Summer Exam-2014

Corporate Sector

Auditing (07.05.2014)
Duration: 3 hrs.

Marks-100

[Instructions]
Ensure that the question paper delivered to you is the same, in which you intend to appear.
Read the instructions given on the title page of Answer Script.
Start each question from fresh page.

Attempt all Questions

Q.1. (a) What procedures must an auditor perform before assessing whether to accept an
audit engagement?

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(b) State the situations where an auditor is allowed to breach the fundamental

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(a) Other than the shareholders of the company, state FOUR common users of the

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principles of confidentiality as laid down in the IFAC code of ethics for

Professional Accountants.

Q.2.

Financial Statements.
(b) State FIVE limitations of auditing which inhibit the auditor from expressing
absolute assurance over the truth and fairness of the Financial Statements.

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Q.3. Describe the following terms:

(a) Performance Materiality

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(b) Qualitative Materiality

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(c) Advocacy Threat

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(d) LowBalling

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(e) Statistical Sampling

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Q.4. ABC Limiteds draft Financial Statements show the following position in respect of
cash and bank balances:

Cash in Hand

2013
2012
Rupees in Thousands
987
23

Cash at Bank
- Current Account

5,467

1,214

- Saving Account

4,440

8,785

- Term Deposit Account

2,500

1,000

12,407
20,972

10,999
4,500

46,773

26,521

Cheques in Hand

Required:

Explain the substantive audit procedures you would perform to verify the cash and 15
bank balances of ABC Limited.
Contd.

Q.5. Connect Insurance Limited is a large, 3,000 employee insurance company offering
various types of insurance cover all over Pakistan through its 10 branch offices in
various cities. A significant portion of the Companys employees include the sales
force (i.e. Insurance Officers) who visit various potential clients to market the
companys products.
Connect pays salaries to its employees on the 5th of each month. Salaries of the
insurance officers include a fixed monthly base salary plus commission at the rate of
5% of insurance premium brought in by the officer as a result of their marketing
efforts. In addition, a departmental bonus is also payable at each quarter end if the
department achieves the quarterly budget for insurance premium. Connect presently
has 4 departments in the sales force: Motor, Fire, Marine and Health insurance
departments.
Each insurance agent communicates the level of insurance premium earned in each
month by the 2nd day of next month; this has to be approved by the Branch Manager
by the 3rd day of the next month and is then forwarded to the respective department
head in Karachi on the 4th day. The respective department head then passes the
summary of all approved commissions for the month to HR and Finance
Departments for their record. The Finance Department then process the commission
based on percentage and adds it to basic salary so that monthly payments can be made
to each employees bank account by the 5th day. The quarterly bonus calculation is
prepared by each Department Head and is verified by the Finance Department before
final approval from the CEO. Due to shortage of time and inadequate resources, the
Finance Department is unable to verify each and every insurance officers calculation
of premium earned through their efforts
For staff other than insurance officers, Connect pays a fixed salary each month. The
salary sheet is prepared by Human Resource Officer and approved by respective
Department Head, HR Manager and CFO. The CEO does not sign the salary sheet
since he thinks that such salaries are routines in nature and of fixed amount.
Increments and promotions are made in 01st July each year and Connect has a 31st
December year end.
245 insurance officers have joined the company during the year whereas 188 left the
company. As for other staff, 14 staff members were hired, 22 resigned and 25 were
promoted during the year.
Required:

(a) State the Control Risks associated with the payroll system of Connect Insurance 08

Limited.

(b) State the Substantive Audit Procedures necessary to obtain reasonable assurance 08

that the total employee benefit expense recorded by Connect is true and fair.

Q.6. Explain the possible audit opinion which may be given in case of each of the following
cases (each part is to be treated separately):
(a) Inventories as per physical count performed in the presence of auditor differ 04
from inventories recorded in the Financial Statements by the material amount.
Management has refused to record the resulting adjustment in the Financial
Statements.
(b) No estimate of provision for dismantling has been done by a power plant. It is 04

expected that it would take substantial time and amount to dismantle the plant
after the end of its 20 years useful life.

Contd. on back

(c) The management does not permit the auditor to send confirmation letters to

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(d) A company manufacturing high-tech smart phones was formed 2 years ago and

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(e) A company was formed for a specific project of three years which has now

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trade receivables, which constitute 80% of total assets on the Balance Sheet.
Lawyer, Tax and Bank confirmations are also not allowed.
has not yet tested its fixed assets for impairment. Similar companies have
performed impairment test but no impairment was identified.

ended. No further operations are being carried out by the company. The
management has not disclosed any information about the companys ability to
continue as a going concern in the Financial Statements.

Q.7. In the light of ISA 620 and by giving examples, describe how an auditor can use the 10
work of experts to manage the nature, timing and extent of Audit Procedures.
Q.8. Describe the principles laid down in ISRE 2410 Review of Interim Financial 10
Information Performed by the Independent Auditor of the Entity in respect of review
engagements on half yearly Financial Statements performed by the auditor of a
company.
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