audit past papers

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The Institute of Chartered Accountants of Pakistan Modular Foundation Examinations Autumn 2001 September 07, 2001 AUDITING (MARKS 100) Module ‘D’ & SM ‘9’ (Paper – D 11) (3 hours) Q.1 (a) You have been approached by a leasing company for appointment as its first auditor. List down five “client screening procedures” which you will perform before making a decision regarding acceptance of the audit. (05) (b) You have been appointed as auditor of a listed company. Draft a letter which you will send to the retiring auditors seeking their professional clearance. (05) Q.2 Engagement letters are sent by the auditors to their clients describing essentially the following matters: (a) scope of audit (b) fraud and irregularities (c) accounting, taxation and other services (d) fees Draft an engagement letter covering all of the above points. (10) Q.3(a) What is the primary objective of an audit? (04) (b) Explain the term “reasonable assurance” in the context of audit opinion. (04) Q.4 You have been assigned to review the payment system of an enterprise. The Finance Director suspects that some duplicate payments may have been made. List five control procedures which you would expect to find. (05) Q.5 Discuss briefly the considerations that you would take into account in developing the overall audit plan for an audit engagement. (05) Q.6 You have been asked by your senior to observe the stock count at one of the audit clients: (a) What procedures would you perform prior to the physical count to ensure a smooth stock count? (04) (b) During the stock count, how would you ensure that the physical inventory listing provided to you is complete? (04) (c) How would you ensure proper cut off for purchases and sales? (04) Q.7(a) Differentiate between tests of controls and substantive procedures. (04) (b) What tests of controls would you perform while carrying out a review of the payroll system of a company? (04) FOR FREE ACCA, CA, CAT & CIMA RESOURCES VISIT: http://kaka-pakistani.blogspot.com

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Page 1: Audit Past Papers

The Institute of Chartered Accountants of Pakistan Modular Foundation Examinations Autumn 2001 September 07, 2001 AUDITING (MARKS 100) Module ‘D’ & SM ‘9’ (Paper – D 11) (3 hours) Q.1 (a) You have been approached by a leasing company for appointment as its first auditor.

List down five “client screening procedures” which you will perform before making a decision regarding acceptance of the audit. (05)

(b) You have been appointed as auditor of a listed company. Draft a letter which you will

send to the retiring auditors seeking their professional clearance. (05) Q.2 Engagement letters are sent by the auditors to their clients describing essentially

the following matters: (a) scope of audit (b) fraud and irregularities (c) accounting, taxation and other services (d) fees

Draft an engagement letter covering all of the above points. (10)

Q.3(a) What is the primary objective of an audit? (04) (b) Explain the term “reasonable assurance” in the context of audit opinion. (04) Q.4 You have been assigned to review the payment system of an enterprise. The Finance

Director suspects that some duplicate payments may have been made. List five control procedures which you would expect to find. (05)

Q.5 Discuss briefly the considerations that you would take into account in developing

the overall audit plan for an audit engagement. (05) Q.6 You have been asked by your senior to observe the stock count at one of the audit

clients: (a) What procedures would you perform prior to the physical count to ensure a

smooth stock count? (04) (b) During the stock count, how would you ensure that the physical inventory

listing provided to you is complete? (04) (c) How would you ensure proper cut off for purchases and sales? (04)

Q.7(a) Differentiate between tests of controls and substantive procedures. (04) (b) What tests of controls would you perform while carrying out a review of the payroll

system of a company? (04)

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Page 2: Audit Past Papers

(02) Q.8 What is the reporting responsibility of the auditor in the following circumstances:

(a) A major suit has been filed against the client which is pending in the Supreme Court. The matter has been decided against the company in lower court. The management has not made any provision against this case and is also refusing to disclose this case as a contingency. (05)

(b) The company has investment in the shares of a listed company. The market value is significantly lower than the cost and the company has not made any provision for diminution in value. However, the market value is properly disclosed in the financial statements. The contention of the company is that the investment is long term in nature and the present diminution is temporary. The effect of diminution in value is material. (05)

(c) The company is using LIFO method for valuation of stocks. The effect of using the LIFO method is disclosed in the financial statement which is a material figure. (05)

Q.9(a) What do you understand by a Computer Information System (CIS) environment in an

audit? (02)

(b) What are the nature of the risks and the internal control characteristics that are normally there in a CIS environment? (05)

Q.10 List down basic elements of a management representation letter. (05) Q.11 What are various sources of audit evidence available to the auditor? (06) Q.12 You are asked to devise form and contents of audit working papers. Write a draft letter to your principal giving your suggestions regarding the form and contents of working

papers in accordance with the relevant International Standard on Auditing. (04) Q.13 Discuss as to how analytical review procedures are used by auditor to help him at the completion stage of an audit. (05)

(THE END)

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Page 3: Audit Past Papers

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Modular Foundation Examinations Spring 2002 March 08, 2002 AUDITING (MARKS 100) Paper –D 11, (Module D, SM ‘9’ & ‘4B’) (3 hours) Q.1 Briefly discuss what is meant by the term ‘true and fair view’ in the context of audit of

financial statements. (05)

Q.2 (a) Describe the procedure prescribed in the Companies Ordinance, 1984 for

removal of auditor of a listed company. (06) (b) Can auditor of a listed company be removed during the term of his

office? (02) Q.3 (a) Why adherence to International Standards on Auditing is so important for

auditors? Discuss (05) (b) What is the scope of an audit? Also discuss as to who is responsible to prepare

financial statements. (07) Q.4 (a) Define “materiality”. Give two examples of qualitative aspects of materiality. (04)

(b) When does the auditor normally considers materiality during an audit? (03) (c) What are the responsibilities of auditor in respect of assessing the work of an

expert? (03) Q.5 (a) What are the objectives of test of control? Give some examples of such tests. (05)

(b) What is a ‘Walkthrough Test’? Under what circumstances it may be treated as test of control? (02) (c) What is the relationship between detection risk and combined level of inherent

and control risk? (05) (d) Describe the term ‘operational audit’. (03)

Q.6 (a) What is meant by sufficient and appropriate audit evidence? Under what circumstances an auditor can rely on management representation as part of audit evidence. (05)

(b) What are the basic assertions which the auditor would aim to address while carrying out verification of fixed assets. (05)

Q.7 (a) Why it is important for the practising audit firms to maintain their quality of

work? (03) (b) What audit procedures you would devise to audit in CIS environment? (07)

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Page 4: Audit Past Papers

(2)

Q.8 Distinguish the following between control environment and control procedures:

(a) reporting, reviewing and approving reconciliation; (b) the function of the board of directors and its committees; (c) checking the arithmetical accuracy of the records; (d) maintaining and reviewing control accounts and trial balances; (e) management’s control system including the internal audit function and

personnel policies and procedures and segregation of duties; (f) defined and documented code of ethics. (06) Q.9 Develop a work program for the verification of liabilities against assets subject to

finance lease. (04) Q.10 An important part of audit of a company is a review of subsequent events and transactions. How would the following reviews assist you in your audit of the financial statements:

• review of payments made subsequent to the year end; and (04) • review of minutes of board/executive committee meeting held after the

balance sheet date (04) Q.11 What will be responsibility of the auditor in the following situations:

(a) company changes policy for revenue recognition but the new policy is not in accordance with the requirements of International Accounting Standards. (03)

(b) there are doubts about the ability of the company to continue operating as a going concern but this issue is properly disclosed in the financial statements. (04)

Q.12 Discuss different types of limitations of scope that may result in a modified opinion giving suitable examples of each (You are not required to draft opinion). (05)

