THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
Final/Professional Examination Summer 2003
June 02, 2003
ADVANCED AUDITING (MARKS 100)
[Module ‘E’ Paper E -14] & [PE -1 Paper 2) (3 hours)
Q.1 (a) The role of external auditors in recent corporate failures has been frequently
questioned. Discuss the impact of major audit failures such as “Enron” and
“World Com” on the audit profession. What in your opinion should bethe
response of the profession to enhance public perception about the profession. (10)
(b) The Institute of Chartered Accountants of Pakistan has notified a list of
services which external auditors can perform for their listed external audit
clients.What are those services? (05)
Q.2 (a) Your firm has recently won a new audit of a large manufacturing company.
However, you noted that prior period’s financial statements had not been
audited. You are of the view that for current assets and liabilities and non -current assets and liabilities, you could obtain some audit evidence as part of
the current period’s audit procedures.
As an audit manager, explain your point of view in detail, for the benefit of
your staff.
(06)
(b) As a result of audit of the manufacturing company mentioned above, you
were unable to obtain sufficient appropriate audit evidence on the opening
balance of inventory. You were, however able to obtain sufficient appropriate
evidence with regard to the closing balance of theinventory. You are required
to draft your opinion, including the qualification, if any. Do not write the
whole report but just draft the qualification, if any and opinion paragraph. (05)
Q.3 (a) When is the auditor’s assessment of materiality and a udit risk expected to be
different? Include in your answer the reason for the same together with an
example in support thereof. (06)
(b) Why would the auditor in planning the audit work intentionally set the
acceptable materiality level at a lower level than is intended to be used to
evaluate the results of the audit? (03)
Q.4 (a) What is the responsibility of the external auditor regarding assessment and
disclosure of a change in accounting policy made by his client. (05)
(b) It is often said th at working papers should possess certain characteristics. List
some of these characteristics. (05)
Q.5 You are relaxed that the financial statements of MNOP Corporation have finally
been issued by its Board of Directors together with auditor’s report, w hen, all of a
sudden, the concerned Audit Manager barged in your room to inform you that he
has just become aware of a material fact related to the financial statements of the
MNOP Corporation, which existed at the date of your report and which if known to
you at that date may have caused you to modify your report.
You immediately got on your feet and started wondering about your course of
action.
Describe the course of action you will follow in the above referred situation. (10)
(2)
Q.6 During y our audit of the financial statements of Triple AAA Insurance Company
Limited for the year ended December 31, 2002, you noted that the company had not
complied with the requirements of S.R.O. 938, issued during the current year by the
Securities and Exchan ge Commission of Pakistan, insofar as the valuation of
“available for sale” investments in the financial statements was concerned. The
company had stated such investments at cost, as opposed to valuing these at the
lower of cost or market value (market val ue to be taken as lower if the fall is other
than temporary), as required in the above S.R.O. As a result, you noted that
provision amounting to Rs.131. 036 million required for valuing such investments
on this basis had not been made by the company in thefinancial statements of the
company.
Further, you noted that although the company had made a provision of Rs.28.929
million for claims “Incurred But Not Reported” (IBNR) in the above referred
financial statements, the same fell short by Rs.57.859 million,as a result of which
provision in the required amount of Rs.86.788 million was not made on this
account.
Given the materiality of the amounts involved and their effects on the financial
statements of the Company, you have decided to express qualificationswith regard
to these matters in your report.
Draft qualifications in respect of the above matters in your Report on the financial
statements of the Triple AAA Insurance Company Limited, together with the
related appropriate wording in the opinion paragraph of your Report. Do not
attempt to write the whole report. Draft qualifications and the related wordings of
the opinion paragraph. (10)
Q.7 (a) State the obligations of Chartered Accountants with regard to the
Confidentiality of client’s information or employer’s affairs. (03)
(b) Is Confidentiality only a matter of disclosure of information? (02)
Q.8 Discuss the role of audit committees in the light of the requirements laid down in
the Code of Corporate Governance. (10)
Q.9 Sputnik Loan Company has 100 branch loan offices. Each office has a Manager
and four or five Subordinates, employed by the Manager. Branch Managers prepare
the weekly payroll, including their own salaries, and pay employees from cash on
hand. The employees signs the payroll sheet signifying receipt of his salary. Hours
worked by hourly personnel are inserted in the payroll sheet from time cards
prepared by the employees and approved by the Manager.
