In the Name of Allah, the Most Beneficient and the Most Merciful

Ans. 1 (a) Quality Control Issues While assigning the audit use to Mr. Manzoor Nazar, the firm ignored the threat which existed due to his earlier intention to join WL as an employee. Mr. Manzoor also failed to update the firm or so this matter, due to which firm could not ascertain the self-interest threat to independence and objectivity of the action partner. Engagement partner did not ensure the engagement reviewer had been appointed. As a upshot, strong matters arising during the audit could not be discussed or resolved. No consultation was undertaken on disadvantage loss give away, which was contentious and material. It appears that engagement partner resolved the difference of panorama among the team segment and the job in charge by imposing his decision without satisfying the team member.No avenue was available to the team member to assert his notion. The following Risk Factors do not seem to submit been considered Change in table of Directors and signifi enkindlet change in Management. Valuation of flora and machinery was being done by an employee who whitethorn pass been an expert but his independence was questionable. Sudden change of assessment in the paygrade creates doubts on the reliability of the work done. Informing stock exchanges well-nigh impairment loss, uncertainty on fair value of plant and machinery, issue of right sh atomic number 18s at declined market expense and acquisition of right shares by directors and their associates point to an apparent want of the Board of directors to accumulate WLs shares at low determine. Deficiencies in audit Approach In view of the precautions perceived motive of presenting poor financial position to affect the market price, the representation by the direction as regards impairment of plant and machinery is not a reliable differentiate. Opinion of the internal expert seems to have been i nfluenced by the directors and the guidance. Thus, it should not have been considered as appropriate evidence. Due contemplation was not given to the auditors previous experience and evidences that were already available in previous stratums working paper files. Audit credence on a significant matter was formed without corroborating other evidences. Recommendation An independent valuation expert be appointed to form an opinion on valuation of plant and machinery. If independent valuation supports the opinion of the internal expert, ascertain whether or not valuation done in previous year was erroneous. In occurrence of error in previous years, comparative financial statements be amended after completion of valuation exercise. In case valuation exercise cannot be completed, the audit subject field should contain an emphasis of matter paragraph on significant uncertainty. If independent valuation does not supp ort the opinion of the internal expert, the auditor should Re-assess the risk of fraudulent misstatement by management and those charged with governance. Consider whether misstatement due to fraud involves higher management and those charged with governance, in which case the firm may consider withdrawal from the engagement. Ans. 2 As soon as we come to know most the above stated facts, we should immediately progress to the client and inform them that unless the auditors have signed their makeup on the financial statements, such financial statements go away remain and be deemed unaudited. SECP should be informed roughly the situation Legal opinion should be taken. The auditor may take necessary steps to inform the shareholders either immediately or in the AGM about the possible impact on the financial statements. Ans. 3 (i) Evidence of subsequent recovery of long outstanding debt leave be evaluated. If the evidence of r ecovery is suitable and appropriate, the financial statements will be revised and issued to the shareholders along with a fresh auditors report. In case of variant with the management on this issue, the auditor will issue a qualified opinion and will also take necessary actions to prevent reliance on the previous report. If the evidence is not sufficient or appropriate, the management will be asked to change the directors report. (ii) Reason for decline in sales is a matter of opinion and will have no impact on audit. (iii) The figure presented on graph may be due to typographical mistake, correction of which should be communicated to the users. In case of disagreement with the management an emphasis of matter paragraph will have to be included in the audit report. However, if the figure is correct on the graph, the error in previous period will have to be rectified retrospectively.In case of disagreement opinion will be appropriately qu alified. (iv) The matter of acquisition of a sick unit will be discussed with the management, as it is a material misstatement of fact (although not affecting the financial statements).In case of disagreement, auditor will taste legal opinion. Ans. The implications of the various issues referred to in the question, on the auditor report, are discussed hereunder (i) Failure to observe stock count Ordinarily the auditor is not unavoidable to perform the procedure of observation for obtaining evidence in a review engagement. Analytical procedure will be sufficient in this case. in that location will be no implication on auditors review report. (ii) Exposure to significant exchange rate risk Auditor is not so-called to give any assurance on the enough of the managements risk management activities. Auditor is responsible to assess whether the derivatives, as discussed, have been accounted for and presented concord t o the requirement of the International Financial Reporting amounts. However, if open position casts a significant threat to the viability of the companys business, the auditor may draw the charge of the reader of conclusion report by adding an emphasis of matter paragraph in the report. (iii) Sale of one of the companys set-up to an associated undertaking The information about the sale of the business segment to a related party is necessary for understanding the changes in financial position. Therefore, an explanatory note should be included in the condensed financial statements. Ordinarily the