(THE END)

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Page 5: Audit Past Papers

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Modular Intermediate Examinations Autumn 2002 September 06, 2002 AUDITING (MARKS 100) Module D Paper D 11 (3 hours) Q.1 (a) Rabia is a newly inducted trainee student in the audit firm. She thinks that

auditor should conduct an audit with a detective approach and should look only for frauds. The principal, Mr. Ahmed tells her that audit has to be conducted with an approach of professional skepticism. The principal has asked you to explain the concept of professional skepticism to Rabia. (04)

(b) What do you understand by “Risk based auditing”? State the factors behind

the increasing use of this approach. (05) (c) Explain auditor’s responsibilities with respect to confidentiality of

information. (03)

(a) State the difference between an “Engagement Letter” and a “Professional Clearance Letter”. (03)

Q.2

(b) Discuss an incoming auditor’s responsibilities when he has been appointed to replace the previous auditor who had issued a qualified audit opinion. (03)

Q.3 (a) Describe the advantages of audit work program. What are the factors to be

considered for its preparation? (04) (b) Describe the procedures normally employed by the principal auditor to obtain

sufficient appropriate evidence that the work of other auditor is adequate for his purposes. (06)

Q.4 (a) Describe the matters that should be considered by an auditor while evaluating

the adequacy of provision against doubtful debts of a large company. (05) (b) What do you understand by positive and negative forms of confirmation

request? How an auditor makes a choice between the two? (05) Q.5 Amjad is on the audit of a large manufacturing company. He has been assigned the

account head of sales for verification. At the initial stages of audit he has to perform the tests of control. His senior has asked him to prepare an ‘internal control questionnaire’ for this purpose. What type of questions Amjad should include in the Questionnaire in respect of the following functions of sales:

(a) Sales order entry (05) (b) Delivery (05) Q.6 (a) Can an auditor ignore substantive procedures for a material account balance if

related internal controls are assessed to be very strong? (02) (b) Discuss some of the factors which influence auditor’s judgment regarding

sample size for tests of control. (05) (c) State some inherent limitations of internal controls. (03)

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Page 6: Audit Past Papers

(02)

Q.7 What types of audit opinion should be expressed in the following circumstances: (a)

A listed company has accounted for a finance lease as an operating lease and accordingly has not recognized the asset and liability in this respect. The impact of this accounting treatment is significant to the financial statements.

(03) (b) The appointment of auditors was such that they have not been able to observe

the physical stock count. However, they have satisfied themselves through alternative audit procedures. (04)

(c) The management has not accounted for the full liability in respect of gratuity. The management is of the view that it is a deferred liability and not a current one. The impact is material but not pervasive in relation to the financial statements. (03)

(a) Differentiate between internal and external auditing. (05) Q.8 (b) Why auditor needs specialized CIS skills in an audit? (07)

(c) What is the role of International Federation of Accountants (IFAC)? (04) Q.9 What are the rights of an auditor under the Companies Ordinance, 1984? (06) Q 10 Your client, a manufacturing company, has carried out revaluation of its plant and

machinery. Revaluation has been carried out through a reputed firm of valuers by the name of Hamid Associates. The client also intends to reflect the revalued amounts in the Financial Statements that are to be audited by you. Explain and list down the audit procedures that you will apply with specific reference to your possible reliance on the work carried out by Hamid Associates. (10)

(THE END)

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Page 7: Audit Past Papers

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Modular Intermediate Examinations Spring 2003 March 07, 2003 AUDITING (MARKS 100) Module D Paper D11 (3 hours) Q.1 (a) In the recent past, the professional firms have developed more advanced level

audit softwares. These softwares have assisted the auditors in various aspects of audit. There is a viewpoint that these technological developments would eliminate the element of human judgement in the audit profession in the near future. Do you agree with this viewpoint? Explain your answer with reasons.

(05)

(b) List down the basic elements of an assurance engagement. (03) (c) What is the difference between an “assurance engagement” and an “audit

engagement”? (02)

Q.2 (a) Is it necessary for an audit firm to issue an engagement letter every year in case of a recurring audit? What are the factors to be considered in this regard?

(04)

(b) 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?

(06)

(c) What do you understand by a ‘Management Letter’? (02) (d) Mr Akbar is the Chief Executive of Prosperity Limited, a listed company. He is

not pleased with the performance of the current auditors. He is planning to propose the name of M/s Asghar Saleem & Co. as the new auditors in the coming AGM after approval of the Board. Mr Asghar a partner in M/s Asghar Saleem & Co. is the brother of Mr Akbar. Is the arrangement legally permissible?

(02)

Q.3 (a) The most significant risks in case of payroll and personnel cycles are the

existence of fictitious employees and falsification of hours worked. These risks are normally mitigated through segregation of duties. Discuss various internal controls regarding segregation of duties to achieve these objectives.

(05)

(b) Describe the specific risks involved in the audit of a small business. (05) Q.4 (a) What do you understand by control environment and control procedures? (02) (b) It is said that during an audit, evaluation of control environment in most of the

cases is more important than the evaluation of the control procedures. What is the logic behind this?

(03)

(c) Materiality and risk are two important concepts in an audit. Describe the relationship between the two giving some example.

(05)

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Page 8: Audit Past Papers

(2) Q.5 (a) What do you understand by corroboration of audit evidence? (03) (b) State the difference between sufficiency and appropriateness of audit evidence. (02) (c) What is an inherent risk? Give some examples of inherent risk at the financial

statements level. (05)

Q.6 (a) Define the basic types of substantive procedures. (03) (b) An auditor can not rely solely on the analytical procedures. What are the

factors to be considered while determining the extent of reliance to be placed on the results of analytical procedures?

(04)

(c) Many auditors are preparing and maintaining the working papers on computers these days. What are the specific factors to be considered regarding retention of working papers stored on electronic media?

(03)

Q.7 Discuss:

i. The differences between sampling risk and non-sampling risk; and ii. What effect does Sampling Risk have on the tests of control and substantive

procedures performed by an auditor.

(02) (04)

Q.8 (a) Develop a positive confirmation request letter to be sent to a trade debtor of a

company. (05)

(b) What do you understand by a cut off test? How an auditor normally performs it in case of local purchases?

(05)

Q.9 (a) State some of the objectives of the review of audit working papers. (03) (b) Describe different forms of documentation of management representation. (03) (c) List down some of the procedures that are normally employed by an auditor to

become aware of subsequent events. (04)

Q.10 What types of audit opinions should be expressed in the following circumstances:

(You are not required to draft the opinion paragraphs)

(a) The major production facilities of the Company have been destroyed due to fire subsequent to the balance sheet date. The plant facilities were not duly insured. No condition in this regard existed at the balance sheet date. The management has not made any adjustments in the financial statements. However, proper disclosure of this fact has been made in the financial statements.

(06)

(b) The management of the company has not allowed the auditors to send request letters to the legal advisors. Accordingly, the auditors could not become aware of the status of all the litigations against the company. On account of their prior experience, the auditors believe that there are significant claims against the Company.

(04)

(THE END)

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Page 9: Audit Past Papers

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Intermediate Examinations Autumn 2003 September 05, 2003 AUDITING (MARKS 100) Module D (3 hours) Q.1 (a) Is an auditor responsible for the detection and disclosure of every error and

fraud? Discuss. (06)

(b) In an audit of small trading company, you, as an audit manager, think that ‘Auditing Around the Computer Approach’ would be appropriate. Explain this approach.

(04)

Q.2 (a) It is said that without proper understanding and evaluation of internal controls

the auditor can not properly determine the extent of substantive procedures. Do you agree? Give two examples in support of your answer.

