NCL
might face operating difficulties
resulting in a material uncertainty that
NCL might not be able to continue as a
going concern in the coming years.
Increase in receivable despite decrease  Review the entity’s policy for
in turnover: provision of doubtful debts.
Trade receivable might include slow  Check aging of debtors and identify
moving or doubtful debts as these had any slow moving and doubtful debts.
increased by Rs. 610 million excluding  Obtain confirmation from major
the effect of dues from Government debtors and check against ledger
entity, which is unusual due to decrease balances.
in turnover. This might result in  Ensure proper disclosure and
overstated current assets and accounting of Government owned
understated provisions / bad debts and debts as per IFRS.
losses thereof.
Dues from Government owned entity
might not be accounted for properly and
may exclude the effect of discounting.

Rescheduled loan from Government

might be classified in short term
Impairment in the value of plant and  Engage experts (management and
machinery: auditor’s) to revalue the property to
Due to decline in sales the value of plant identify any impairment/decline in
and machinery might be impaired surplus on revaluation.
which could result in overstatement of  Review working for value in use, if
property, plant & equipment, necessary.
understatement of impairment and
overstatement of profits.
Risk of fraud: Operating results  Understand and evaluate NCL’s
NCL may be inclined to show better financial reporting process and the
results to the financial institutions from controls over journal entries and other
which it has obtained financing. adjustments and determine whether
they have been implemented.
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Audit, Assurance and Related Services
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2016

 Perform substantive testing in all the

areas with low control reliance.
 Perform cut-off test to check that the
vouchers have been completely
Risk of fraud: Management override  Test the appropriateness,
of controls authorization and completeness of
As it is a closely held entity with journal entries recorded in the general
majority shareholding owned by a single ledger and other adjustments.
family and with key positions occupied  Use professional judgment to
by family members, there is always a determine the nature, timing and
risk of fraud due to management extent of journal entries testing and
override of controls. other adjustments and assess the
completeness of the population subject
There is an increased risk of fraud as to testing
evident from the termination of
employee in September 2016, and
working of internal audit department
as it is evident from their reports.
Risk of misstatement in opening  Review prior year working papers of
balances: the previous auditor.
It is the first year audit and there is a  Design audit procedures to provide
possibility that prior year opening evidence relevant to opening balances.
balances are materially misstated and
are not correctly brought forward.
Deferred Tax Asset:  Review the management’s future
Deferred tax asset can only be projection of taxable profits and
recognized to the extent that the reasonableness of the assumptions
company expects that it would generate used.
sufficient profits to realize the benefit. In
the given scenario it seems difficult for
the company to generate sufficient
taxable profits in the near future to
realize the deferred tax assets.

Ans.4 Following are the additional matters that have to be included in the audit reports of listed
 Key audit matters
 Statement from the auditor that it has provided those charged with governance with
a statement that the auditor has complied with relevant ethical requirements
regarding independence and communicate with them all relationships and other
matters that may reasonably be thought to bear on the auditor’s independence, and
where applicable, related safeguards;
 Statement that from the matters communicated with those charged with governance,
the auditor determines those matters that were of most significance in the audit of
the financial statements of the current period and are therefore presented as the key
audit matters.
 The name of engagement partner.

Further in the audit report of listed companies the auditor is supposed to include a
separate section named “other information” if at the date of audit report the auditor has
obtained or expects to obtain other information whereas in the case of unlisted company
this paragraph is only given if the auditor has obtained any such information.

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Audit, Assurance and Related Services
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2016

Ans.5 Steps for verification of the claim “Carbon emissions were within the limits allowed
by the regulator”:
 Inspection of relevant guidelines and benchmarks related to carbon emissions, as
may be allowed/ specified by the regulator.
 Review the company’s processes for collecting, analyzing and aggregating data on
the carbon emissions.
Assess the use of work of an expert with reference to compliance with environmental
regulations and standards.
 Interview management and employees of relevant departments.
 Compare the weekly/monthly / yearly carbon emission report and analyze and
discuss the reason for major variations, if any.

