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

string(122) " out review of subsequent events: | | | | |In a review engagement auditor is not responsible to review subsequent events\." |Ans. 1 |(a) |Quality Control Issues: | | | | |While assigning the audit work to Mr. Manzoor Nazar, the firm ignored the threat which existed due to his earlier | | | | |intention to join WL as an employee. We will write a custom essay sample on In the Name of Allah, the Most Beneficient and the Most Merciful or any similar topic only for you Order Now | | | | |Mr. Manzoor also failed to update the firm about this matter, due to which firm could not ascertain the self-interest | | | | |threat to independence and objectivity of the engagement partner. | | | |Engagement partner did not ensure the engagement reviewer had been appointed. As a result, significant matters arising | | | | |during the audit could not be discussed or resolved. | | | | |No consultation was undertaken on impairment loss issue, which was contentious and material. | | | | |It appears that engagement partner resolved the difference of opinion between the team member 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 | | | | |opinion. | | | | | | | | | |The following Risk Factors do not seem to have been considered: | | | | |Change in Board of Directors and significant change in Management. | | | | |Valuation of plant and machinery was being done by an employee who may have been an expert but his independence was | | | | |questionable. | | | |Sudden change of assessment in the valuation creates doubts on the reliability of the work done. | | | | |Informing stock exchanges about impairment loss, uncertainty on fair value of plant and machinery, issue of right | | | | |shares at declined market price and acquisition of right shares by directors and their associates point to an apparent | | | | |motive of the Board of directors to accumulate WL’s shares at low price. | | | | | | |` | |Deficiencies in Audit Approach: | | | | |In view of the management’s perceived motive of presenting poor financial position to affect the market price, the | | | | |representation by the management as regards impairment of plant and machinery is not a reliable evidence. | | | |Opinion of the internal expert seems to have been influenced by the directors and the management. Thus, it should not | | | | |have been considered as appropriate evidence. | | | | |Due consideration was not given to the auditor’s previous knowledge and evidences that were already available in | | | | |previous year’s working paper files. | | | |Audit opinion 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 case of error in previous years, comparative financial statements be amended after compl etion of valuation exercise. | | | | | | | | | |In case valuation exercise cannot be completed, the audit report should contain an emphasis of matter paragraph on | | | | |significant uncertainty. | | | | | | | | |If independent valuation does not support 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 about the above stated facts, we should immediately contact the client and inform them that unless | | | |the auditors have signed their report on the financial statements, such financial statements will remain and be deemed | | | |unaudited. | | | | | | |SECP should be informed about 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 will be evaluated. | | | | |If the evidence of recovery is sufficient and appropriate, the financial statements will be revised and issued to the | | | | |shareholders along with a fresh auditors’ report. | | | |In case of disagreement 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 director’s 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 mistak e, 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 qualified. | | | | | | | | |(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 seek 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 required to perform the procedure of observation for obtaining evidence in a review | | | | |engagement. | | | | |Analytical procedure will be sufficient in this case. | | | |There will be no implication on auditor’s review report. | | | | | | | | |(ii) |Exposure to significant exchange rate risk: | | | | |Auditor is not supposed to give any assurance on the adequacy of the management’s risk management activities. | | | |Auditor is responsible to assess whether the derivatives, as discussed, have been accounted for and presented | | | | |according to the requirement of the International Financial Reporting Standards. | | | | |However, if open position casts a significant threat to t he viability of the company’s business, the auditor may draw | | | | |the attention of the reader of conclusion report by adding an emphasis of matter paragraph in the report. | | | | | | | | | | | | |(iii) |Sale of one of the company’s 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 bad debts estimation: | | | | |Apparently, bad debt provision is following the historical trend. The auditor is required to persue inquiry and | | | | |analytically re view 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. You read "In the Name of Allah, the Most Beneficient and the Most Merciful" in category "Papers" | | | |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 made by the company has no plausible basis. | | |The actual returns during the year are Rs. 130 million as against the total sales of Rs. 6 50 million. If the sales and sales | | | |returns are made evenly throughout the year, a plain application of return percentage suggests that the provision should be | | | |nearly Rs. 32. 5 million. | | | |In the above circumstances the auditor should obtain an understanding of the entity’s assumptions on which estimate is based. | | | |If the basis is considered inappropriate, the auditor should make a revised estimate either on his own or by using expert | | | |opinion. The estimate should be based on: | | | |industry practice and trend of sales return; | | | |comparison of industry and company’s 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 prepared on the above assumptions will be compared with management’s 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 management’s estimate. | | | | | | | | | | |Ans. 6 |(a) |Verbal confirmation from Local Government as regards the resolution of dispute on capital adequacy and price | | | | |computation of cement, will not be considered as appropriate/sufficient audit evidence. | | | | |Refusal of written confirmation is a scope limitation and unless other appropriate evidence i s available the report | | | | |will need to be modified. | | | |Management’s intention to use the auditor’s report for the purpose of dealing with the local government is beyond the| | | | |scope of the engagement. Therefore, the auditor’s report should specify the agreed intended use thereof. | | | | |Interpretations given in Regulation JKL, 1961 were used to form the opinion on compliance relating to minimum | | | | |inventory 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 considered 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 Limit ed’s 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 â€Å"The Independent Auditor’s 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 evidence | | | | |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 capital 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, except 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. | | | | | | | | |AUDITOR | | | | |Date | | | | |Address | | | | | | | | |C |Views of the management on job time: | | | | |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 would|In the given engagement the auditors were required to | | | | |have been studied which could impact the revenue and |obtain assurance about the management’s 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 auditor’s| | | | |large number of documents that could have required |report, it required far extensive examination. | | | | |auditors’ attention. Hence only a general review of the | | | | | |same 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 accepting the assignment and assigning the job to Mr. Umer are as | | | | |follows: | | | | | | | | | |Acceptance of engagement: | | | | |Client 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 limit prescribed by the Board of Directors is sufficient. | | | | |Whether the projected financial statements and auditor’s 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. | | | | |Firm 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 the 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 Note X on which it is based. | | | | | | | | |This projection has been prepared for assuring the viability of the segment referred to in preceding p aragraph. 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 management’s 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 assumptions, 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 | | | | |likely 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 company’s business and trends and relation that would exist among the elements of financial | | | | |statements; and | | | | |a yardstick for considering management’s 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. | | | | |Personal 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 usually vague. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |(ii) |Statistical Sampling | | | | |Advantages | | | | |Disadvantages | | | | | | | | | |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 selling 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. it s name, nature, registration and reputation. | | | | |Scrutinize 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 approval 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 company’s business. | | | | | | | | | |If the auditor is unable to satisfy himself on the above issue he will have to qualify the report by: | | | | |stating the brief facts of the case. | | | | |using the â€Å"except for† type of qualification, while certifying that the business has been conducted in accordance | | | | |with the objects of the company. | | (TH E END) How to cite In the Name of Allah, the Most Beneficient and the Most Merciful, Papers