The Professionals’ Academy Of Commerce

Certificate in Accounting and Finance

18th June, 2019

Mid Term Examinations Autumn 2019 Sir Jafar Hussain
15 Minutes Additional Reading Time 100 marks – 3 Hours
Audit and Assurance

Question#1
a) You have been appointed as the auditor of a company which was previously audited by
another auditor. Being a new client, what additional considerations would you take into
account while performing the preliminary engagement activities prior to commencement
(4)
of the audit?
b) Mike Tyson Chartered Accountants (MTCA) is deciding to issue some promotional
material so as to promote its services. Advise MTCA as to what regulations it should
consider when making a reference to fees in its promotional material. (3)

Question#2
a) Briefly describe the principles which will assist you as the auditor in assessing the
(4)
relevance of audit evidence.
b) Shadeed Ltd is considering appointing Moutadil Chartered Accountants as its auditor.
Advise Moutadil Chartered Accountants as to what safeguards it should apply before
accepting the engagement. (6)

Question#3
You are being hired to advise Goku ltd on their internal controls;
a) Describe three General IT Controls each relating to the (3)
i. Documentation and testing of program changes.
ii. Prevention of unauthorized amendments to data files (3)
b) Briefly explain the problems that may arise when control systems rely excessively on the
involvement of senior management. (3)

Question#4
a) John Wick Ltd is a newly Incorporated Company and is presently drafting its Internal
Control Manual. Advise John Wick Ltd as to which controls they should apply when
(5)
receiving goods and invoices.
b) As a member of the audit staff of the company's external auditors, you visit the garage
and make a count of cash on hand. You subsequently compare details of unbanked cash
receipts that you counted with the entry in the cash receipts boots for that date.
Although the total in the cash receipts book is the same, the amount of banknotes and
coins is less and there is a cheque from a business customer that you did not record.
 i. Explain the procedures to be followed in making a cash-count for audit purposes. (4)
ii. Explain the irregularity that the discrepancy between the cash count and cash
receipts book might lead you to suspect, and describe how you would investigate the
discrepancy. (3)

Question#5
a) Briefly describe the term “Applicable Financial Reporting Framework”. (2)
b) List down at least five audit procedures undertaken by the auditor in respect of
verification of inventory quantities as a follow up of test count (5)
c) Briefly describe the various actions that an auditor can take if he decides that the audit
(5)
evidence the auditor has obtained is insufficient to reach his opinion.

Question#6
(a) Next Level Chartered Accountants is in the process of testing the Internal Controls at
Microhard Ltd. Advise Next Level Chartered Accountants as to what test of controls it can
apply to evaluate the internal controls in operation over “Dispatch of goods and
invoicing”. (5)

(b) You have been assigned to work on your firm’s largest client, Barq Electronics, a publicly
traded company. In your process of evaluating Internal Control, your audit plan instructs
you to evaluate Barq Electronics’ control environment. In your evaluation you have found
the following:

 The Board of Directors and audit committee consist of several financially savvy
individuals who take their jobs very seriously. Furthermore, all members of its audit
committee are top managers in the company, so they are intimately familiar with the
company’s operations.

 Management stresses an ethical environment. In their weekly meetings each team

reports its operating results, and the different teams quiz each other and respond
with solutions and challenges. In the weekly meetings, management encourages the
teams to act ethically while achieving their mandatory year-over-year, 40% revenue
growth numbers.

 Due to high industry growth, Barq has enhanced its market share largely by
significant mergers and acquisitions. To keep up with its growth, Barq is constantly
upgrading its internal control system. Fortunately, the well-trained staff have been
able to continue testing the new programs after they are put in place and to change
programming problems as they crop up.

Required:
What problems in financial control environment do you see in the above situation? Also
suggest the tests you would carry out on these controls (8)
Question#7
Ghazi is the audit senior on the audit of Hameed Limited (HL). Upon his manager’s instruction
Ghazi had determined the overall 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 overall materiality level to Rs. 7.5 million.
Required:
a. Identify the possible causes which motivated Ghazi to reduce the overall materiality level. (2)
b. Discuss the impact of reduction in the materiality level on audit risk and the audit
procedures to be performed. (3)

Question#8
Your firm is the auditor of Wayne Enterprises (Private) Limited (WEPL), which operates a chain of
mobile phone retail outlets. About 25% of shareholding in WEPL is owned by Bruce and his wife.
Bruce is the Chief Executive of WEPL and also looks after the finance and operations of
the company. There are five other directors and each of them holds 15% shares in WEPL.