(08)

(b)

It is generally stated that internal controls have certain inherent limitations. Why is it so? Give at least four reasons. (05)

Q.3 You have been assigned, as an audit senior, to supervise the audit of a large

manufacturing company having offices throughout Pakistan. Your audit firm also has regional offices in all the major cities of the country. You have been asked to develop an over all audit plan for this engagement. Briefly describe the factors you would consider in respect of the following:

• Knowledge of business • Reliance on internal audit • Delegating work to other offices • Budgeting and staffing (12)

Q.4 (a) What is the use of performing analytical review procedures at the planning

stage? (04)

(b) Discuss the “materiality” concept in relation to an audit of financial statements.

(06)

Q.5 (a) When is it appropriate to examine the entire population of items that make up

an account balance or class of transactions during the course of substantive audit procedures?

(06)

(b) Under what basis would you decide for the use of statistical or non-statistical sampling approach?

(04)

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Page 10: Audit Past Papers

(2) Q.6 (a) Why adherence to International Standards on Auditing is important for the

auditors? Discuss.

(05)

(b) Under the Companies Ordinance, 1984 which persons are not qualified for appointment as auditors of companies?

(05)

Q.7 (a) What is meant by sufficient and appropriate audit evidence? Under what

circumstances an auditor can rely on management’s representation as part of audit evidence?

(05) (b) What are the basic assertions which the auditor would aim to address whilst

carrying out the verification of fixed assets?

(05) (c) Discuss the need and importance of the audit working papers. (05) Q.8 (a) Discuss briefly some of the procedures that are normally employed by an

auditor to ensure that all the contingent liabilities have been identified.

(06)

(b) Due to a major computer breakdown during the year, the accounting records of the company are no more verifiable. The company does not have proper manual records. Although the integrity of the management is not in doubt, the auditor is not in a position to substantiate management’s assertions contained in the financial statements. What type of opinion should be expressed in these circumstances?

(04) Q.9 Develop a brief work program for verification of the following: (a) Stock-in-trade. (05) (b) Trade creditors. (05)

(THE END)

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Page 11: Audit Past Papers

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Intermediate Examinations Spring 2004 March 10, 2004 AUDITING (MARKS 100) Module D (3 hours) Q.1 (a) Briefly discuss the term “true and fair view” in the context of an audit. (05) (b) What are the advantages of an audit to an organization? (05) Q.2 (a) List down the factors that are normally considered by an auditor before

accepting a new audit client. (05) (b) State any five principle contents of an audit engagement letter. (05) Q.3 (a) List down the general ethical principles governing an audit engagement. (04) (b) Describe the procedure for removal of auditor of a listed company as laid down

in the Companies Ordinance, 1984. (06) Q.4 (a) What are the uses of analytical procedures? (05) (b) Can an external auditor use the work of internal auditor for his planning

purposes? What are the factors to be considered by him before doing this? (05) Q.5 (a) Under what circumstances would an auditor refer to the result of the work of

an expert in the audit report? (04) (b) Give four examples of reports, opinions and statements of an expert. (06) Q.6 (a) Why it is important for an auditor to know the source and nature of audit

evidence and what are their impacts on the audit? (04) (b) What are the factors to be considered by an auditor when he receives

management representations relating to some material item? (04) Q.7 (a) State the assertions that are normally addressed by an auditor while attending

the physical stock count. (03) (b) List down some audit procedures for verification of stock held and controlled

by a third party. (04) Q.8 (a) State the basic objectives of tests of control. (02) (b) Describe some of the preventive and detective internal control procedures in

connection with duplicate payments to parties. (05) (c) Describe the effects of a computer information system (CIS) environment on

an audit. (05) Q.9 (a) Masoom & Co. Chartered Accountants have audited the financial statements of

Cunning Limited. The financial statements have been issued after getting proper approval of the Board of Directors and audit report signed by the auditors. After some time, the auditors came to know that a major lawsuit was decided against the company subsequent to the year-end but before the audit report was signed by the auditors. The issue existed at the balance sheet date.

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Page 12: Audit Past Papers

(2)

The outcome of the lawsuit was not brought to the knowledge of the auditors.

Had it been known to the auditors, the financial statements would have required proper adjustments in this respect. State auditors’ responsibilities in this situation. Also analyze the situation, if the issue of financial statements for the following period is imminent. (06)

(b) Which financial statement assertions are fulfilled through following audit

procedures; • Debtors balance confirmation • Physical inspection of inventory • Review of bank reconciliation statements • Confirmation from the legal advisors • Verification of title deeds of fixed assets (05)

Q.10 You are the auditor of certain companies, audits of which have been finalized and

audit opinions are expected to be shortly issued. Significant issues concerning these audits are as follows:

Company A

Subsequent to the year end, a debtor from whom a significant balance is due initiated winding up proceedings.

(04)

Company B

The company is a shipping line with more than 6 ships as its assets. Subsequent to the year-end, one of its high value ship, carrying huge stock for other parties, sank in high seas.

(04)

Company C

Audit of the year ended 31st December 2003, would need to be finalized by 4th January 2004. The credit period for trade receivables is 3 months. You noted that significant sales were made in late December 2003. You have requested the company to provide the evidences for such sales, which request has been sent by them to its field office. However, the company considers that these evidences may not be timely available by 4 January 2004 due to law and order situation in the area where the field office is situated.

(04)

As an audit engagement partner of above companies, what would be your suggestions to the companies management regarding the above circumstances on the financial statements of the companies? Also explain the type of opinion you would issue, if the companies management do not agree with your suggestions.

(THE END)

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Page 13: Audit Past Papers

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Intermediate Examinations Autumn 2004 September 10, 2004 AUDITING (MARKS 100) MODULE D (3 hours)

Q.1 (a) What does the term ‘scope of audit’ refer to? How would you describe the “scope of audit” of a listed company?

(04)

(b) What is meant by reasonable assurance? (02) (c) Why an auditor cannot provide an absolute assurance as a result of audit?

Explain. (03)

Q.2 (a) What is meant by uncertainty? Give any two examples about the

uncertainty relating to the financial statements being audited by you. (03)

(b) What is agreed-upon procedures engagement? Give an example. (06) Q.3 (a) Which persons are not qualified for appointment as auditor of a company

under the Companies Ordinance, 1984? (05)

(b) Who fixes the auditor’s remuneration under the Companies Ordinance 1984?

(02)

Q.4 You are the auditor of Central Chemical Company Limited, a public listed

company which is engaged in the manufacture and sale of Chemicals. The production is carried out at five different locations throughout Pakistan. The customers include a number of local as well as foreign buyers. You are required to explain the action you would take in each of the following independent situations with respect to audit for the year ended June 30, 2004: a) On August 10, 2004, a competitor introduced a low cost product which

was a very good replacement of one of the company’s product being marketed under the brand name “Dello”. The Marketing Manager was of the view that the company would not be able to sell Dello, unless the price is reduced to Rs. 40 per kg i.e. 20% below its present cost. While the management was considering how to reduce the cost, it was decided to sell all the inventory in hand at Rs. 40. The stock of that product as on August 10, 2004 was 100,000 kgs, out of which 5000 kgs, had been produced after the year end. You become aware of the situation on August 11, 2004, when the accounts have already been finalised but prior to the signing of the audit report. The management is of the view that the matter need not be disclosed in the financial statements nor any adjustment is needed.

