The Institute of Chartered Accountants of Pakistan

Auditing
Intermediate Examination Spring 2011 Module D March 7, 2011 100 marks - 3 hours

Q.1

Strawberry Pakistan Limited (SPL) was incorporated on March 1, 2011. The directors of SPL are in the process of appointing the first statutory auditor of the company. They have requested your firm to submit a proposal for the statutory audit assignment. A partner of your firm has asked you to draft the proposal after assessing whether the preconditions for the audit exist. Required: (a) Briefly discuss the term preconditions for an audit. (b) What are the steps that you would perform in order to ensure that preconditions for the audit exist? (c) Discuss whether your firm may or may not accept the assignment if one of the preconditions for the audit is not present. (15 marks)

Q.2

One of the objectives of obtaining a written representation from management is to ensure that the management knows and acknowledges its responsibility for the preparation of the financial statements and for the completeness of the information provided to the auditor. Required: Specify the situations which may create doubts as to the reliability of written representations. What course of action would the auditor take in such a situation? (07 marks)

Q.3

(a) Differentiate between the following: (i) Statistical and non-statistical sampling (ii) Sampling and non-sampling risk

(05 marks)

(b) You are the audit manager on Apple Distribution Limited (ADL). While reviewing the audit planning documentation, you found that the audit team has selected 100 out of a total of 2,550 debtors for balance confirmation. The details are as follows: 50 largest debtors constitute approximately 40% of total debtors. Out of these, 10 have been selected. 90 other debtors were selected through haphazard sampling. All debtors below Rs. 5,000 were ignored as immaterial. Balances due from government and some of the related parties were ignored as prior years working papers showed that they never responded to requests for confirmation. Required: (i) Comment on the sampling approach adopted by the audit team. (ii) Suggest alternative means of selecting the sample in which the material balances have a greater probability of selection. (08 marks) Q.4 A chartered accountant is required to comply with five fundamental principles specified by ICAPs Code of Ethics. However, compliance with the fundamental principles may potentially be threatened by a broad range of circumstances. Required: Briefly describe the categories of threats that may potentially affect compliance with the fundamental principles. Give two examples for each category. (10 marks)

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Q.5

The auditor should obtain sufficient appropriate audit evidence in order to be able to form an audit opinion. Required: (a) Identify the situations which restrict the auditors ability to obtain sufficient appropriate audit evidence. Give two examples for each situation. (09 marks) (b) List three reasons why audit evidence is considered to be persuasive rather than conclusive. (03 marks)

Q.6

You are the training manager at Guava & Co., Chartered Accountants. Some trainees in the firm have requested you to clarify the following issues: (a) Can the auditor discard any audit document, forming part of his opinion, after the issuance of the auditors report? (b) The changes that can be incorporated during the final file assembly process citing three such examples. (c) The circumstances under which it becomes necessary to modify the existing audit documents or add new audit documents after the issuance of the auditors report and the matters that should be documented in such a situation. Required: Offer appropriate explanations for each of the above issues. (11 marks)

Q.7

Direct communication with an entitys external legal counsel assists the auditor in obtaining sufficient appropriate audit evidence regarding potentially material litigations and claims and in assessing the managements estimates of the financial implications thereof. Required: Explain the different manners in which an auditor may communicate with the entitys external legal counsel. (08 marks)

Q.8

(a) (b)

Briefly explain the term pervasive effects on the financial statements.

(04 marks)

As the engagement partner, you have reviewed the audit working papers of Apricot Engineering Limited (AEL). The audit team has highlighted the following matters in the working papers. The company has issued a bank guarantee to one of its related parties after the balance sheet date. No disclosure in this regard has been made in the draft financial statements. (ii) AEL has paid a dividend after many years. Zakat has been appropriately deducted and deposited in the Central Zakat Fund. (iii) Subsequent to the year end, a major debtor has declared bankruptcy. The company expects to recover only 20% of the outstanding amount. The management has refused to make a provision but is ready to disclose the fact by way of a note. (iv) With effect from January 1, 2010, AEL has: Changed the method of charging depreciation on its fixed assets from the straight line to the diminishing balance; and revised its estimate of useful lives of vehicles from 6 years to 4 years. Required: Discuss the impact of each of the above matters on your audit report. (10 marks) (i)

Q.9

The auditor should have an understanding of the entity and its environment to enable him to plan the engagement and select the inquiries, analytical and other review procedures. Required: State the procedures which an auditor may perform, to update his understanding of the entity and its environment, while carrying out an engagement to review interim financial information. (10 marks) (THE END)