The Internal Audit Function comprises of three senior officers who are graduates. Their duties
include checking of accounting records, physical stock taking, preparation of bank reconciliations,
reviewing payments and verification of fixed and current assets.

During the planning phase, Bruce stressed the need for early completion of audit, in order to be
able to submit the audited financial statements for seeking a long term finance. He was of the
view that internal audit working papers would be of enormous help in performing and early
completion of the audit.

Required:
Identify and briefly describe the fraud risk factors in the above scenario. (5)

Question#9
Jawan is being considered by Mujahid ltd to be hired as its new Chief Financial Officer. Jawan has
a degree in accounting and finance from Uganda which he secured five years ago. During the past
5 years he has had been unemployed. Jawan does not feel that an employee should be
concerned about any office related issues once the office hours end. He is often seen discussing
matters with his friends about the conditions of different companies including some of his
previous employers, at the stock exchange. He justifies these actions saying that he always does
the discussions after his working hours at Mujahid ltd Jawan holds shares in Mujhid ltd. He
recently bought a brand new car from the previous dividend. Jawan paid charges against a case of
fraud on him while selling his Porsche about two years ago. He regards the charges against him as
unfair without any evidence against them, to this day.

Required: Discuss the fundamental principles that are being compromised in the given situation
along with safeguards (if any). (8)
Question#10
Comment on the following independent situations with respect to appointment of Auditors in
accordance with Companies Act 2017:

a) Shakoor & Co. Chartered Accountants are proposed to be appointed as statutory auditors
of Khajoor Limited. Spouse of a partner is nominee director in Ghafoor Ltd, in which
Khajoor Limited holds 21% shares, and she also holds shares in that company. (3)
b) Khyber Limited is considering appointment of Khan & Co. Chartered Accountants as its
statutory Auditor. A partner of firm is indebted to Gilgit Limited in other than ordinary
course of business, which Khyber Limited holds 51% shares. (3)
c) UVW Limited holds 21% shares in WXY Limited whereas WXY Limited has 58% shares in
DEF Limited. JKL Limited holds 51% shares in WXY Limited and 60% shares in GHI Limited.
ALM & Co. Chartered Accountants is proposed to be auditor of GHI Limited whereas a
partner of firm holds some shares of UVW Limited. (3)
d) Alafasy and Company, a firm of Chartered Accountants, has received an offer for
appointment as auditor of Sudais Limited (SL). Abdul Rehman, a partner in Alafasy and
Company is also a partner in Pure Investment Associates, a partnership firm, which owns
100,000 shares in SL. (3)

Question#11
a) Jack Sparrow ltd holds 21.5% shares in Davy jones ltd which is a subsidiary of
Blackbeard ltd. The Finance Director of Blackbeard ltd holds 19% shares in Jack
Sparrow ltd. Flying Dutchman & Co. Chartered Accountants has been hired for the
audit of Jack Sparrow ltd. The firm holds shares in Blackbeard ltd through a partner.

Required: Comment on the relationship between the companies and whether Flying
Dutchman & Co. Chartered Accountants is eligible for the engagement.
(3)
b) Brutus & Co. Chartered Accountants have been approached by Popeye ltd which
deals in the wholesale of agricultural products, for audit for the year ended 31-12-18.
Olive Oil, the director of Popeye ltd has not paid the electricity bills for the last 6
months relating to the apartment provided by Popeye ltd. Brutus, a partner in Brutus
& Co. Chartered Accountants, has given a guarantee on behalf of Pluto ltd’s
indebtness to Popeye ltd relating to a recent order for Spinach. Brutus has had been
imprisoned in the past for 2 months for fraud with a previous client, to which a
period of 10 months has successfully passed .
(4)
Required: Discuss the eligibility of Brutus & Co. Chartered Accountants for this
engagement, with reasons to support your answer.