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					AUDITINGDITING                                                                 CA Mock Exam
 AUGUST, 15                                                        Intermediate Examinations 2011

Module D                       Time Allowed-3 hours                                        Marks-100

Q.1   IFAC came into being in the 1970s as a result of proposals put forward and eventually
      approved by the International Congress of Accountants. What is the role of International
      Federation of Accountants and its mission?                                               (05)

Q.2   (a)   Your assurance firm is auditor of Clifton Goods. The audit manager has just become
            engaged to the managing director’s daughter, who he met through a mutual friend.
            The managing director owns 51% of the shares in Clifton Goods.

            List the threats to independence which might arise as a result of the above. Also
            explain briefly.                                                                      (06)
      (b)   List ten conditions or events that may indicate the risk of existence of material
            misstatement.                                                                         (05)
Q.3   (a)   State the assertions that are normally addressed by an auditor while attending the
            physical stock account.                                                               (03)
      (b)   List down some audit procedures for verification of stock held and controlled by a
            third party.                                                                          (04)

Q.4   The reliability of audit evidence is influenced by its individual circumstances. However,
      there are certain factors which are generally taken into consideration t determine the
      extent of reliability of audit evidences. Describe such factors briefly.                  (05)

Q.5   (a)   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 it would further aggravate the relationship.
            However the management is willing to provide you copies of the statements
            received from the customer along with 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 principals provided by the International (05)
            Standards on Auditing.
      (b)   A negative external confirmation request asks the respondent to reply only in the
            event of disagreement with the information provided in the request. Negative
            confirmation requests may be used to reduce the risk of material misstatement to
            an acceptable level in certain circumstances, write those circumstances.              (04)

Q.6   (a)   Auditors base their judgment as to the extent of working papers upon what would

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             be necessary to provide an experienced auditor, with no previous connection with
             the audit, with an understanding of the work performed, the results of audit
             procedures, audit evidence obtained, significant matters arising during the audit and
             conclusions reached.
             Describe four benefits that auditors will obtain from working papers that meet the
             above requirement.                                                                    (04)
       (b)   List the maters which affect the form and content of working papers.                  (03)

Q.7    (a)   Explain the difference between interim and final audit.                               (06)
       (b)   What is the objective of an engagement to review interim financial information?       (04)

Q.8    (a)   You are audit in charge of Moosa Limited. The company has established an internal (06)
             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
       (b)   List the inherent limitations of internal control. (Explanation is not required)       (04)

Q.9    (a)   Mr. Danish the partner of an audit firm, in normal course of his investment activities (04)
             bought shares of XYZ 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?
       (b)   Which persons are not qualified for appointment as auditor of a company under the
             Companies Ordinance, 1984?                                                             (05)

Q.10   (a)   “An unmodified report is not a guarantee that the financial statements are free
             from material misstatements”. Discuss the rationale of this statement.            (06)
       (b)   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)
       (c)   The date is an important element of an audit report. What date should the auditor
             put on the audit report and what does it represent?                               (03)

Q.11   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

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       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.
       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)
Q.12   List the elements of control environment.                                                   (05)

                                            (THE END)

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