auditor is not required to corroborate the evidence provided by the management. In case management refuses to disclose this information, suitable modification will be considered. (iv) Discontinuation of the practice of using Age Analysis for noisome debts estimation Apparently, bad debt provision is following the diachronic trend. The aud itor is required to persue inquiry and analytically review procedures in a review engagement. If the results of such procedures are satisfactory, then no further procedures are required. Accordingly age analysis for estimating bad debts is not mandatory in this situation. There will be no implication on audit report. (v) Failure to carry out review of subsequent events In a review engagement auditor is not responsible to review subsequent events. Management is inquired about the procedure it has followed to identify subsequent adjusting event. There will be no implication on audit report. Ans. 5 Audit procedure to verify Provision for sales return Apparently, the provision do by the company has no plausible background. The actual returns during the year are Rs. 130 million as against the total sales of Rs. 650 million. If the sales and sales returns are made evenly throughout the year, a plain application of r eturn percentage suggests that the provision should be nearly Rs. 32. 5 million. In the above destiny the auditor should obtain an understanding of the entitys assumptions on which estimate is based. If the basis is considered inappropriate, the auditor should make a revised estimate either on his protest or by using expert opinion.The estimate should be based on manufacturing practice and trend of sales return comparison of industry and companys terms of sale Trend of sales return in the company i. e. sales return with-in first 15 days between 16 to 30 days between 31 45 and so on. Own estimate vigilant on the above assumptions will be compared with managements estimates. If the difference is material, the management will be asked to explain. Subsequent sales returns up to the date of authorization will also provide an evidence about the reasonableness or otherwise of the managements estimate. Ans. 6 (a) Verbal confirmation from loca l Government as regards the resolution of dispute on superior adequacy and price computation of cement, will not be considered as appropriate/sufficient audit evidence. Refusal of written confirmation is a scope boundary and unless other appropriate evidence is available the report will need to be modified. Managements intention to use the auditors report for the purpose of dealing with the local government is beyond the scope of the engagement. Therefore, the auditors report should specify the agreed intended use thereof. Interpretations given in Regulation JKL, 1961 were utilize to form the opinion on compliance relating to minimum list level and price computation. Therefore, the Regulation should also be referred to in the report for better understanding of the assurance. Not renewing performance guarantee is a clear non-compliance which needs to be reported as qualification. Decision to keep the inventory with distributors could not be co nsidered as a non-compliance because these are covered under binding contracts and the purpose of the arrangement is also mentioned in the contract. (b) We have audited Cement moderates compliance with certain covenants of cement supply agreement No. XYZ/2004 dated November 03, 2004 read with Local Regulation JKL 1961, executed between the company and the Local Government. The purpose of the report is to fulfill the condition attached to an application to be filed with the Provincial Government to obtain a cement supply contract. We conducted our audit in accordance with International Standards on Auditing-800 The Independent Auditors Report on Special Purpose Audit Engagement applicable to compliance auditing. The Standard requires that we plan and perform the audit to obtain reasonable assurance as to whether Cement Limited has complied with the agreement referred to in preceding paragraph. An audit ncludes examining appropriate ev idence on a test basis. We believe that our audit provides a reasonable basis for our opinion . We report that We could not directly confirm, from the Local Government, the status of non-compliance of slap-up adequacy and price computation of quick-set cement. The company failed to maintain a performance guarantee with a scheduled bank, which is a violation of the agreement. In our opinion, boot out for the effect on the overall compliance, if any, as might have been determined, had we been able to obtain the confirmation from the Local Government in respect of capital adequacy and price computation of quick-set cement and the non-compliance stated in paragraph (b) above, as of December 31, 2007, the Company was, in all material respects, in compliance with the covenants of price computation, minimum inventory level and other matters related to financial reporting of the agreement referred to in the preceding paragraphs. AUDI TOR Date Address C Views of the management on job fourth dimension It is true that auditors have already reviewed the subject agreement during the audit of the financial statements. However, the review was different in nature as discussed below Materiality was set on the basis of certain values of Materiality was set on the basis of principles agreed at financial statements. the time of engagement. During the audit only those clauses of the agreement wouldIn the given engagement the auditors were required to have been studied which could impact the revenue and obtain assurance about the managements claim of expenditure and risk of loss. compliance with all the clauses which may or may not have significant financial impact on the company. The agreement was among one of the very Since only this agreement was the subject of the auditors large number of documents that could have required repor t, it required far spacious examination. auditors fear.Hence only a general review of the aforementioned(prenominal) was required. Due to these differences the nature and extent of examination of agreement was much larger in this engagement than in audit. Accordingly, considerable time was required to complete the