THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Audit, Assurance and Related Certified Finance and Accounting Professional
Services (CFAP) Examination - Summer 2018

General:

The overall performance in this attempt with passing ratio of 12.5% was slightly better
than the previous attempt where the passing ratio was 11.2%. However, such low passing
percentages are a matter of concern especially in a subject in which all the students are
obtaining extensive training. The matter of concern is that the performances were poor in
all the questions except one, with passing percentages ranging between 7 to 17%.
Further, in all these questions, between 25 to 60 percent of the candidates could not even
score 25% marks.

Question wise comments are given below:

Question 1

This was a standard question on identification of risks and the key audit procedures to be
performed in respect thereof. Despite the fact that questions in this area appear in every
attempt, the performance of the students was very poor as only 14% of the candidates
secured passing marks. A significant number of students were totally unprepared as about
40% of the candidates secured 5 or less marks in this 20 mark question.

Majority of the candidates were able to identify some of the risks but were unable to
identify the relevant audit procedures. Further, risks related to segment reporting,
onerous contract and foreign exchange translation were identified by few students only.
A major issue with many students was that they gave generalized steps such as “ensure
that appropriate provision has been made” instead of specifying what steps have to be
taken in this regard. Some of the other common issues are discussed below:

 With regard to overstatement of revenue / understatement of expenses, hardly any

student mentioned that the intention may be to show better results to be able to issue
right shares at a much higher premium. Moreover, the students seemed to be unaware
of the areas which should be scrutinized when such a risk is identified and only few
could mention steps related to review of journal entries, accounting estimates,
transactions outside the normal course of business, etc.
 With regard to assets held for sale the review of board minutes and criteria for
classification of non-current assets as held for sale were rarely discussed.
 Somehow, a number of students wasted a lot of time in discussing the issue of going
concern which was hardly relevant as the company had earned substantial profits this
year as well as in the past also.

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 Examiners’ Comments on Audit, Assurance and Related Services – CFAP Examination
Summer 2018

 With regard to segment reporting procedures for ascertaining whether any other
segment had fulfilled the criteria for being reported as a separate segment was
mentioned by few students only.

Question 2

This was a scenario based question in which the candidates were required to discuss the
matters which they would focus while performing a due diligence review under the given
scenario. They were also supposed to identify any additional information which they may
require during the review. The performance in this question was extremely poor and only
7% could secure passing marks. About 62% of the candidates secured three or less marks
in this 15 mark question.

Majority of the students seemed to have very little idea of the important aspects which
are considered in a due diligence review. Accordingly, most of the answers revolved
around analyzing the data given in the question irrespective of the significance of each
type of information. Moreover, very little or no emphasis was placed on other important
areas such as (i) role of partners and in the absence of any experience of similar business,
how would the acquirer manage the business (ii) is there any key staff and would they
continue (iii) terms of employment of the existing delivery staff who would have to be
relieved, (iv) are the financial statements audited and (v) other off balance sheet items.
Even the analysis of data was weak in many cases as the following matters were
discussed by few students only:

 Why the finance cost remained constant in 2014 and 2015

 Which assets have been leased and would the lease continue
 Why there is no provision for taxation
 What are the details of operating expenses

While discussing the other important information/documents required, items like bank
details, legal advisor’s details, contracts with restaurants and suppliers, etc. were mostly
ignored.

Question 3

In this question an audit report drafted by an audit team member was given and the
candidates were required to critically analyse the audit report i.e. identify the apparent
errors. This was expected to be a high scoring question but even in this question, the
performance was very poor as only 13% candidates secured passing marks. About 30%
of the candidates secured two or less marks in this 11 mark question.

Majority of the students identified only two or three mistakes in the draft report, which
were definitely not enough to justify a question worth eleven marks. Some very basic
statements were incorrectly phrased in the draft report but they were picked up by only a
handful of students like the words “conclusively” and “CFO has refused” and use of
acronyms for international accounting standards were very obvious mistakes.

