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Qualitative Misstatements, Complete Set Of General Purpose Financial Statements-Advanced Auditing and Taxation-Exam Paper, Exams of Auditing

This is exam paper for Advanced Auditing and Taxation course. It was designed by Prof. Vidya Nayak at Anand Agricultural University. This exam paper includes: Qualitative, Misstatements, General, Purpose, Financial, Statements, Mandatory, Period, Materiality, Levels, Planning, Stage

Typology: Exams

2011/2012

Uploaded on 08/26/2012

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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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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)

Q.5 (a) Sajjad is the audit senior on the audit of Hameed Limited (HL). Upon his manager’s instruction Sajjad had determined the acceptable materiality level to be Rs. 10 million at the initial planning stage. However, at the time of evaluating the results of audit procedures carried out at the interim stage, he has reduced the materiality level to Rs. 7.5 million.

Required: (i) Identify the possible causes which motivated Sajjad to reduce the materiality level. (02) (ii) Discuss the impact of reduction in the materiality level on audit risk and the audit procedures to be performed. (05)

(b) During the course of an audit, both quantitative as well as qualitative misstatements need to be considered. Give four examples of qualitative misstatements. (04)

Q.6 (a) The auditor is required to issue an audit report at the end of the audit, which sets out his opinion on the financial statements. An important element of the audit report is the statement of auditor’s responsibility.

Required: Narrate the matters that should be contained in the statement of auditor’s responsibility as included in an audit report issued under ISA-700 ‘The Independent Auditor’s Report on a Complete Set of General Purpose Financial Statements’. (08)

(b) Identify the situations in which an auditor may modify his report without affecting his opinion. Also explain how such a modification should be presented in the audit report. (07)

Q.7 (a) Briefly explain the components of internal control as referred to in the International Standards on Auditing. (09)

(b) Your firm is the auditor of Shahzad Limited (SL), a listed company, which is a wholesaler of consumable products. SL records its sale on delivery of goods and maintains up to date computerised inventory records.

A full inventory count was conducted at the year end. The senior who attended the physical stocktaking at the central warehouse has observed the following matters:

(i) The inventory count took place on January 1, 2010 under the supervision of the Inventory Controller. No movement of inventory took place on that day. (ii) Four counting teams were formed. Each team comprised of two persons. The floor area was allocated by the teams among themselves. (iii) Each team was instructed by the Inventory Controller to remember which inventory had been counted. (iv) Pre-numbered count sheets were provided to the staff involved in the inventory count. The count sheets showed the inventory ledger balances, to facilitate reconciliation. (v) Old, slow-moving or already sold inventories were highlighted on the count sheets at the time of counting. (vi) Items not located on the pre-numbered inventory sheets were recorded on separate sheets which were numbered by the staff. (vii) At the end of the count, all inventories against which advances from customers had been received were removed from the physical inventory on the instruction of the Inventory Controller.

Required: Identify the weaknesses in the system of inventory count. Give appropriate explanations to support your point of view. (09)