Advanced Auditing: Case Studies on Impairment Losses, Financial Discrepancies, and Complia, Exams of Auditing

Download Advanced Auditing: Case Studies on Impairment Losses, Financial Discrepancies, and Complia and more Exams Auditing in PDF only on Docsity! ADVANCED AUDITING (MARKS 100) (3 hours) Q.1 Wood Limited (WL) is a listed company. SMSF Chartered Accountants have been the auditors of the company for the last three years. In November 2007, with substantial change in shareholding a new Board of Directors was elected. The new Board made significant changes in the senior management within a week of taking charge. On February 10, 2008, after completing the field work, the auditors sent the financial statements alongwith initialed draft audit report, to WL’s board for its approval. On the same date, a senior partner was assigned to carry out an engagement quality control review. During the review he noted the following: (i) Management representation letter contains a paragraph that “We have taken charge from the previous management on 28 November 2007 and after taking charge, we commenced valuation exercise in respect of plant and machinery in various factories owned by WL. To date, thirty percent of plant and machinery has been valued. The exercise carried out so far shows that fair value of the assets is 20% less than the carrying value, for which an impairment loss has been accounted for. In view of this situation, we are not confident about the fair value of the plant and machinery as presented in the financial statements.” (ii) The valuation is being carried out by the production manager who is a qualified engineer. He had been responsible for year-end valuation review for many years. This is the first time when he has reported an impairment. (iii) The issue of impairment loss, which is of material amount, was a contentious matter between a team member and the job in charge. On inquiry Mr. Manzoor Nazar, the engagement partner, informed that he had accepted the job in charge’s view point. (iv) This matter was also reported to the stock exchanges on December 5, 2007 resulting in a sharp decline in share prices of WL, which otherwise had a good price-growth history. (v) Subsequent to year end, WL has been awarded a very profitable long-term supply contract by Timber Limited (TL), a reputable industrial undertaking. No direct confirmation was obtained from TL. (vi) WL announced a 100% right issue in December 2007 at market price. Because of discouraging response from the minority shareholders, the directors and their associates purchased a large number of right letters from the open market. (vii) The firm’s record reveals that Mr. Manzoor had applied twice for a job in WL during last one and half years. However, there is no current information about his intention. Required: Write a review report on behalf of the reviewer indicating the deficiencies noted in the audit as well as the policies of the firm and submit your recommendations. (16) docsity.com (2) Q.2 You are the engagement partner of a listed company. After completing audit field work, you have provided the draft audit report alongwith the draft financial statements prepared by management to the Board of Directors with a cover letter stating that the firm will issue its audit report after the Board has approved the financial statements. Your manager has brought to your knowledge that last week the client has published its annual report including Financial Statements and audit report (which had not been signed by the firm). Notice of Annual General Meeting (AGM) has also been published in the newspapers. Required: Explain what course of action should the firm take in the above situation. (06) Q.3 On reviewing the published financial statements of RRK Limited, their auditors, Ahmad Mobeen and Company, Chartered Accountants, noted the following: (i) It has been mentioned in the directors’ report that a material amount which was provided as a bad debt had been recovered after year end. (ii) Director’s report states that decline in sales, was due to general economic conditions. However, the auditors’ feel that it was due to inappropriate strategies adopted by the management. (iii) A graph in the published report depicted the value of last year’s inventory at Rs. 326 million, which according to the corresponding figures given in audited financial statements amounted to Rs. 250 million. (iv) Directors’ report stated that negotiations for expansion of production facilities by acquiring a sick unit had been finalized, whereas the auditors have definite information that the company could not strike the deal. Required: Explain how the auditor should resolve each of the above issues. What steps would the auditor need to take in case the client does not agree with his recommendations? (10) Q.4 You are the audit engagement partner of a listed company, Steel Limited (SL). The firm is currently in the process of completing limited scope review of SL’s interim financial statements for the half year ended December 31, 2007. The audit team has recently concluded their work with following findings for your decision: (i) Inventory is a significant item of the balance sheet but the auditor was not asked to attend the stock count at the end of the period. Consequently, the audit team relied on the count communicated by the management. (ii) SL has executed many contracts with its customers for long term future deliveries at different prices, amounting to Rs. 1,200 million. To avoid loss on account of price fluctuation, short term futures had been bought in international market against future deliveries valuing Rs. 300 million only. Such futures are carried-over on maturity. Remaining deliveries have been left open. (iii) A set up of the company in Lahore having carrying value of Rs. 235 million has been sold to an associated undertaking for Rs. 240 million. The minutes of the Board of Directors show that the transaction was carried out at an arm’s length price. No explanatory note has been given in the financial statements in this regard. (iv) As a percentage of total debts the provision for bad debts are in accordance with the previous history of the company. However, due to time constraints the practice of using age-analysis of debtors has not been used this time. (v) Due to time constraints the review of subsequent event was not carried out by the audit team. Required: Discuss the above issues and their implications on your report. (11) docsity.com