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 Examiners’ Comments on Audit, Assurance and Related Services – CFAP Examination
Summer 2018

Question 4

This question required the candidates to mention the key audit procedures for share based
payment option described in the given scenario. The performance in this part was quite
satisfactory as 48% of the candidates secured passing marks. However, about 25% of the
candidates were totally unaware of this area and obtained one or less mark in this six
mark question.

Though many of the students performed very well; yet there were several others who had
no idea of the key issues involved such as the vesting period, fair value of share options
and the assumptions used, forecast of employee turnover rates, etc. Many candidates
produced lengthy discussion on the competency and integrity of the management expert
although it was mentioned in the question that this aspect was not required to be
discussed.

Question 5

Code of Ethics is considered a favourite area of the students; however, in this attempt the
performance was poor in this area also. Only 17% of the candidates secured passing
marks and about 20% of the candidates secured three or less marks in this 15 marks
question.

Majority of the students were only able to obtain a few marks on the basis of their
comments on shareholding of the engagement partner’s wife’s. Most of the candidates
tried to give generalised comments on the scenario as a whole instead of analyzing each
situation separately.

Many students did not consider the partners giving non-audit services as part of audit
team and hence made incorrect conclusions. Similarly, only a few students touched on
the threats arising due to holdings of other employees as majority concluded that no
threats would arise due to holdings of other employees.

Question 6

This question consisted of two independent parts. Only 15% of the candidates could
secure passing marks in this question. Part wise comments are given below:

Question 6(a)

According to the scenario given in the question the following matters were highlighted
with regards to a listed company AFL:

1. It had incurred gross loss as because of shortage of gas supply, its plant could not run
on optimum capacity.
2. AFL had made arrangements with a gas supply company which is expected to
convert gross loss into gross profit.
3. Long-term loan had been restructured and classified as a short term loan.
4. Method of recording depreciation has been changed.
5. A paragraph from the directors’ report was reproduced.

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 Examiners’ Comments on Audit, Assurance and Related Services – CFAP Examination
Summer 2018

The requirement was to discuss what matters the auditor would need to discuss with the
management (other than going concern issues) and the possible impact on audit report if
the management does not agree with the auditor’s point of view.

Most of the students picked up the obvious points but failed to identify the non-obvious
ones. Some of the errors also resulted because of not reading the question carefully.
Some such issues are discussed below:
 It was clearly mentioned in the question that the restructuring of loan has been agreed
after year-end. Therefore, they should have mentioned that restructuring of loan is a
non-adjusting event and that any change in the classification of liability from current
to non-current would not be done this year. Instead, most of them mentioned that the
auditor needs to consider whether it is an adjusting or a non-adjusting event.
 No questions were raised as to how total number of units which the plant would
produce has been estimated.
 Regarding the change in depreciation method, a lot of students perceived it as a
change in accounting policy and discussed about its retrospective application whereas
under IAS 16 change in depreciation method is to be accounted for as a change in
accounting estimate.
 Regarding inconsistencies between auditor’s information and director’s report, only
few students raised question regarding director’s claim that the company would be
able to record profits in the next year and their claim regarding improvement in
current ratio which could even reverse after appropriate classification of long term
loan.

Question 6(b)

In this question, the candidates were required to draft how the given matter would be
reported in the key audit matter section. The issue pertained to petition filed by a
competitor where the client’s legal advisor was unable to give any estimate about the
outcome and consequently no provision had been made but full disclosure had been
given. The candidates were allowed to assume further details if necessary.
The performance of the students in this part was much better. However, in many cases
the answers suffered on account of poor english as the candidates produced meaningless
sentences.

Question 7

In this question the candidates were required to specify the controls which they would
expect with regard to processing of journal entries and what action should the auditor
take if serious deficiencies are identified during the control testing process.

Some basic controls and consequent actions were pointed out by majority of the students
but only 17% could secure passing marks.

Controls like documented policies and procedures, standardized forms for standard
journal entries, automated exception reports for un-usual entries were hardly discussed.
Similarly, auditors’ actions like use of computer assisted audit techniques, increasing the
extent of substantive testing and assessing risk of management override of controls were
rarely mentioned.
(THE END)

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