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TitleCAF9Audit&AssuranceQuestionbank.pdf
TagsAudit Fixed Asset Cheque Board Of Directors
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Document Text Contents
Page 1

2015

AUDIT AND
ASSURANCE
QUESTION BANK

Page 103

Answer bank: Objective test and long-form answers

© Emile Woolf International 93 The Institute of Chartered Accountants of Pakistan

119 Companies Ordinance 1984

(a) The appointment of Farrukh & Co. will be in order because the firm would not
be considered indebted to the company as the period for which the utility dues
are unpaid does not exceed 90 days.

(b) Mr Shahid cannot be appointed as statutory auditor of Rehman Limited
because of the following:

(i) Mr Shahid is not eligible for appointment as statutory auditor since only
70 days have passed since the company’s incorporation and therefore
obviously less than three years have elapsed since he left the
employment of the company.

(ii) Directors have lost their authority to appoint external auditors after the
expiry of 60 days from date of incorporation.

(c) Syed & Co. shall not be appointed as auditor of the company because his
spouse holds shares in its associated company. However, the firm can be
appointed as auditor of Fazal Limited if the spouse of the partner disinvests the
shares within 90 days of appointment.

(d) Mr Dawood’s appointment shall be void because only a chartered accountant
can be appointed as auditor of a private limited company having share capital
of Rs. 3 million or more.

(e) Hussain Associates (Pvt.) Ltd. being a body corporate cannot be appointed as
external auditor of any company.

20 ASPL

(a) (i) In the absence of any valid explanations from the management, it would be
considered as misappropriation of assets i.e. fraud as it seems to involve
the theft of an entity's assets.

(ii) It is a case of fraudulent financial reporting as it seems that management
has tried to inflate the sales in order to deceive financial statement users.
An apparent intention behind this action is the management bonuses which
are linked to the operating performance of the company.

(iii) It is an error on the part of accountant. The underlying records such as the
invoice etc. have not been altered and even the voucher has been prepared
with the correct amount which shows that it is an unintentional
misstatement.

(b) (i) If we have identified a fraud or has obtained information that indicate that a
fraud may exist, we should communicate these matters on a timely basis to
the appropriate level of management. This is so even if the matter might be
considered immaterial.

We should consider whether there are matters related to fraud to be
discussed with those charged with governance of the entity. Matters may
include:

� Concerns about the nature, extent and frequency of management's
assessments of the controls in place to prevent and detect fraud and
of the risk that the financial statements may be misstated.

Page 104

Audit and Assurance

© Emile Woolf International 94 The Institute of Chartered Accountants of Pakistan

� A failure by management to appropriately address identified
significant deficiencies in internal control, or to appropriately respond
to an identified fraud.

� Our evaluation of ASPL’s control environment, including questions
regarding the competence and integrity of management.

� Actions by management that may be indicative of fraudulent financial
reporting, such as management's effort to manage earnings in order
to deceive financial statement users by influencing their perceptions
as to the entity's performance and profitability.

� Concerns about the adequacy and completeness of the authorization
of transactions that appear to be outside the normal course of
business.

Based on the discussion and our overall understanding of the matter, we
should:
� ask the management to reverse the sales made;
� revise its risk assessment of the entity’s control environment and

modify the further planned audit procedures accordingly.
� Consider the impact on audit report.

(iii) Since this seems to be an error, the appropriate level of management
should be informed about it and the relevant adjustments in fixed assets
and depreciation account should be made.

221 AMF

(a) Areas of Inherent Risk

(i) Donations

� Donations may fall, especially where donors’ own income is limited or
declining, or there is a change in the circumstances.

� No control over the completeness of donations (especially over the cash
donations).

(ii) Expenses

� Donations are spent outside the aims and objectives of AMF.

� Donations are not spent in accordance with donors’ instructions.

(b) Effect on the audit approach

(i) It is difficult to estimate that income in the future will be sufficient to meet the
expenditure of the AMF. Audit of the going concern concept (as in ensuring
that the AMF can still operate) will therefore be quite difficult.

(ii) Audit tests are unlikely to be effective to meet the assertion of completeness.
The audit report may need to be modified and qualified to explain the lack of
evidence stating that completeness of income cannot be confirmed.

(iii) Careful review of expenditure will be necessary to ensure that expenditure is
not ‘ultra vires’ the objectives of the AMF. The auditor will need to review the
trust deed and other documents of the AMF carefully in this respect.

(iv) The use of donations received for specific purposes would have to be
checked to ensure that instruction of donors has been followed.

Page 206

2015

AUDIT AND
ASSURANCE
QUESTION BANK

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