(06) b) After the audit report has been issued you come to know that one of the

factories have caught fire causing a loss of machinery worth Rs. 250 million. On inquiry you are informed that the loss is covered by insurance policy but the factory will have to remain closed till the new machinery is

installed. The installation may take six to eight months. The financial statements have not yet been published or circulated to the shareholders.

c) After the financial statements have been issued, there was a significant

decline in the market value of investments.

(08)

(03)

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Page 14: Audit Past Papers

2

Q.5 How is the audit of a small business different from that of a large organization? (05)

Q.6 State internal control procedures in respect of the following functions:

(a) Purchase ordering (05) (b) Dispatches and invoice preparation for sales (05) Q.7 (a) What is the auditors’ duty in case of balances for which the management

has requested for not sending the confirmation?

(03) (b) What is the difference between negative and positive confirmation

requests?

(02) (c) What is the duty of the auditor if response of a negative confirmation has

not been received?

(02) (d) When can the negative confirmation request be used to reduce audit risk

to an acceptable level? (03)

Q.8 (a) When should the auditor apply analytical procedures? (01) (b) List down the factors on which the reliance on the results of analytical

procedures depend. (03)

(c) What factors should the auditor consider when he/she intends to perform analytical procedures as substantive procedures?

(06)

Q.9 What do you understand by general and application EDP controls? Give two

examples of each. (10)

Q.10 (a) List down the basic elements of an audit report. (05) (b) Analyze the following situations and state under which condition an

auditor would most likely issue a disclaimer of opinion:

(i) Presentation of short term investment as long term. (ii) There are certain indications that the company may not be a going

concern. However, management has adequate plans to mitigate such problems.

(iii) Management’s refusal to furnish written representations in respect of an item for which no other evidence is reasonably expected to exist.

(iv) The terms and conditions of a long term loan have been incorrectly disclosed.

(08)

(THE END)

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Page 15: Audit Past Papers

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Intermediate Examinations Spring 2005 March 11, 2005 AUDITING (MARKS 100) Module D (3 hours) Q.1 (a) What do you understand by ‘governance’? Who is normally charged with

governance in an organization? (03) (b) Why is the attitude of professional skepticism essential for an effective audit? (05) (c) Briefly discuss the level of assurance given in the following types of

engagements:

i. Audit ii. Review iii. Agreed upon procedures iv. Compilation (06)

Q.2 (a) Orient Trading Limited was incorporated on October 21, 2004. Ahmad Ali,

the company secretary has approached you on October 31, 2004 for your appointment as the first statutory auditor of the company. Assuming that you are eligible for this appointment, explain who should make this appointment under the provisions of the Companies Ordinance, 1984. (03)

(b) When an external auditor intends to use specific work of internal auditor he is required to evaluate and test his work to confirm its adequacy for achieving his audit objectives. Summarize the steps an external auditor should perform for evaluating the adequacy of specific work of internal auditor. (06)

Q.3 (a) Briefly describe what overall audit plan is and what are its contents? (06) (b) You are about to start the planning process of an audit engagement. List the

sources from where you can obtain knowledge of the industry and the entity being audited. (06)

Q.4 (a) How can an auditor reduce sampling and non-sampling risks in case of tests

of control and substantive tests? (05) (b) Define ‘anomalous error’. How should it be treated at the time of projecting

sample errors to the population? (02) Q.5 (a) Describe the basic elements of a management representation letter. (05) (b) What do you understand by ‘points forward’ or ‘points for next year audit’?

Give two examples of them. (05) (c) What do you understand by cut off test? How an auditor ensures proper cut

off in case of bank payments? (05)

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Page 16: Audit Past Papers

(2) Q.6 (a) During the audit you are unable to obtain relevant and sufficient audit

evidence that you consider necessary for obtaining reasonable assurance about accounts receivable. You have raised this issue with the managing director of your client and informed him of your intention to issue a qualified opinion to highlight scope limitation. Managing director, in order to resolve this issue has suggested for change in the scope of engagement from ‘audit’ to a ‘review engagement’. Would you agree to such a change in the terms of engagement? Explain your response. (07)

(b) You, as external auditor, have received a direct communication from the company’s legal advisor about a claim of significant amount which was provided for and included in the sundry claims payable accounts last year. The communication states that the relevant court of law has, subsequent to the year end, issued judgment in favour of the company. The matter was discussed with the management but they are not willing to reverse the provision on the ground that the decision of the court was delivered after the financial year end. What will be the impact on your audit opinion on management’s reluctance to reverse the above provision? (07)

Q.7 (a) What are the uses of working papers? (03) (b) List the matters which affect the form and content of working papers. (03) (c) What is a permanent audit working papers file? How is it distinct from

current audit files? (03) Q.8 Briefly discuss the following risks in a Computer information system environment:

• Risks of lack of transaction trails. • Risk associated with lack of segregation of functions. • Risk of automatic initiation or execution of transactions. (06)

Q.9 Draft audit programmes for the following:

(a) Accrued expenses (b) prepayments

(03)(03)

Q.10 You are the statutory auditor of Northwest Company (Private) Limited, a

manufacturing concern. The company has used the services of an expert in valuation of its plant and machinery at the year end. You being the statutory auditor of the Company, have expressed to the Chief Financial Officer (CFO) of the company that you intend to evaluate the competence and objectivity of the expert and his work. The CFO has asked you to explain to him the specific provisions of applicable Standard on Auditing on the subject. State the relevant requirements of the Auditing Standard with regard to the above. (08)

(THE END)

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THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Intermediate Examinations Autumn 2005 September 09, 2005

AUDITING (MARKS 100) Module D (3 hours)

Q.1 (a) You have been asked to send your consent to act as the auditor of a listed company in place of the auditor removed by the company while their audit was in process. State briefly the course of action you are supposed to follow under the Code of Ethics prescribed by the Institute of Chartered Accountants of Pakistan.

(05)

(b) Mr. K the partner of an audit firm, in normal course of his investment activities bought shares of ABC Limited, of which his firm was statutory auditor. However, he disposed of all these shares within thirty days and immediately informed the company secretary about the whole transaction. Is the company secretary required to take any step under the Companies Ordinance, 1984? Discuss.

(04)

(c) What are the ethical requirements governing the auditors professional responsibilities? Briefly describe any two.

(06)

Q.2 (a) The following issues were highlighted in a meeting of the audit committee of

XYZ Limited with regard to financial statements of one of its subsidiaries on which auditors had issued an unmodified audit report:

(i) The audit procedures were unable to detect a material error in inventory valuation, because it occurred under exceptional circumstances and the internal controls established by the management could not prevent and detect the same.

(ii) The provision for bad debt was insufficient and the impact was material. It was also evident from the subsequent events, which came into the knowledge of the auditors before they issued their report.

You are one of the independent members of the audit committee and are considered an expert on financial reporting issues. The chairman of the audit committee has asked your comments with regard to the responsibilities of management and auditors of the above mentioned subsidiary. Give your comments on each of the above matters. (06)

(b) The financial statements are required to give a true and fair view. List the principal qualitative characteristics of financial statements that can be termed as giving ‘true and fair view’ of the financial position and results of operations.

(10) Q.3 (a) What are the audit assertions that cannot be usually addressed by following audit

procedures:

- External confirmation of trade debt - Physical count of inventory - Verification of title documents of fixed assets

(03)

(b) List the information that is normally requested by the auditor in direct bank confirmations.

(04)

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Page 18: Audit Past Papers

(2) Q.4 (a) 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.

(04)

(b) N, a member of external audit team of a consumer goods manufacturing company, was assigned to verify ‘trade debts’ by the audit in-charge. What are the internal control activities, which are expected to be in place?

