The Professionals’ Academy of Commerce

Pakistan’s Leading Accountancy Institute

Certificate in Accounting and Finance Stage Examinations
December 13, 2024
Section: B (Asim Nazir Ch.) Marks: 100

Audit & Assurance

Instructions to examinees:
(i) Answer all NINE questions.
(ii) Answer in black pen only.
(iii) Multiple Choice Questions must be answered in answer script only.

Question. 1
Archery Limited (AL) is an online travel agent specializing in travel to unusual destinations. AL operates as an
intermediary between customers and thousands of travel service providers, which include airlines, hotels, car rental
companies and tour operators. Assume the date is 11 March 2024. Soomro and Co. Chartered Accountant (SCCA) is
the external auditor of AL. You are the audit senior responsible for the final audit of the financial statements of AL for
the year ended 31 December 2023.
Potential future engagements
1. A competitor of AL, Boxing King Ltd. (BKL), has asked SCCA to consider taking it on as an audit client. BKL is
particularly interested in SCCA, because of its experience of auditing an online travel agent. BKL is planning to
restructure its business and its directors have stated that there will be a substantial amount of additional non-audit
work that SCCA would be offered if it became auditor.
2. SCCA has also been approached by Judo Cat Ltd. (JCL), a company that specializes in products for cat care, and is
not an audit client of SCCA. JCL would like SCCA to provide an assurance report on prospective financial
information to be used in support of a bank loan. The finance director of JCL will produce the information for an
urgent meeting with the bank, which will take place next week.
3. Track Cycling Ltd. (TCL) is a company 100% owned by the husband of Saima who is an audit partner at SCCA.
TCL is looking for an auditor as it has just crossed the statutory audit threshold. Other audit firms approached have
quoted excessive fees and Saima has proposed that SCCA take on this work for a lower fee.
Required:
Explain the professional and ethical matters SCCA should consider in relation to each of the three potential future
engagements. State the actions SCCA should take as a result. (9 Marks)

Question.2
You have been assigned to plan the test of controls in respect of receiving of goods and invoices from suppliers of
Bhurban Limited. In this regard, you are required to identify the following:
(a) The related risks
(b) Audit procedures that you need to perform to test the controls (6marks)

Question. 3
a. In the light of the Companies Act, 2017 briefly explain the process that a shareholder should follow if wants to
appoint auditor other than the existing auditor as proposed by the board. Also discuss the requirements that the
company should follow. (5 marks)
b. Define an Assurance Engagement and enlist the elements of Assurance Engagement. (5 marks)
c. What are the key features of an Audit Report. (3 marks)
Question.4
(a)
You are a partner in a firm of chartered accountants. Your firm has recently been approached by following clients for
the appointment as external auditors for the year ended December 31, 2023.
i. Ballot Mining Ltd. (BML) is engaged in the mining of barite deposits in Baluchistan, along with its associate,
Paper Mines Ltd. (PML). The mining industry is strictly regulated through local laws and applicable reporting
standards. If this appointment is accepted, BML would be the firm’s first client in the mining sector. While evaluating
client acceptance, you came to know that the owners of BML have strong political connections and, a few years back,
were investigated by authorities due to their alleged involvement in operating an offshore company. While you were
discussing this matter with one of your partners in the firm, he informed you about his wife's shareholding in PML,
which she purchased two years ago. (4 marks)
ii. Voter Limited (VL) deals in the manufacturing of hiking equipment. One of your partners, Ali Kaleem, was an
employee of one of the directors of VL (Salman Sheikh) in his consultancy business. Later, that employment changed
to a partnership between Ali Kaleem and Salman Sheikh due to the successful running of the consultancy business. Six
years ago, the partnership was dissolved, and Mr. Ali Kaleem was employed in VL. He left his employment four years
ago and started his auditing practice. Further, the CEO of VL shows interest in implementing a supply chain
management system and requested your firm to handle all matters from the selection of software to implementation.
You discussed this prospect with your partner who knows some renowned vendors for such software. Your partner
also suggested receiving a commission relating to the procurement of software. (8 marks)
Required:
Comment on each of the above independent situations.

(b) What are the main limitations of Statutory Audit (5 marks)

Question. 5
a) In the planning phase of the audit of Dynamic Limited for the year ending 30 June 20X3, you have
calculated the following ratios from the management accounts of the company for the eight months ended
29 February 20X3:
b)

Eight months period ended Year ended Year ended

29 February 20X3 30 June 20X2 30 June 20X1
Gross profit percentage 35% 40% 40%
Inventory turnover days 120 105 78
Current ratio 1.5 2.3 2.6
Quick asset ratio 0.78 1.6 1.7
Times interest earned 0.91 1.67 2.1
Debtors turnover days 132 86 68

Required: Identify the prospective audit risks which the auditor should consider while planning the audit.
(5 marks)
b) You are the audit manager of the Educational University (EU) for the year ended 31 December 2015. EU has a
student base of 2,500 students. It follows a policy of receiving 50% of the fees at the start of the semester and 50%
in the middle of the semester. However, 10% discount is allowed to those students who pay the entire amount in
advance. The cost of course material is included in the fees. The semester starts in December and June each year.
You have noticed that 30% of the students who were registered in December 2015 had not claimed the course
material till 31 December 2015.
Required: Discuss the audit risks in the above scenario and how you would deal with them. (5 marks)