Ans.6 Independent Limited Assurance Report

To the Director Compliance of Nuclear Drug Control Authority:
We have been engaged by Sensitive Products Limited (SPL) to perform a limited
assurance engagement in respect of the following information (said information) presented
in the 2016 Report to the Director Compliance, Nuclear Drug Control Authority, for the
year ended December 31, 2016:
 The type and number of nuclear medicines produced during the year;
 The details of machinery and equipment used to manufacture nuclear medicines;
 Details of safety and quality control measures adopted by SPL during the year.

Inherent Limitations
Non- financial information, such as that included in the SPL’s report to the Nuclear Drug
Control Authority, is subject to more inherent limitations than financial information,
given the more qualitative characteristics of the said information and the methods used for
determining said information.

Management’s Responsibilities:
Preparation and fair presentation of the said information in accordance with the specified
regulations is the responsibility of the SPL’s management. Management is also
responsible for such internal control as management determines is necessary to enable the
preparation of the said information such that it is free from material misstatement.

Practitioner’s Responsibility:
We are responsible for:
 Planning and performing the engagement to obtain limited assurance about whether
the said information is is free from material misstatement, whether due to fraud or
 Forming an independent conclusion, based on the procedurse we have performed
and the evidence we have obtained; and
 Reporting Our Conclusion To The Director Compliance, Nuclear Drug Control

Professional Standards applied and level of assurance:

We conducted our limited assurance engagement in accordance with the International
Standard on Assurance Engagements 3000 (ISAE 3000), “Assurance Engagements other
than Audits or Reviews of Historical Financial Information” published by the
International Federation of Accountants. A limited assurance engagement is substantially
less in scope than a reasonable assurance engagement in relation to both the risk
assessment procedures, including an understanding of internal control, and the procedures
performed in response to the assessed risks.

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Audit, Assurance and Related Services
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2016

Independence, quality control and competency statement:

We have complied with the Code of Ethics for Professional Accountants issued by the
International Ethics Standards Board for Accountants, which includes independence and
other requirements founded on fundamental principles of integrity, objectivity,
professional competence and due care, confidentiality and professional behavior. In
accordance with International Standard on Quality Control 1, we maintain a
comprehensive system of quality control including documented policies and procedures
regarding compliance with ethical requirements, professional standards and applicable
legal and regulatory requirements.

Work Done
We are required to plan and perform our work to obtain limited assurance about whether
the said information is free from material misstatements In doing so we:
 Make enquiries of SPL’s management.
 Evaluate the design of the key structures, systems, processes and controls for
managing, recording and reporting the said information.
 Perform limited substantive testing on a selected basis and access the records and
discussion with the relevant staff to check that data had been appropriately
measures, recorded, collated and reported; and
 Evaluate the disclosure and presentation of the said information.

Basis for qualified opinion

As per Nuclear Drug Control Regulations, SPL is required to get approval of the updated
list of suppliers from NDCA on yearly basis, however during the year no such approval
was obtained and we observed that the raw materials were purchased from suppliers who
were not in the list of suppliers of last year. Therefore we are unable to determine whether
the raw material procured by SPL comply with the minimum safety requirements as
specified by NDCA.

Qualified opinion
Based on our limited assurance procedures performed, as described above and the
evidence we have obtained, except for the possible effects of the matter described in the
basis for qualified opinion paragraph, nothing has come to our attention that causes us to
believe that the selected information for the 2015 reporting year has not been prepared, in
all material respects, in accordance with the Nuclear Drug Control Regulations.

Other Matters
Our report has been prepared solely for the purposes of SPL’s compliance with the
reporting requirements relating to Sections XXX of the NDCR and is not intended to be
and should not be used for any other purpose. Our duties in relation to this report are
owed solely to NDCA, and accordingly, we do not accept any responsibility for loss
occasioned to any other party acting or refraining from acting based on this report.