engagement. (d) Appointment of Mr.Sharif Since Mr. Sharif was also the engagement partner on the audit of Cement Ltd. , his appointment for this assignment may result in self review threat. Ans. 7 (a) The matters which should be considered while driveing the assignment and assigning the job to Mr.Umer are as follows Acceptance of engagement thickening acceptance consideration, such as, integrity of management, expertise available in firm etc will be given. Whether the assumptions being used are clearly realistic. Whether the time rig prescribed by the Board of Directors is sufficient . Whether the projected financial statements and auditors report will be appropriate for the intended use. Although the firm is legally allowed to accept the assignment, adequate safeguards should be considered n view of the fact that one of the partners wife had financial interest in the entity and close family relations with the CFO of the company. There should be an agreement with the management that abridged projections must contain a caution for shareholders that for better understanding complete set of prospective financial statements be referred. unattackable should also consider whether it will be able to carry out the engagement with due professional competence even if Mr. Umer is unable to be the engagement partner. Assigning the job to Mr. Umer Since the wife of Mr. Umer has financial interest in the company as a shareholder, Mr. Umer is not expected to carry out the assignment with the level of objectivity required for t he engagement. Therefore, he should not be appointed as engagement partner. (b) We have examined the projection of XYZ Business Segment of Fiber Limited in accordance with the International Standard on Assurance Engagements applicable to the examination of prospective financial information. Management is responsible for the projections including the assumptions set out in set X on which it is based. This projection has been prepared for assuring the viability of the segment referred to in preceding paragraph. As the segment is in development phase the projection has been prepared using a set of assumptions that include hypothetical assumptions about future events and managements action that are not necessarily expected to occur. Consequently, the users are cautioned that the projection may not be appropriate for purposes other than those described above. Based on our examination of the evidence supporting the assumpti ons, nothing has come to our attention which causes us to believe that these assumptions do not provide a reasonable basis for the projection. Further, in our opinion the projection is properly prepared on the basis of the assumptions and is presented in accordance with the International Financial Reporting Standards. Even if the events anticipated under the hypothetical assumptions described above occur, actual results are still potential to be different from the projection since other anticipated events frequently do not occur as expected and the variation may be material. (c) The historical financial statements provide the auditors with the knowledge of companys business and trends and relation that would exist among the elements of financial statements and a yardstick for considering managements assumptions. The auditors also uses historical financial statements to assess whether the prospective financial statements have been prepared on the basis consistent with them. Ans. (i) Judgmental Sampling Advantages Disadvantages As the approach is being used for many years so its well understood and refined by experience. The auditor can bring his judgment and experience into play. No special knowledge of statistics is required. Time saved form non deployment of statistical methods may be spent on carrying out further audit procedures on different areas. Saving of extra resources such as computer soft wares. Selecting samples with large amounts facilitates greater coverage. It is not based on any scientific technique. No quantitative results are obtained. face-to-face bias in the selection of sample is unavoidable. There is no real logic behind the selection of the sample or its size The conclusion reached is commonly vague. (ii) Statistical Sampling Advantages Disadvant ages It is based on scientific techniques Special software is available to help efficient execution The method is impartial and can be defended easily It provides precise mathematical statements about probabilities of being correct The method is efficient as the same level of confidence can be achieved with a relatively smaller sample.Overlarge sample size are not taken The system in different audit firms tend to become standardized It can be used by staff at all levels It lacks flexibility Often several attributes of transactions or documents are tested at the same time Lacks human judgement and more reliance is placed on statistical conclusion As the technique is not always understood, false conclusions may also be drawn. Ans. 9 (a) The following issues are significant in respect of the donation of Rs. 15 million Donations represent 25% of the total sell and administration expenses. Such a huge amount of donation by a company which has already incurred a loss casts serious doubts about the motive behind such donation. Audit procedures to address the issue may involve the following Obtain information about the charitable institution i. e. its name, nature, registration and reputation. inventory possibility of any relationship between the two organizations, their directors/trustees and their spouses and relatives etc. Verify mode of payment i. e. cash, bearer cheque, crossed cheque etc. Verify boon and authorization. Assess the relevance of the donation to the nature of business of the company. (b) Since appropriate business consideration does not seem to be involved, mere approval by the Board would not confirm that the expenditure has been incurred for the purpose of the companys business. If the auditor is unable to satisfy himself on the above issue he will have to qualify the report by stating the br ief facts of the case. using the except for type of qualification, while certifying that the business has been conducted in accordance with the objects of the company. (THE END)