(08) Q.5 What procedures does an auditor of consolidated financial statements of a holding

company perform while using the work of the auditor of the subsidiary company? (07)

Q.6 (a) What audit procedures are necessary in case the analytical procedures identify

relationship that is inconsistent with other evidences available with the auditor? (03)

(b) List components of internal control and briefly describe any two. (07)

(c) Briefly describe the scope and objectives of internal audit. (05) Q.7 (a) List ten conditions or events that may indicate the risk of existence of material

misstatement.

(05)

(b) Briefly describe the procedures for obtaining audit evidence. (06)

(c) Management representations are normally obtained by the auditor in the form of a letter. What are the other ways of its documentation?

(04)

Q.8 (a) List down the situations that may result in limitation on scope of auditor’s work. (04)

(b) Briefly discuss the nature of audit report in case of significant uncertainty other than going concern problem.

(04)

(c) Suggest how would you modify the audit report in the following situations: (05)

(i) A client of your firm has a history of tax contingencies arising out of appeals pending at various levels. The company has disclosed all such contingencies along with the estimated amounts in accordance with the accounting standards. Assume that the aggregate sum of these contingencies is material.

(ii) You are appointed as the auditor of a company after the year-end i.e. June 30, 2005. Hence, you have not been able to physically observe the counting of inventories at the year-end. Further, alternative audit procedures could not be performed due to the nature of the company’s records.

(THE END)

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Page 19: Audit Past Papers

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Intermediate Examinations Spring 2006 March 10, 2006 AUDITING (MARKS 100) Module D (3 hours) Q.1 (a) Discuss briefly the role of the following:

(i) International Federation of Accountants (ii) International Auditing and Assurance Standards Board

(03) (03)

(b) Briefly discuss the authority attaching to International Standards on Auditing

(ISAs) with respect to audit of a limited company in Pakistan.

(03) (c) While accepting an audit client, the auditor takes into account the integrity of

the client. What are the matters that an auditor should consider in this regard?

(04) Q.2 (a) You have received a letter from the company secretary of ABC Group of

companies on March 04, 2006. The group consists of four public limited unlisted companies. The secretary requested you to advise him as to who will have the authority to appoint new auditors in following situations relating to different companies of the group:

- The auditors of Company A will be retiring in August, 2006 on the conclusion of the Annual General Meeting of the company.

- The auditors of Company B were removed by the members on March 02, 2006.

- The auditors of Company C became disqualified on February 14, 2006. - The auditors of Company D resigned on January 28, 2006.

(08) (b) What would be the term of office of new auditors in the cases given above? (02) Q.3 You, as audit in-charge of Sindh Craft Limited, were assigned the job to perform

preliminary engagement activities for the year 2005-06 soon after the completion of audit for the year 2004-05. An engagement letter is not sent to this client each year. You are requested to explain the following to your audit team members: (a) The activities an auditor performs as preliminary engagement activities. (b) What does an auditor ensure by performing these activities? (c) The possible justification for not sending an engagement letter to the client

each year?

(03) (03)

(06)

Q.4 Pak Tools Limited has a subsidiary in Dubai whose operation is significant to the

company. You, as principle auditor, are responsible to express an opinion on the company’s consolidated financial statements. The subsidiary was previously being audited by a local firm. However, the auditors were changed last year, and the current year’s audit has been performed by a firm, which has been affiliated with your firm for a long time.

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Page 20: Audit Past Papers

(2) (a) What difference do you expect in your audit procedures while using the work

of other auditors in view of the above change? (b) What basic information would you document in the working papers?

(04)(04)

Q.5 Give four examples of the circumstances when manual controls are given

preference over the automated controls.

(04) Q.6 You, being auditor of World Limited were not provided with the management

representation in respect of adjustments based on the fair values of investment in some listed securities of material amount. The CFO of the client has requested you to explain: (a) What are the matters on which International Standard on Auditing prescribes

it necessary to obtain management representation? (b) What alternate, if any, is available to auditors in the absence of management

representation in the above matter? (c) What may be the impact on your audit opinion in such situation?

(05)

(03) (02)

Q.7 Indus Limited has a policy to change their auditors every year. Explain whether the

auditors of Indus Limited should prepare proper working papers, despite the fact that they would not be appointed for the next term.

(03) Q.8 The reliability of each audit evidence is influenced by its individual circumstances.

However, there are certain factors which are generally taken into consideration to determine the extent of reliability of audit evidences. Describe such factors briefly.

(06) Q.9 At a client, there are large number of debtors with small balances. The audit

incharge is considering to send negative confirmation request. (a) What weakness do you see in such kind of confirmations? (b) Is it appropriate to send negative confirmation request in the given case?

Explain briefly.

(03)

(04) Q.10 (a) List down substantive procedures for the verification of ‘liability against

assets subject to finance lease’. Also mention the audit assertions addressed while performing each suggested procedure.

(06) (b) What do you understand by ‘stratification’? (02) Q.11 When and what type of audit procedures should be carried out by the auditors to

identify subsequent events? State briefly. (05) Q.12 While performing audit of Mehran Chemicals Limited you used the work of an

expert for valuation of work-in-process and raw material inventory. Expert’s report shows substantial differences in valuation of both. You have decided to qualify your report on the basis of the expert’s opinion. Narrate the important matters that you should ensure while implementing the above decision.

(04)

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Page 21: Audit Past Papers

(3) Q.13 You are manager incharge for the audit of Sehwan Marbles Limited. During audit

you noticed that the company was sued for breach of contract by a customer claiming damages of Rs. 200 million. Based on the lawyer’s opinion (received through management), the management asserted that there would be no significant liability at the balance sheet date in respect of the said breach and accordingly, no provision was made in the financial statements. However, while studying the case file you found a memorandum from the head of the legal department addressed to the managing director in which he had opined that the company will have to pay at least 50% of the damages claimed. You concluded that this note was a strong evidence indicating the existence of this liability, which should be provided for. Management considers that such note was nullified by the opinion of the company’s legal advisor and as such there was no need to make any provision in respect of this contingent liability that was considered to be remote. Therefore, the CFO advises you that at the most there may be a disclosure of this contingent liability in the financial statements or perhaps an emphasis of matter paragraph in the auditor’s report without qualification. Required: Write a memorandum containing your conclusion and recommendation for the decision of the partner as to the type of opinion that should be issued and why.

(10)

(THE END)

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Page 22: Audit Past Papers

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Intermediate Examinations Autumn 2006 September 08, 2006 AUDITING (MARKS 100) Module D (3 hours) Q.1 (a) Analyze the following independent situations with reference to qualification of

statutory auditor:

(i) Mr. Zakir Ali, a practicing chartered accountant, has been offered appointment in Heera Limited as external auditor. He was an employee of the company before he started his own practice.

(ii) Diamond Associates (Pvt) Limited, a consultancy company, the majority of whose directors are chartered accountants, have been offered appointment as external auditor in Lal (Pvt) Limited whose share capital is less than Rs. 1.5 million.

(iii) Miss Fatima Khan, a practicing chartered accountant, has been offered appointment in Neelam Limited as external auditor. She was an employee of the company’s director two months before the offer.

(iv) Mr. Farid Hussain is a partner of Farid & Company, Chartered Accountants. The firm has been offered appointment in Feroza Limited as external auditor. Son of Mr. Farid holds shares of Feroza Limited.

(08) (b) Your assistant has an understanding that under the Companies Ordinance, 1984

only a Chartered Accountant can be appointed as auditor of a limited company. What is your understanding of the law in this regard?