The weekly payroll sheets are sent to the Head Office along with other accounting
statements and reports. The Head Office compiles employees earnings records and
prepares all tax salary reports from the weekly payroll sheets.
Salaries are established by Head Office job evaluations schedules. Salary
adjustments, promotions and transfers of full time employees are approved by a
Head Office salary committee based upon the recommendations of Branch
Managers and Area Supervisors. Branch Managers advise the salary committee of
new full - time employees and terminations. Part- time and temporary employees are
hired without referral to the salary committee.
(a) Based upon your review of the above referred payroll system, how
might payroll funds be diverted?
(b) Prepare a payroll audit program to be used in the home office to audit
the branch office payrolls of the Sputnik loan company.
(08)
(12)
(THE END)
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN
Final Examination Summer 2003
June 03, 2003
ADVANCED ACCOUNTING & FINANCIAL REPORTING (MARKS 100)
Module ‘E’ Paper E -15 (3 hours)
Q.1 Following is the Balance Sheet and an extract from the Profit and Loss account of A Limited for the
year ended June 30, 2002.
BALANCE SHEET
2002 2001
Rupees Rupees
Share capital 2,565,000 2,565,000
Capital reserve 160,000 160,000
Revenue reserves 6,144,100 5,837,800
________ ________
8,869,100 8,562,800
Long term loans 744,200 1,304,700
Deferred taxation 299,000 474,000
Current liabilities
Current maturity of long terms loans 536,100 545,000
Short term finance 1,650,000 0
Creditor, accrued and other liabilities 2,359,800 1,320,300
Taxation [ net of advance tax] 511,900 509,900
Proposed dividend 513,000 1,026,000
5,570,800 3,401,200
_________ _________
15,483,100 13,742,700
========= =========
Fixed assets 2,307,500 3,072,800
Capital work in progress 12,200 5,000
Long term Investment 3,406,300 3,211,800
Long term loans and advances 34,000 27,100
Long term deposit, prepayments and
deferred costs 161,500 159,200
Current Assets
Stores and spares 1,242,700 1,144,900
Stock in trade 68,000 140,800
Trade debts 769,100 704,900
Loans, advances, deposits,
Prepayments and other receivables
990,000 520,000
Short term investments 4,825,000 3,485,400
Cash and bank balances 1,666,800 1,270,800
9,561,600 7,266,800
________ ________
15,483,100 13,742,700
======== ========
(2)
EXTRACTSFROM PROFIT AND LOSS ACCOUNT
Rupees
Profit before financial charges and
other income 3,757,100
Financial charges 333,100
________
3,424,000
Other Income 1,089,600
Other charges (323,700)
_________
Net profit before tax 4,189,900
Provision for taxation 1,546,000
_________
Profit after tax 2,643,900
Unappropriated profit b/f 337,800
_________
2,981,700
Appropriation
Transfer to general reserve 700,000
Interim dividend 1,539,000
Final dividend 513,000
2,752,000
_________
229,700
========
During the year loss of Rs.285,600 arising from valuation of investment in associated undertaking at
fair market value was debited directly to revenue reserve account.
Short-term finance is in the nature of overdraft and is payable on demand.
Creditors, accrued and other liabilities include following:
2002 2001
Accrued markup on loans 57,200 63,000
Unclaimed dividend 550,600 52,900
Depreciation for the year was Rs.889,600. During the year assets having book value of Rs.3,900
were sold for Rs.10,300
Other income include exchange gain on foreign currency investments of Rs.134,600, exchange gain
on foreign currency deposits with bank Rs.3,000, income on loans and investments including
markup charged to associated undertaking Rs.924,200.
Duri ng the year provision of Rs.41,000 was made for slow moving and obsol ete spares for the first
time i n the history of the company.
Loan advances deposits and prepayments include following:
2002 2001
Due from associated undertakings 702,400 212,700
Accrued income on investment and
bank deposits 206,600 196,100
(3)
Short term investment include Pak rupees Bonds purchased 15 days prior to year end with following
maturities
2002 2001
Maturing on July 15 250,000 200,000
Maturing on September 30 200,000 300,000
Maturing on October 31 200,000 100,000
Financial charges include exchange gain of Rs.23,300 on long terms loans obtained by the
company.
