Management Letter, Audit Risk, Appointment As Auditor-Advanced Auditing and Taxation-Exam Paper, Exams of Business Taxation and Tax Management

Download Management Letter, Audit Risk, Appointment As Auditor-Advanced Auditing and Taxation-Exam Paper and more Exams Business Taxation and Tax Management in PDF only on Docsity! ADVANCED AUDITING (MARKS 100) (3 hours) Q.1 Sukoon Limited is engaged in manufacturing and sale of office equipments. It has appointed you in place of XYZ & Company for the audit of financial statements for the year ended June 30, 2007. During the audit you noted the following: ° An employee of the company, responsible for after-sales-services, misappropriated cash which he recovered from the customers without raising proper invoices. The amounts were small and much below the materiality level. ° During the last year (ended on June 30, 2006), the middle management in connivance with lower staff booked a sale of material amount which actually pertained to the current year. The higher management has issued warning letters to the concerned employees but is reluctant to take any further action as the company has not suffered any losses. XYZ & Company has given an unmodified report on the previous year’s financial statements. Required: (a) Describe how each of the above situations will impact the following: (i) Assessment of risk and audit procedures; (03) (ii) Communication with management and with those charged with governance. (04) (b) As a result of material misstatement in sales of previous year, management has agreed on restatement of the corresponding figures in current year’s financial statements. What would be the impact on the auditors’ report in this case? (03) (c) Explain the difference between corresponding figures and comparative financial statements. (04) Q.2 As the senior in-charge of audit of a listed company, you noted the following matters: (i) Some of the outstanding balances are in excess of the credit limits. (ii) Certain sales tax invoices were not signed by the preparer and the reviewer. (iii) IT Steering committee has not been constituted. However, major decisions regarding IT are discussed in the Management Committee as well as the Board meetings. (iv) The company does not have an approved Disaster Recovery Plan. Required: Prepare a note for inclusion in the Management Letter, covering your observations in respect of the above, the implications thereof and your recommendations. (10) Q.3 Maria Khan, an audit supervisor, has been deputed on an audit client as audit senior of the team attending stock taking exercise. The value of stock at year end is Rs. 250 million and total assets are worth Rs. 400 million. During the stock taking she has come across an item of raw material packed in sealed containers. The containers were few in number but of high value; the total cost being Rs. 24.0 million. She has been informed that the raw material will be used in the production of a very specialized product which the client has recently developed. The raw material needs specialized storage facilities and the containers are required to be opened in specialized conditions. docsity.com (2) Management has refused to open the sealed pack containers for physical verification. The field staff has counted the containers and satisfied themselves that raw material as per records was physically available. Maria has approached you, as audit manager, for advice as to what needs to be done. Required: What would be your advice to Maria about the procedures that may be undertaken to reduce the audit risk to an acceptably low level. (08) Q.4 Your firm is a member of an internationally recognized network of accountancy firms and provides wide range of professional services. A large multinational company South Union wishes to have a business presence in Pakistan. Having completed the necessary regulatory formalities, the management of the company has approached your firm for appointment as auditors. The management has also requested you to provide the following services in the current year: (i) Carry out market search to identify the parties engaged in distribution business. The fee will be dependent on the eventual appointment of the distributor by the management; (ii) Recruit professionals in the position of Head of finance and Internal Audit; (iii) Provide a general ledger package that has been developed by your firm. Your firm has decided to accept the appointment as auditor but has refused to carry out the other services. Required: Write a letter to the management, briefly explaining the reasons for refusal to accept the other assignments. (07) Q.5 Rufi, a practicing member of the Institute of Chartered Accountants of Pakistan, is engaged in compilation of financial statements of Peshawar Branch of Gamma Limited, a furniture manufacturer and supplier. These will be incorporated in the consolidated financial statements of the company. The fact that the financial statements of the branch have been compiled by Rufi will be mentioned in the annual report of the company. During the assignment he noticed the following: (i) The management had ignored an expert’s opinion indicating impairment in value of tangible fixed assets and these have been stated at cost less depreciation; (ii) It was not possible to verify sales made to related parties, as management had not provided the relevant details; (iii) The management has given a representation that all spares are in good condition. However, during discussion with one of the employees it was revealed that some spares of material amount were damaged and were of no value at the balance sheet date. Rufi is about to finish the assignment and intends to issue a report on the compiled financial statements. Management wishes to present above financial statements to their auditors without any adjustment. Required: (a) How should Rufi deal with the issues referred to in para (i), (ii) and (iii) as given above? (05) (b) Why do you think Rufi is inclined to issue a report? Assuming that Rufi is able to resolve the above issues appropriately, prepare a draft report that Rufi may submit to the management. (08) docsity.com