THE INSTITTUTE OF CERTIFIED PUBLIC ACCOUNTANTS OF

PAKSITAN (ICPAP)
CPA PROFESSIONAL/ FINAL STAGE EXAMINATIONS
WINTER EXAMINATION DECEMBER 2009
COURSE XI- ADVANCED AUDITING

Time Allowed: 03 Hours Maximum Marks: 100

NOTES:
1. All questions are to be attempted.
2. Answers are expected to the precise to the point and well written.
3. Neatness and style will be taken into account in marking the papers
for which four marks are awarded.

Question No. 1

(a) “When auditor are verifying a client’s bank reconciliation, they are particularly
concerned with the possibility that a list of out standing checks may include a
non existent or fictitious check, and also are concerned with the possibility of
omission from the reconciliation of a deposit in transit”. Criticize the above
quotation and revise it into an accurate statement. (07 Marks)

(b) During the first few months of the year, Mr. Hassan, the cashier in a small
company, was engaged in lapping operations. However, he was able to restore
the amount of cash, borrowed by March 31, and he refrained from any
fraudulent acts after that date. Will the year end audit probably lead to the
discovery of his lopping activities? Explain. (07 Marks)

(c) Describe circumstances that might cause a client to understate assets such a
cash and marketable securities. (06 Marks)

Question No. 2

(a) A primary requirement of an effective internal control structure is a satisfactory

plan of organization. Explain the characteristics of a plan of organization for an
information systems department including the relationship between the
department and the rest of the organization. (10 Marks)

(b`) Compare the objectives of the internal auditors with those of the independent
auditors. (05 Marks)

(c) What consideration, if any, may independent auditors give to the work of a
client’s internal audit staff? (05 Marks)
Question No. 3
ISA 700 Auditor’s Report on Financial Statements sets out to establish standards and
possible guidance on the form and content of Auditors Reports issued as a result of the
Financial Statements of an entity.
Required:-
a. List the standard contents of an unqualified audit report and state the reasons
for the inclusion of each of the items included therein. (07 Marks)
b. Explain the meaning and discuss the importance of the following audit
concepts which are contained in or associated with audit reporting:-
(07 Marks)

i. Independence
ii. True and fair view
iii. Materiality
c. Describe the nature and purpose of the audit test which should be carried out
between the Balance Sheet date and the signing of the Audit Report. (06 Marks)

Question No. 4

Tools & Dye (T&D) is a large, Pakistan registered, privately-owned, holding company,
which operates two wholly owned subsidiaries that manufacture tools and dyes. All three
companies have a 31 December year-end.

T&D plans to make a significant acquisition over the next few months, which it will
finance through an equity offering, either to existing shareholders, or to the general
public, which will require the listing of the company shares on the Karachi Stock
Exchange.

T&D has been notified by its current auditors that they will be shortly resigning as statutory
auditors for its 31 December 2008 accounts, as they prefer to focus on their tax and
business advisory activities.

T&D has approached your audit firm, S & K CPA, with a view to becoming its statutory
auditor for its 2008 accounts. In this regard, T&D wishes to ascertain whether it needs to
adopt International Financial Reporting Standards (IFRSs) / International Accounting
Standards (IASs) as its accounting basis for its 2008 annual accounts instead of the
current Financial Reporting Standards (FRSs) / Statements of Standard Accounting
Practices (SSAPs).

If it were to adopt the new IFRS/IAS accounting basis, T&D would like to change some of
its accounting policies and estimates that it uses to value its assets, particularly inventory
and property, plant and equipment. However, it does insist on not revaluing its subsidiary
assets and liabilities because of the work involved.

REQUIREMENT:-

(a) One key pre-nomination acceptance procedure that S & K should perform is to
determine whether it is professionally qualified to act as auditors for T&D. Identify
and briefly discuss three independence matters, pursuant to the ICPAP’s Code of
Professional Ethics, Conduct and Practice (the Code) - Section 8: Independence,
that S & K should consider in this regard. (05 Marks)

(b) Briefly discuss the key post-nomination acceptance procedures that Keane &
Keane should perform. (05 Marks)
(c) Discuss whether T&D should adopt IFRS/IAS for its 31 December 2008 accounts.
(05 Marks)

(d) Discuss the impact on the auditors report concerning the 31 December 2008
valuation issues raised by T&D in the last paragraph of the above case study.
(05 Marks)

Question No. 5

A firm of Certified Public Accountants has been considering the areas it needs to address
in its documented policies and procedures that it intends to develop further. This is to
provide it with reasonable assurance that the firm and its personnel comply with the
professional standards and the applicable regulatory and legal requirements; and that
reports issued by the firm or engagement partners are appropriate in the circumstances.
The firm has four partners, four qualified audit staff, twenty trainee audit staff and four
secretarial/technical staff. The firm has already a number of audit clients across a range
of activities and has recently been approached by a Private Limited Company (PLC)
and asked to tender for their audit. Whilst most of the detailed audit work is carried out
by trainee staff, each audit assignment is controlled by an engagement partner and
supervised by a qualified member of the audit staff. If they take on the Private Limited
Company (PLC) client, the firms are aware they will have to carry out an engagement
quality control review.

On recurring engagements, the engagement partner in-charge of the audit reviews with
the engagement team, the permanent audit file, audit programmers and other audit
working papers from the prior audit while planning the current audit to determine their
usefulness for the current engagement.

REQUIREMENT:-

a) List the areas to be addressed in the documented polices and procedures in a

system of quality control. (04 Marks)

b) State as per ISA-220 Quality Control for Audits of Historical Financial Information
what an engagement quality control review entails. (06 Marks)

c) List the purposes of audit working papers and explain why each purpose is
important. (06 Marks)

d) Define what is meant by a permanent audit file, and list FOUR types of
information typically included. (04 Marks)

--------The End--------