Deferred cost amortized during the year was Rs.68,500
Required:
Prepare Cash F lowStatement providing al l the information /notes required under IAS 7 (20)
Q. 2 a) F Limited has branches in many countries. Whilstpreparing the annual accounts for
the year ended June 30, 2002the accountant of the company observed the
following:
I. UK branch has an inventory as on June 30, 2002valued at Pound Sterling
1,000,000. The exchange rate of one pound sterling on the date of purchase of
inventory w as Rs. 90 and on June 30, 2002was Rs. 80. The net realizable value of
inventory as on June 30,2002was pound sterling 1,100,000.
II. US branch has an inventory as on June 30, 2002valued at US $ 1,000,000. The
exchange rate of one US dollar on the date of purchase of inventory was Rs. 60 and
on June 30, 2002 was Rs.65. The net realizable valueof inventory as on June
30,2002was US $ 950,000. The branch has recorded the inventory at net realizable
value in its financial statements.
You are required to explain how the above positions shall be reflected in the financial statements of
the branch and the financial statements of F Limited. (06)
b) Financial statements ofLBS Limited showing following financial i nstruments:
I. Investment in Term Finance Certificates quoted on stock exchanges carrying
markup @ 17% per annum payable semiannually.
II. Long terms loans obtained from a financial institution carrying markup @ 2%
above the State Bank of Pakistan’s discount rate.
III. Foreign currency long-term loans provided by the company to one of its associated
concern carrying interest @ 2 %above London Inter Bank Market Rate.(LIBOR)
You are required to classify the above financial instrument into following financial risk sas required
under IAS 32 (Financial Instrument: Disclosure and Presentation)
1. Exposed to interest rate price risk
2. Exposed to interest rate cash flow risk
3. Exposed to currency risk (06)
(4)
Q.3 Foreign investment Ltd., has “Investment Held for Trading” in 1,000 shares of Y Ltd. which was
purchased at Rs.20. The fair value of shares on Jan 01, 2002 was Rs.30 and on Dec 31, 2002was
Rs.35. The shares were indicated at cost in the accounts for the year ending Dec 31, 2001. The
shares weresold at Rs.32 on March 27, 2003.
Show the workingin the boo ks for the year ending Dec 31, 2002and on disposal in accordance with
IAS 39. Explain the term “Held for Trading” and describe the disclosure in the financial statements
for the year ending Dec 31, 2002. (10)
Q.4 Foreign Investment Ltd., owns a building which is given on rent. The historical cost in the
financial statement for the year ending December 31, 2000 is included in the f ixed assets at Rs.30
million. The fair value of the plaza on Jan 01, 2001 was Rs.300 million and on December 31, 2001
Rs.302 million
Show the working byadopting fair value model under IAS 40. Indicate how these transactions
would be disclosed in the financial statements for the year ending Dec 31, 2001. (10)
Q.5 Southern Ltd has recently decided to introduce a Non-Contributory Defined Benefit Pension
Scheme to cover all of its full-time employees. A separate pension fund has now been set up.
The following information has been obtained from various sources including the results of actuarial
calculations.
(i) on the recommendations of the actuary, the company intends to make payments to trustees
in respect of regular pension costs. Payments to be made on December 31, 2000 and 2001
amount to Rs 350,000 and Rs 410,000 respectively.
(ii) in addition , the company agrees to make four annual payments of Rs 200,000 each year
(payments to be made on December 31, 2000, 2001, 2002 and 2003 respectively). These
payments relate to retroactive changes in benefi ts (past service costs) as no pension scheme
previously existed.
You ascertain that the expected average remaining service lives of employees in the scheme is ten
years.
Required:
(a) State the main assumptions required in order to determine an appropri ate charge to profit
and loss account under a Defined Benefit Scheme. (05 )
(b) Explain and justify the treatment in respect of the past service costs referred to
in (ii ) above. (04)
(c) Provide therelevant extracts from the balance sheets for 2000 and 2001. (04)
(5)
Q.6 It was agreed that, with effect from 1 January 2001, Nexus Ltd would acquire the whole of the net
assets of Forte Ltd and the fixed assets, stocks and goodwill of Motiwala & Palkiwala, a
partnership, by the issue of ordinary shares of Rs 10 each fully paid at their then market value of Rs
12.50 per share.
In computing the number of shares to be issued for each business:
(a) The fixed assets were to be taken at the value placed on them by an independent valuer.