(03) Q.2 Briefly describe the following: (a) Entity’s risk assessment process (05) (b) Monitoring of controls (05) Q.3 (a) International Federation of Accountants (IFAC) provides leadership to the

worldwide accountancy profession in serving the public interest. What activities are undertaken by IFAC to achieve this aim?

(04) (b) You have been offered to audit an entity, where management has not made any

decision regarding the applicable financial reporting framework. Explain the importance of financial reporting framework at the client acceptance level.

(03)

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Page 23: Audit Past Papers

(2)

Q.4 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?

(08) Q.5 Your audit client Aqeeq Limited, a large manufacturing company that has substantial

investment in plant and machinery, has used the services of Mr. Samad Hussain, a qualified engineer, for assessing the remaining useful life of a major plant. This plant, which was installed during the year, is expected to double the production capacity of the company. The assessment of useful life of the plant will have significant impact on estimation of depreciation expense for the year. You noted that Mr. Hussain has been in the employment of the company for the last four years. Brief your audit team about using the above work of Mr. Hussain.

(06) Q.6 (a) Explain the term ‘error’ with examples. (02) (b) Fraudulent financial reporting often involves management override of controls.

Describe some techniques that are used by management to override controls.

(05) Q.7 (a) What information is considered material with reference to an audit? (03) (b) Why does an auditor establish a materiality level? (02) Q.8 (a) What is meant by sufficient and appropriate audit evidence? (04) (b) The auditor obtains evidence about the operating effectiveness of internal controls

from tests of controls. What matters he should consider in determining the extent of such tests?

(05) Q.9 (a) An auditor considers various factors while designing and performing analytical

procedures as substantive procedures. These factors include assessing whether the expectation is sufficiently precise to identify a material misstatement. Briefly discuss the matters which the auditor considers while making such assessment.

(05) (b) How does an auditor use a conclusion drawn from analytical procedures, at the

end of the audit?

(03)

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Page 24: Audit Past Papers

(3)

Q.10 In the course of verification of ‘trade creditors’ of Mirpur Limited, you sent fifteen positive confirmations to the suppliers. The results have been summarized as under:

(i) Three suppliers confirmed the balance. You came to know that bulk of the

sales of these suppliers is made to Mirpur Limited. (ii) Five suppliers confirmed the balances over telephone. (iii) No replies have been received from the remaining suppliers.

Briefly discuss how you would deal with each of the above situations.

(09) Q.11 As audit manager on the audit of Yaqoob Limited, you are supposed to assign the

review of subsequent events to one of the members of the audit team.

(a) Brief your team about the purpose and timing of reviewing events occurring after

the balance sheet date.

(04) (b) Describe some of the procedures that are carried out to identify events which may

require adjustment of or disclosure in financial statements.

(05) Q.12 (a) In what circumstances an auditor expresses the following:

(i) an unqualified opinion (ii) a qualified opinion

(05) (b) An audit report contains title, addressee, date, auditor’s opinion, auditor’s address

and auditor’s signature. Describe the other essential elements of audit report.

(06)

(THE END)

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Page 25: Audit Past Papers

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Intermediate Examinations Spring 2007 March 9, 2007 AUDITING (Marks 100) Module D (3 hours) Q.1 (a) “The auditor is responsible to obtain evidence regarding the events occurring after

the date of financial statements.” Briefly explain the above statement. (02)

(b) The financial statements for the year ended June 30, 200X of Bakers Limited along

with auditor’s report thereon were issued. Subsequently, the auditor became aware of an error, which resulted in overstatement of sales by a material amount. (i) What course of action the auditor is supposed to take according to the

applicable standards? (ii) Under what situation the revision in financial statements may not be

necessary? (08) Q.2 Cobblers Limited is the holding company of Shoes Limited and Boots Limited. There is

no common directorship as the holding company has nominated different persons as the directors for each subsidiary. Moreover, there is no inter-company investment among the subsidiary companies. The following issues are under consideration of the company secretary: (i) The directors of Shoes Limited, which had been incorporated eighty three days

back, are considering appointment of Mr. Bright, a chartered accountant, as the first auditor. Mr. Bright holds a very small number of shares in Boots Limited.

(ii) The members of Cobblers Limited have appointed Mr. Polite, a qualified MBA, as

auditor of the company in their annual general meeting at a fee which is less than the fee charged by the previous auditor.

In the light of relevant provisions of Companies Ordinance, 1984, provide your response to the following:

(a) With reference to (i) above, discuss whether Mr. Bright is qualified to be appointed

as auditor of Shoes Limited. (b) With reference to (ii) above, discuss the validity of appointment of Mr. Polite as

auditor of Cobblers Limited. (05) Q.3 Primarily, the audit engagement partner is responsible for the overall quality of audit.

Briefly state the responsibilities of engagement partner in respect of: (i) leadership; (ii) acceptance and continuance of client relationship; (iii) assignment of engagement team; and (iv) engagement quality control review. (08)

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Page 26: Audit Past Papers

(2)

Q.4 (a) “An unmodified audit report is not a guarantee that the financial statements are free from material misstatements”. Discuss the rationale of this statement. (06)

(b) In a meeting before the commencement of a large audit engagement, the

engagement partner has emphasized the importance of audit documentation. As an audit manager, you are required to explain to your team, the characteristics which make the documentation self explanatory. (03)

Q.5

During the audit of Drapers Limited, following errors were detected by the engagement team by applying tests of details on audit samples: - depreciation on various assets has been overcharged by an aggregate amount of

Rs. 250,000; and - staff gratuity of various employees has been underprovided aggregating Rs. 300,000.

The materiality level was Rs. 600,000. Therefore, the concerned member of the team did not consider it necessary to discuss them with the management. In your opinion, what steps should the job in-charge take in the given situation?

(04) Q.6 (a) During the verification of ‘repair and maintenance account’, the auditor noted that a

repair expenditure of material amount was not supported by proper documentary evidence. According to the management, it was done in haste to avoid an abnormal shut down of plant. The management has offered to give specific representation in this regard. Discuss the appropriateness of management’s representation as audit evidence in this case. (03)

(b) What are the basic elements of a management representation letter? (03) Q.7 Green & Company, Chartered Accountants have been asked to audit the financial

statements of Encom Technologies Limited (ETL). ETL’s business is carried out through various branches in different cities. Two such branches constitute nearly 40% of total business, significant portion of which is quite complex. Further, the firm has virtually no experience of auditing the business carried out at these branches, which are audited by other firms of chartered accountants. Moreover, there are certain doubts as regards the competence of the auditors of one of the above branches. What consideration should be given by the firm while accepting the engagement? (08)

Q.8 (a) While applying analytical procedures on an audit, the auditor has predicted direct

material consumption of Rs. 1,500 million. The actual cost of direct material consumed as per accounts is Rs. 1,570 million. The auditor has emphasized on production volume and increase in material price, in arriving at the said estimation. The management believes that general increase in material prices is the reason for such deviation. Describe the course of action the auditor should take in dealing with this situation. (06)

(b) An auditor has to rely on various kinds of data while performing analytical

procedures. The reliability of data is influenced by a number of factors. List out the main factors with examples. (04)

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Page 27: Audit Past Papers

(3)

Q.9 (a) The outcome of an uncertainty depends on future actions or events not under the direct control of the entity but it may have a material effect on the financial statements. Discuss the impact of an uncertainty on the auditor’s report. (03)

(b) The date is an important element of audit report. What date should the auditor put

on the audit report and what does it represent? (03) Q.10 (a) Briefly describe the responsibilities of the management and the auditors as

described in the audit report of a company given in Form 35A prescribed under the Companies Ordinance, 1984. (07)

(b) The auditors of Porters Limited had a disagreement with the management on

application of certain accounting policies. The audit adjustments suggested by the auditors in this respect were refused by the management. Describe with reasons the possible modifications in the audit report of the company. (06)

Q.11 (a) Briefly state the matters an auditor considers while developing overall audit

strategy and plan of an initial audit engagement. (05) (b) Discuss the nature and contents of audit plan. (07) Q.12 (a) What do you understand by:

(i) Statistical sampling; and (ii) Stratification?

