Professional Documents
Culture Documents
Suggested Answers
Intermediate Examinations – Autumn 2009
Ans.1 (a) The management’s responsibilities in relation to the financial statements include the following:
The overall responsibility for the preparation and presentation of the financial statements.
Identifying the financial reporting framework to be used in the preparation and presentation of
the financial statements.
Designing, implementing and maintaining internal controls relevant to the preparation and
presentation of financial statements that are free from material misstatement whether due to
fraud or error.
Selecting and applying appropriate accounting policies.
Making accounting estimates that are reasonable in the circumstances.
Elaboration on the response of the audit manager that auditor should always maintain an attitude of
professional skepticism throughout the audit:
Although the auditor cannot be expected to disregard past experience of the honesty and integrity of
the entity’s management and those charged with governance, the auditor’s attitude of professional
skepticism is particularly important in considering the risks of material misstatement on account of
changes in circumstances.
Ans.2 Some of the situations which are indicative of fraud or an attempt to conceal fraud or fraudulent financial
reporting are as follows:
Significant transaction, that are outside the normal course of business or that otherwise appear to be
unusual.
Where a transaction appears overly complex.
Management has not discussed the nature of and accounting for such transactions with those charged
with governance of the entity and there is inadequate documentation.
Management is placing more emphasis on the need for a particular accounting treatment than on the
underlying economics of the transaction.
Transactions that involve non-consolidated related parties, including special purpose entities and
have not been properly reviewed or approved by those charged with governance of the entity.
The transactions involve previously unidentified related parties or parties that do not have the
substance or the financial strength to support the transaction without assistance from the entity under
audit.
Ans.3 (a) (i) Audit efficiency may be improved as the auditor has stratified a population by dividing it into
discrete sub-populations which have an identifying characteristic. The stratification reduces
the variability of items within each stratum and therefore allow sample size to be reduced
without a proportional increase in sampling risk .
(ii) Other ways by which sales population may be stratified are as under:
By product
By customers or category of customers
Geographically
Terms of sales such as credit, cash, advance etc.
(b) Circumstances in which an auditor may decide to examine entire population of items that make up
an account balance.
The auditor may decide to examine the entire population in the following circumstances:
Ans.4 (a) For the purpose of determining the extent of reliance that may be placed on the work of internal
auditor in specified areas, it may be evaluated by:
(i) Inspecting the adequacy of the scope of the work and related programs.
(ii) Determining by means of inspection whether the preliminary assessment of Internal audit
function remains appropriate.
(iii) Obtain evidence that:
The work is performed by staff having adequate technical training and proficiency as
internal auditors and the work of assistants are properly supervised, reviewed and
documented.
Sufficient appropriate audit evidence was obtained to serve as a reasonable basis for
conclusions reached.
Conclusions reached are appropriate in the circumstances and any reports prepared are
consistent with the results of work performed.
Any exceptions/unusual matters disclosed by internal audit are properly resolved.
(b) Important differences between Internal Audit and the External Audit
Independence
Since internal audit is a part of the entity, no matter how autonomous and objective it is., it cannot
reach the level of independence enjoyed by the external auditors.
Objectives
The objectives of internal audit function vary according to management’s requirements. Whereas,
the primary objective of external auditor is to ascertain whether or not the financial statements are
free of material misstatements.
Reporting
Report of external auditor is addressed to the members (shareholders) / owners / those charged
with the governance of the entity.
Internal audit reports are addressed to the management and those charged with the governance.
The reporting requirement of the external auditor is determined by the framework under which
the audit is being carried out and by applicable legal and regulatory requirements.
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AUDITING
Suggested Answers
Intermediate Examinations – Autumn 2009
Ans.6 (a) Substantive procedures for verification of trade debts (excluding receipt from customers)
Investigate any unexpected or unusual movement/differences between current and prior
period as regards the amounts of trade debts, debtor’s turnover, ageing of receivable and ratio
of debtors to credit sale etc.
Review of period end reconciliation of subsidiary and general ledger and investigate large and
unusual items.
Reviewing the period-end bank reconciliation statements with specific reference to the list of
cheques deposited but not credited in the bank.
Review the following:
Large or unusual postings in the general ledger.
Large or unusual balances in subsidiary records including, credit balances, past due
balances and balances exceeding credit limits etc.
Circularization of confirmations and performance of appropriate follow-up of selected
customer balances at the period end and obtaining and testing reconciliation of balances
confirmed with the book balance.
Review the ageing schedule and ensure reasonableness of provision based on:
Discussion with the credit manager.
Examination of the subsequent collections made.
Past practice and consistency.
(i) Review prior year working papers for names of known related parties;
(ii) Review the entity’s procedures for identification of related parties;
(iii) Inquire as to the affiliation of those charged with governance and officers with other entities;
(iv) Review shareholder records to determine the names of principal shareholders or, if appropriate,
obtain a listing of principal share-holders from the share register;
(v) Review minutes of the meetings of shareholders and those charged with governance and other
relevant statutory records such as the register of directors’ interests;
(vi) Inquire of other auditors currently involved in the audit, or predecessor auditors, as to their
knowledge of additional related parties; and
(vii) Review the entity’s income tax returns and other information supplied to regulatory agencies.
Ans.8 The report specified in form 35A in the in the Companies (General Provisions and Forms) Rules, 1985
covers the following additional reporting responsibilities.
(i) that proper books of accounts are being maintained by the company as required by the Companies
Ordinance, 1984.
(ii) that the balance sheet and the profit and loss account together with notes thereonare in conformity
with the Companies Ordinance, 1984 and in agreement with the books of accounts and are further
in accordance with the accounting policies consistently applied.
(THE END)
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