XYZ Chartered Accountants

Engagement partner: ABC
Dated: 08 December 2016

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Audit, Assurance and Related Services
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2016

Ans.7 (a) Evaluation of the situation:

 Amount of Rs. 2.5 billion is approximately 16.67 times of profit before tax and
is therefore material.
 Status of Rs. 500 million outstanding since last year, whether the company is
still negotiating with the government or has decided to write off the same.
 Evidence available in respect of Rs. 2 billion (agreement or any
 The written representation provided by management is not an alternative to
other audit evidence in the absence of any written agreement or
correspondence and cannot in itself taken as a reliable audit evidence, when in
this case the audit report was also qualified with respect to this matter.
 Evaluate the implications of management’s refusal on the auditor’s assessment
of the relevant risks of material misstatement, including the risk of fraud, and
on the nature, timing and extent of other audit procedures; and

Course of action:
 Inquire management of reasons of refusal and seek audit evidence as to their
validity and reasonableness.
 Perform alternative audit procedures to obtain relevant and reliable audit
 Check subsequent clearance from post year end bank statements to verify if
Rs. 2 billion has been received.
 Communicate with those charged with governance. If:
– the auditor concludes that management’s refusal to allow the auditor to
send a confirmation request is unreasonable; or
– the auditor is unable to obtain relevant and reliable audit evidence from
alternative audit procedures,

(b) Evaluation of the situation:

The loss on disposal has reduced profit before tax by Rs. 20 million and is
approximately 13.33% of profit before tax and is therefore material. Moreover, the
transaction is a related party transaction due to 20% director’s holding
in NPL.

Course of action:
(i) Consider reasons for disposal of building.
(ii) Promptly communicate the relevant information of the related party
transaction to other members of the audit team.
(iii) Request management to identify all transactions with NPL for further
(iv) 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.
(v) Review the appropriateness of depreciation policy. If it is not appropriate then
review the remaining non-current assets to ensure that they are not impaired.
(vi) Investigate the influence of director with respect to the said transactions even
though he did not participate in the voting.
(vii) Inquire as to why the entity’s control over related party relationships and
transactions failed to enable the identification or disclosure of the related party
relationships or transactions.
(viii) If the non-disclosure by management appears intentional (and therefore
indicative of risk of material misstatement due to fraud), evaluate the
implications for the audit.

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Audit, Assurance and Related Services
Suggested Answer
Certified Finance and Accounting Professional Examination – Winter 2016

(ix) Obtain the following evidence:

 A copy of the sale agreement
 A copy of any valuation report carried out on the asset
 Evidence of receipt of the proceeds through the bank
 The calculation of the loss (this should be checked for accuracy)
(x) Ensure proper disclosure of related party transaction in the financial

Ans.8 (a) (i) As Jamal is associated with KL since last eleven years it will create a
familiarity and self-interest threats.

The threats created are significant as:

 association of Jamal with KL is of 11 years;
 Jamal has a key/main role in the audit engagement of KL, being the
engagement partner; and
 the engagement is a statutory audit.

Other factors on which the significance of threats will depend are:

 Structure of the firm;
 Whether the client’s management team has changed;
 Whether the nature or complexity of the client’s accounting and reporting
issues has been changed.

(ii) As Jamal has served the audit client for six or more years when the KL
becomes a listed company, however as per the requirements of Code of Ethics
Jamal can still continue to serve as an engagement partner for a maximum of
two additional years.

Further, Jamal can continue to serve as an engagement partner for more than
the period specified, provided an independent regulator has provided an
exemption from partner rotation. If such an exemption is not provided then
the auditor should leave the audit engagement.

(b) Since the services comprise of reviews and recommendations (as quality assessment)
for improvement of the client's Internal Audit function and giving recommendations
with respect to improving the structure of the internal audit department and the
quality of its staff, does not seem to involve any management decision or taking
management responsibility, therefore these are the allowed services under code of
ethics and listing regulations.

However, if it appears that the recommendations are binding on management which

may be the case if the management is not competent to evaluate the
recommendations or exercise its own judgment, then these services cannot be

(The End)

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