AUDITING (MARKS 100)
Module D (3 hours)
Q.1 Comment on each of the following situations with reference to the appointment of external
auditors in accordance with the requirements of the Companies Ordinance, 1984:
(a) Farrukh & Co., Chartered Accountants, has received an offer to be appointed as the
external auditor of Ebrahim Gas Company. The firm is indebted to the company as it
has not paid the last two months’ bills amounting to Rs. 4,860.
(b) After seventy days of incorporation, the directors of Rahman Limited (RL) decided to
appoint Mr. Shahid as the company’s statutory auditor. Mr. Shahid was employed by
RL before he started his own practice.
(c) The directors of Fazal Limited (FL) have decided to appoint Syed & Company,
Chartered Accountants, as external auditor of the company. One of the partner’s spouse
holds 1,000 shares in the subsidiary of FL.
(d) The directors of Najam (Pvt.) Limited having paid-up capital of Rs. 4.5 million have
appointed Mr. Dawood to act as the external auditor of the company. Mr. Dawood has
been awarded a diploma in International Financial Reporting Standards by the Institute
of Chartered Accountants of Pakistan and has completed the mandatory period of
training from a leading firm of chartered accountants.
(e) All directors of Hussain Associates (Pvt.) Limited are chartered accountants. The
company has recently received an offer for appointment as the external auditor of
Masood (Pvt.) Limited which has a paid-up share capital of Rs. 1,000,000. (10)
Q.2 Direct confirmations of balances due from customers are obtained to satisfy the objective of
ensuring that the customer exists and owes the specified amount to the company at a certain
date.
Required:
(a) State the circumstances in which an auditor may decide not to circulate the requests for
direct confirmation. (05)
(b) What are the factors that an auditor considers while designing the requests for direct
confirmation? (05)
(c) Describe the alternative audit procedures which may be conducted if the customer does
not reply to a request for confirmation. (06)
Q.3 The management of Zafar Textile Limited (ZTL) has become aware of an error in its audited
financial statements after its issuance to the shareholders. ZTL intends to rectify the error
and have approached the auditor for issuance of a new audit report on the revised financial
statements.
Required:
Describe the procedures which the auditor should adopt in the above circumstances. (08)
Q.4 The preparation of working papers is an integral part of the auditor’s responsibilities.
Identify the factors that the auditor should consider while determining the form, content and
extent of audit working papers. (07)
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