Question .6
a) Define Materiality and what are the uses of materiality? (4 marks)

b) Hamna & Co has been appointed as the auditor of Shell Private Limited (SPL) for the year ending 30 June, 2025.
This is the first time of Hamna & Co has been appointed as the auditor of SPL, Hamna & Co has some concerns
regarding the relevance of Audit Evidence obtained from SPL. What are the general Principles set out in ISA
500 to assist the auditor in assessing the relevance of audit evidence. (4 marks)
 c) You are the manager responsible for the audit of newly incorporated company, Trojan Limited (TL). Following
are the extracts from the draft financial statements of TL for the year ending June 30, 2025.

Rs. In Million
Revenue 12,000
Profit before Tax 72
Total Assets 13,000
Total Liabilities 7000

Since this was the first year of operations and profit before tax was quite low. However as the expectation of
management profit before tax would exponentially grow over the period for next three years.
Your audit team has determined the materiality on the basis of profit before tax for the year ended June 30, 2025.
In view of audit team profit before tax is the main performance indicator for the TL’s Board of Directors.
Required: Discuss the appropriateness of benchmark used by the audit team. (3 marks)

d) The time is now towards the end of the audit, and you are reviewing working papers produced by the audit team.
An example of a working paper you have just reviewed is shown below.
Client name: Glasses2Go
Year end: 30 April 20X3
Working paper: Payables transaction testing
Audit assertion: To make sure that the purchases day book is correct.
Method: Select a sample of 15 purchase orders recorded in the purchase order system.
Trace details to the goods received note (GRN), purchase invoice (PI) and the purchase day book (PDB)
ensuring that the quantities and prices recorded on the purchase order match those on the GRN, PI and PDB.
Test details: In accordance with audit risk, a sample of purchase orders were selected from a numerically
sequenced purchase order system and details traced as stated in the method. Details of items tested can be found
on another working paper.
Results: Details of purchase orders were normally correctly recorded through the system. Five purchase orders
did not have any associated GRN, PI and were not recorded in the PDB. Further investigation showed that these
orders had been cancelled due to a change in spectacle specification. However, this does not appear to be a
system weakness as the internal controls do not allow for changes in specification.
Conclusion: Purchase orders are completely recorded in the purchase day book.

Required: Explain why the working paper shown above does not meet the standards normally expected of a
working paper. Note: You are not required to reproduce the working paper. (6 marks)
Question. 7
Caretaker Sports Limited (CSL) is a manufacturer of footballs and is a new audit client for your firm. You are required
to assess the sales system and recommend control improvements. The sales system of CSL operates as follows:
i. CSL generates new customer leads through a third-party company.
ii. Sales staff assess new customers' creditworthiness and propose credit limits, which are authorized by the sales
director.
iii. Sales staff have monthly sales targets and can grant sales discounts of up to 10% at their discretion. These
discounts are recorded in the customer master data file.
iv. Sales staff visit customer sites and complete orders using two-part pre-printed order forms. The sales order
number is based on the salesperson's identification (ID) number.
v. CSL markets itself on dispatching all orders within three working days. Sales staff email the finance department
and warehouse dispatch team with customer IDs and sales order details, which generates a pick list. Sequentially
numbered goods dispatched notes are completed and filed in the warehouse.
vi. Sequentially numbered invoices are generated using pick lists for quantities and customer master data for prices.
vii. Standard credit terms for customers are 30 days. Any sales invoices over 90 days outstanding are notified to the
relevant salesperson for direct payment follow-up with the customer.
Required:
Identify and explain any six deficiencies in the sales system of CSL and provide a recommendation to address each of
these deficiencies. (12 marks)
Question. 8
1) You have been assigned the audit of Pacific Shipping Limited (PSL) for the year ended 31 December 2017. During
the audit, you have noted that the invoicing system was not operational for four days in January 2017. Upon
inquiry, you were informed that some changes were made by one of the three programmers working in the IT
department, merely on the request of a sales officer. The change caused the whole invoicing system to malfunction
and it had to be closed down. During these four days, all invoices were generated manually.
Required: Identify any three control weaknesses in the above situation and suggest any two mitigating controls
against each weakness (4 marks)

2) A) State the auditor’s responsibility in respect of ‘Assembly of final audit file’ (2 marks)
B) The audit report of Salim Limited was signed on 30 April 2016. After issuance of the audit report, the auditor
was informed that a major debtor has become bankrupt.
Required: Specify the matters that the auditor would be required to document in the above situation. ( 2marks)

Question. 9
a) Analytical procedures are an important part of the audit process and a tool which the auditor uses during the
various phases of an audit
Describe the factors that the auditor needs to consider while designing and performing analytical procedures as
substantive procedures. (4 Marks)
b) 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:
(1) Acceptance and continuance of client relationship. (2 marks)
(2) Need to send a new engagement letter (2 marks)

(THE END)