(02) (02)

(b) What do you understand by the term “sampling risk”? Briefly describe the two

types of sampling risks and the effect thereof on the audit as a whole. (05)

(THE END)

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Page 28: Audit Past Papers

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Intermediate Examinations Autumn 2007 September 03, 2007 AUDITING (MARKS 100) Module D (3 hours) Q.1 While carrying out the audit of a client you had found that direct confirmation from a

major customer of the company had not been received. The management of the company has explained that due to a dispute which arose in the recent past, it is not advisable to pursue the customer as this would further aggravate the relationship. However, the management is willing to provide you copies of the statements received from the customer alongwith the reconciliation to verify the year end balance, which you may retain in your working papers as audit evidence.

In the given scenario, explain the guiding principles provided by the International

Standards on Auditing. (06)

Q.2 The purpose of audit sampling is to draw conclusions about the entire population. The

auditor adopts different methods to select a representative sample i.e. which has characteristics typical of the population. Briefly describe the principal methods of selecting the samples.

(09)

Q.3 Describe the criteria given in the International Standards on Auditing, to evaluate the

reliability of audit evidence. (06) Q.4 List the audit procedures for the verification of fixed assets as appearing in the financial

statements. Also give the related ‘audit assertion’ against each step. (12) Q.5 (a) An auditor is required to establish overall audit strategy as part of developing the

audit plan. The overall audit strategy sets the scope, timing and direction of the audit, and guides the development of more detailed audit plan.

Identify the matters, which should generally be considered in establishing the scope

of audit engagement. (07) (b) The auditor performs risk assessment procedures to obtain an understanding of the

entity and its environment, including its internal controls. Briefly discuss all such procedures.

(09)

Q.6 You are in-charge of a team engaged in the audit of a listed company. The engagement

team is about to hold a meeting to discuss the susceptibility of the company’s financial statements to material misstatement due to fraud. One of your team members is perplexed about the auditor’s responsibility towards fraud. You are required to explain the following:

(a) Auditor’s responsibilities for detecting material misstatements due to fraud; and (04) (b) The matters that would be considered in the above mentioned meeting. (08)

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Page 29: Audit Past Papers

(2)

Q.7 Under the Companies Ordinance 1984, while reporting on the financial statements the auditor has to express an opinion whether the financial statements give a true and fair view in all material respect. Briefly state the matters other than the above, on which the auditor is required to express his opinion as per the requirements of Section 255 of the Companies Ordinance, 1984.

(08)

Q.8 (a) In peculiar circumstances the client restricts the auditors from performing certain

audit procedures. Discuss how the auditor should deal with such restrictions if the same are imposed: (i) at the time of appointment (ii) during the audit.

(08)

(b) Briefly state the circumstances when the audit report is modified without affecting

the auditor’s opinion. Also state how such modification is dealt with in the audit report.

(08)

Q.9 The auditor of a listed company is required to review the half yearly financial statements.

You are required to explain:

(a) the objectives of such review and how does it differ from audit; and (b) the procedures that are performed while carrying out such review. (07) Q.10 While reporting on the consolidated financial statements the principal auditor has to

evaluate the financial statements of the subsidiary company also. At times, such financial statements are audited by other auditors. The local regulations applicable in such a case may allow the principal auditor to base his opinion solely on the report issued by the other auditor. Describe the effect of such regulation on audit procedures and audit report to be issued by the principal auditor.

(08)

(THE END)

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Page 30: Audit Past Papers

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Intermediate Examinations Spring 2008 March 3, 2008 AUDITING (MARKS 100) Module D (3 hours) Q.1 Explain briefly the role of International Auditing and Assurance Standards Board

(IAASB) and the purpose of the pronouncements issued by it. (04)

Q.2 You are the manager on the audit of Nobel Limited, a listed company, which

manufactures automotive parts and air-conditioners for motor vehicle assemblers. Annual sale of the Company is Rs. 850 million and profit before tax is Rs. 60 million. Your review of the audit working paper file has disclosed the following outstanding issues: (i) The company is facing a potential legal claim from Mehran Motors Limited

(MML) in respect of defective air conditioners supplied to them. A claim for Rs. 25 million being the cost of replacement of air conditioners and lost production time has been lodged with the Company by MML. The management is of the view that the claim is not justified, as the air conditioners were properly functioning and had been tested for quality and that the defects have arisen because of the negligence of MML and its technicians. However, a provision of Rs. 2 million has been made in the financial statements in this respect.

(ii) Depreciation on certain equipment has been charged at 10% per annum on

reducing balance method. This rate is consistent with prior years and the same rate is being used by most other companies, in the automobile industry. However, significant losses have recently been recorded on the disposal of similar equipment.

Management has provided written representations in respect of the above matters.

Required:

What audit evidence will you gather to address the above issues? (10)

Q.3 (a) You are the audit manager on the audit of Indus Limited. The audit senior has

completed the audit of the company for the year ended June 30, 2007 and submitted a draft audit report for your review. The following paragraphs have been extracted from the draft audit report: ‘We conducted our audit in accordance with the auditing standards as applicable in Pakistan. These standards require that we plan and perform the audit to obtain……. We believe that our audit provides a reasonable basis for our opinion and, after due verification, we report that: We did not observe the counting of the physical inventories as of June 30, 2007, since that date was prior to the time we were initially engaged as auditors of the Company. Owing to the nature of the Company’s records, we were unable to satisfy ourselves as to the quantities of inventory by other audit procedures.

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Page 31: Audit Past Papers

(2)

In our opinion and to the best of our information and according to the explanations given to us, the balance sheet ……….. so required and respectively give a true and fair view of the state of the Company’s affairs as at June 30, 2007 and of the loss, its cash flows and changes in equity for the year then ended. The Company’s liabilities exceed its assets at June 30, 2007 creating an adverse situation which management believes is reversible over the coming twelve months. Management further believes that the Company is capable of continuing in operation for twelve months from the date of this report.”

Required:

Identify the shortcomings in the above paragraphs extracted from the audit report. (08)

(b) ABC, Chartered Accountants released a qualified audit report on financial

statements of Normal Limited due to a disagreement on tax provisions. Before issuance of financial statements and audit report to the shareholders, the management revised the financial statements on the basis of subsequent decisions announced by the appellate authorities. The adjustment made in revised financial statements now agrees with the previously suggested audit adjustments. The revised financial statements have been provided to ABC for fresh audit report. Required: List the steps which ABC, Chartered Accountants should take before issuing a revised (unqualified) audit report.

(06)

Q.4 (a) How would you determine the aggregate of uncorrected misstatements? (04) (b) Discuss the factors that influence the auditor’s judgment as to what constitutes

sufficient appropriate audit evidence? (07)

Q.5 (a) If the auditor plans to rely on controls that have not changed since they were last

tested, the auditor should test the operating effectiveness of such controls at least once in every third audit. Identify the situations in which the auditor may decide to test the controls again, in the very next audit.