(b ) Stocks were to be taken at book value subject to a deduction of Rs. 2,000 from the stocks of
Motiwala & Palkiwala for obsolete stock.
(c) In the case of Forte Ltd, debtors, credit ors and balance at bank were to be taken at book
value less Rs 3,000 in respect of a bad debts.
(d ) Goodwill was to be valued at two years’ purchase of the average profits of the last three
years subject only to the following adjustments:
In the case of Forte Ltd:
(i) The directors’ remuneration charged in each year was to be reduced by Rs 5000.
(ii) The depreciation charged in each year on ‘other fixed assets’ was to be substituted
with depreciation on those assets calculated at 10% of cost on a straightline basis.
In the case of Motiwala & Palkiwala:
(i) Notional salaries of Rs 10,000 pa, in total, are to be charged for the partners.
(ii) Rs 4,000, being an exceptional items of expense, was to be added back to the
profits in the year to 31 December 2000.
The summarized balance sheets of the three businesses at 31December 2000were:
Nexus
Ltd
Rs
Forte
Ltd
Rs
Motiwala &
Palkiwala
Rs
Freehold premises at cost 100,000 36,000 24,000
Other fixed assets at costs less depreciation 316,000 74,000 40,000
Stocks at cost 270,000 36,000 22,000
Debtors 246,000 86,000 42,000
Balance at bank 42,000 24,000 11,000
974,000 256,000 139,000
Ordinary shares of Rs 10 each, fully paid 600,000 100,000
Capital account:
Motiwala 61,000
Palkiwala 22,000
Profit and loss account 244,000 52,000
Creditors 130,000 104,000 56,000
974,000 256,000 139,000
(6 )
You ascertain:
Nexus
Ltd
Rs
Forte
Ltd
Rs
Motiwala
&
Palkiwala
Rs
(a) The depreciation deducted from the cost of
other fixed assets at 31 December 2000 124,000 50,000 20,000
(b) The independent valuations at 31 Dec. 2000
were:
Freehold premises 120,000 50,000
Other fixed assets 66,000 42,000
(c) The profits for the last three years ending
on:
31 Dec. 1998 18,000 18,000
31 Dec. 1999 24,212 13,000
31 Dec. 2000 26,200 19,000
after charging depreciation amounting to
(fo r the years ending):
31 Dec. 1998 10,500
31 Dec. 1999 8,916
31 Dec. 2000 9,072
(d) The other fixed assets at 31 Dec. 2000at
cost were:
before 31 Dec. 1997 104,000
purchased 1 Jan. 1999 20,000
(e) Forte Ltd has disposed of ‘other fixed assets’ on 1 Jan. 2000which had cost Rs 16,000 on
1 Jan. 1997.
Required:
(a) a statement showing the number of shares to be issued by Nexus Ltd to pay for the
acquisition; and
(b) the balan ce sheet, as far as the required information is available, of Nexus Ltd on 1 Jan.
2001after giving effect to the issue of shares for the acquisitions. (21)
Q.7 Kamal Associates won first contract of the financial y ear on April 1, 2001for destruction of a group
of ten buildings of similar size and technical specification for a price of Rs 2 million. The work was
to be completed within six months of an award of the contract failing that a penalty of 6% per
annum of the contract price would be paid to the customer for the delay.
Following information w as available as at June 30, 2001; the date on which Kamal Associates close
their financial year. On that date five buildings were demolished.
(7)
Site labour Rs 2 00,000; site supervision Rs 150,000; material used Rs 250,000; depreciation on
plant used at site Rs 100,000; general and administration costs Rs 50,000; research and development
costs Rs 25,000; selling costs Rs 25,000: Other construction overheads Rs 200,000.
The management of Kamal Associates compared above information with budgeted cost of the
contract and was satisfied with performance except that it would require four months to complete
the rest of the contract. Due to delay in completion and inflati on, cost over run would be as follows:
Increase in wages of site labour by 10%. Escalation in material cost by 20%. Other construction
overhead would increase by 20%. Research and development cost to go down by Rs 5,000.
Subsequent to June 30, 2001Kamal Associates was notified of a claim of Rs 50,000 from third
party for damage done to a building next to the one demolished by Kamal Associates. Kamal
Associates accepted the claim.
Required :
Prepare contract account clearly indicating profit earned orloss incurred as at the close of financial
year on June 30, 2001in accordance with IAS 11 (revised 1993) Construction Contracts. (14)
(THE END)