(04)

(b) Briefly describe the components of internal control. (10) Q.6 The following three entities have approached Alpha & Company, Chartered

Accountants (the firm) for appointment as their statutory auditors. In each case there are following issues which need to be considered before the firm decides to accept the assignments. (i) Client: Safe Bank Limited

Issue: the firm has acquired office equipment from the bank under finance lease arrangements. In addition, some partners of the firm are also using the bank’s credit card facility.

(ii) Client: Pride Communication Limited (PCL): Issue: One of the firm’s partners had remained the director of PCL for many years, as a nominee of Federal Government.

(iii) Client: Gama Limited Issue: A partner of the firm holds shares in Beta Limited which is an associated company of Gama Limited.

Required:

In each case specify the minimum conditions specified by Companies Ordinance, 1984, which should be fulfilled in order to accept the audit engagement. (09)

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Q.7 (a) List down the principal contents of an audit engagement letter. (07) (b) Audit documentation facilitates understanding of the nature, timing and extent of

audit procedures; the results of audit procedures and significant matters arising during the audit. Discuss briefly: (i) What are the “significant matters” which are required to be documented? (ii) In how many days after the date of auditor’s report, the auditor is required

to complete the assembly of his final audit file? (07) Q.8 As the manger on the audit of Masoom Limited you want the management to appoint

experts to assist you on certain matters. Explain the circumstances where auditor may use the work of an expert and the auditor’s responsibilities in this regard.

(07) Q.9 You are the audit manager on the audit of a listed company DB Limited. During initial

discussion with the management, the General Manger of DB was apprehensive about various inquiries you made and information and explanation you requested. He feels that many of them are not relevant to the financial statements and some are confidential in nature. He is particularly reluctant to provide information about: (i) industry performance; (ii) shareholding of the close relatives of the directors in other entities; (iii) production procedures; (iv) location of warehouses; (v) new research carried out; (vi) qualification of head of internal audit; and (vii) future plans to recoup the huge losses sustained in prior years.

Required:

Explain the relevance of above inquiries to the management, with reference to the objective and scope of the audit?

(07)

Q.10 You have completed the audit of financial statements of Pride Limited showing profit

before tax and total assets of Rs. 74 million and Rs. 582 million respectively. Following issues are still unresolved: (i) Subsequent to year end, an employee left the company without settling a loan of

Rs. 0.5 million. Management has refused to make provision but is ready to give a disclosure.

(ii) The company imported a plant on deferred payment arrangement. No forward exchange cover was taken by the company. At year end the liability was valued at Rs 83.0 million and reported accordingly. However, it was finally settled for Rs. 88.5 million.

(iii) The revenue recognition policy is not consistent with the relevant International Accounting Standard (IAS). Had it been in accordance with the IAS, the profit before tax would have been Rs. 79.2 million.

(iv) The contract with a major customer is about to expire after three years. Certain internal documents show that the company might have to face a very difficult situation thereafter.

(v) Personal files of many senior executives do not contain any documentary evidence of their qualification. Salaries paid to such executives are Rs. 24 million.

Required: Discuss the impact of each of the above matters on your audit report.

(10)

(THE END)

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Page 33: Audit Past Papers

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN Intermediate Examinations Autumn 2008 September 1, 2008

AUDITING (MARKS 100) (3 hours) Q.1 You are the audit manager on the audit of Gold Limited. During the planning phase of the

audit, the audit senior had a meeting with the CFO of the company. While discussing matters such as performance of the company, financial ratios and the overall audit strategy etc., the CFO informed that there were no related party transactions during the year. He also acknowledged that management is responsible for identification and disclosure of related parties. In view of the above, the audit senior feels that there is no need to prepare audit program in respect of related parties.

Required: (a) Comment on the conclusion drawn by the audit senior and give brief explanation of

the auditor’s responsibility in respect of related party transactions. (04) (b) What types of transactions may indicate the existence of unidentified related parties? (07) Q.2 Because of the nature of fraud and the difficulties encountered by the auditors in detecting

material misstatements in the financial statements on account of fraud, the management has to play a significant role in assisting the auditors in the performance of appropriate audit procedures. Make a list of representations that the auditor should obtain from the management in this regard. (07)

Q.3 (a) Explain audit sampling and the risks associated with the use of audit sampling

techniques. (10) (b) Identify the factors which influence the sample size for: (i) Tests of controls (ii) Tests of details. (05) Q.4 Karim & Company, Chartered Accountants are engaged in the review of interim financial

information of Babar Textiles Mills Limited for the half year ended June 30, 2008. The increase in oil and energy prices and current inflationary trend prevailing in the country has resulted in substantial losses and the Company’s outlook is negative. Moreover, in view of recessionary pressures being faced by the US and many of the EU economies, some of the large customers in those countries have not renewed their orders and many others are expected to follow. Consequently, the company has decided to lay off 40 percent of its workforce gradually, over the next few months. The company’s management acknowledges the severity of the situation but is reluctant to provide specific details in the interim financial information. However, it has given a note containing general indications about the future prospects of the company.

Required: Describe how the auditor should address the above issue and the implications it may have

on the review report of interim financial information. (09) Q.5 Mr. Mubarak is the audit senior on the audit of Sky Blue Limited. While comparing the

draft financial statements with the previous year, he noted many unusual fluctuations. Briefly explain the procedure he should follow, in the above situation. (06)

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Q.6 You are the senior in-charge on the audit of financial statements of Fine Tractors Limited, for the year ended June 30, 2008. The audit field work has revealed the following issues which are still unresolved:

(a) The company is not charging depreciation on a building which was constructed

during the year on freehold land belonging to the company, at a cost of Rs. 128 million. The management is of the view that land and building are part of the same class of assets and no depreciation is required to be charged thereon because the value of such assets is expected to increase considerably in future.

(b) A customer of the company has filed a suit claiming damages of Rs. 4.6 million, on account of company’s failure to meet a deadline for supply of certain goods. The company has filed a counter claim of Rs. 5.5 million, against the same customer on account of the customer’s failure to fulfil certain conditions regarding payment of advance. No provision has been made in the books of the company as the company’s lawyers are not very sure about the outcome of the lawsuit.

You have discussed these matters with your manager who believes that the amounts

involved are material. Required: Draft a qualification paragraph that may have to be included in the Audit Report. You may

assume necessary details. (10) Q.7 Direct confirmations from third parties provide independent audit evidence that certain

account balances and items in the financial statements are properly recorded and disclosed. Required: (a) Distinguish between positive and negative confirmations. (02) (b) Briefly describe the risks associated with each of the above type of confirmation and

the steps that an auditor usually takes to avert such risks. (05) (c) Explain why and under what circumstances an auditor may decide to use negative

confirmation requests. Also, identify the circumstances where the auditor may use a combination of positive and negative confirmations. (06)

Q.8 You are the engagement manager on the audit of Chill Limited. During the course of audit,

you have been provided an Actuarial Valuation Report on the Company’s Employees Retirement Benefits Scheme. You have noted that the report has been prepared by M/s Saleem and Company which is not well known to you.

Required: Briefly describe the matters that you would consider before using the report prepared by

Saleem and Company. (05) Q.9 Azeem and Company have been the auditors of Shahid Corporation Limited, a listed

company, for the past many years. You have been appointed as the audit engagement manager.

Briefly explain the matters which you would consider while assessing the following: (a) acceptance and continuance of client relationship. (05) (b) need to send a new engagement letter. (03) Q.10 (a) Explain the difference between “The Overall Audit Strategy” and the “Audit Plan”. (04) (b) Identify the matters which are usually discussed / explained in each of the above

documents. (12)

(THE END)

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