THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS COMMENTS

SUBJECT SESSION
Advanced Auditing Final Examination Winter 2015

General

The performance in this attempt was above average. The result could have been much
better had the students been able to perform well in all questions. In fact, performance in
questions which pertained to those areas which are not tested frequently i.e. question
numbers 2 and 5 was quite poor. This was a clear indication of selective study which
should be avoided, in order to be successful.

Question-wise comments

Question 1

This question was designed to test the students ability to identify relevant audit risks
under the given situation which is a very important audit step during the planning phase.
The overall response was average. Generally, the students were able to specify the more
apparent risks such as going concern, impairment of plant and machinery, failure to make
adequate provision against stock, recognition of deferred tax assets and foreign currency
risks. However, majority of the students were unable to mention the risks such as risk of
fraud in revenue recognition and management over-ride of controls. Further, since the
requirement is to discuss the issue, it is important that in addition to the identification of
risk, the students should also specify why they consider a particular issue to be a risk. For
example, while discussing the going concern issue, many candidates gave just one or two
insignificant reasons which did not seem enough for raising the going concern issue.
Further, a large number of candidates did not approach the question on a composite basis
i.e. preferred to disintegrate the entity level issues into divisions/segments resulting in
duplication of response and deviation from the entity level audit risks.

Question 2(a)

According to the scenario in this question, the regulator had decided to investigate the
affairs of a company and in this regard, a firm was required to submit a request for
proposal whereas the requirement for the candidates was to prepare a paragraph
describing the scope of work (in the given circumstances). It was probably the most under
scoring question of this attempt. Most of the students were unable to understand the
requirement and produced the standard wording of an agreed upon procedures
engagement letter whereas the requirement was to write only the scope of the
investigation assignment/proposal and that too with relevance to the given situation.

Question 2(b)

This part of question was also not appropriately addressed by majority of the candidates.
Either they lacked the basic knowledge about governance matters or they did not read the
question properly. The question clearly stated that the entity under consideration was a

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listed company and therefore the approach should have been devised accordingly. Further,
the discussion on the role of auditor was confined to the extent of independence violation
with very little emphasis on how non-compliances were reported or attended to by the
external auditor and how completeness of transactions with related party was ensured.
Further, some students made sweeping statements that composition of the board is in non-
compliance of CCG but did not explain the reasons thereof.

In sub-part (ii), many students misunderstood the basic concept that the question required
evaluating the role of auditors rather than them being the auditors in the given scenario.
Based on this misunderstanding, many students answered what they would do as auditors
which was not relevant.

Question 3

This question required the candidates to give their views on three outlined situations in the
light of the principle of independence applicable to an auditor. Comments on each of the
three parts are provided below:

Question 3(a)

The performance in this part was average. Many students lost marks by mentioning only
that partner should dispose of shares immediately or firm should not accept the
assignment. They ignored the fact that since 85% of the work had been completed, if those
charged with governance request the auditor to continue with the engagement then the
auditor could have continued with his appointment by applying certain safeguards.
Further, most students who recommended immediate disposal of shares, did not consider
that in the question it was specifically stated that the shares can not readily be sold.
Further, many students kept referring to Companies Ordinance which was not relevant.

Question 3(b)

This aspect of the code was tested for the first time and therefore either the students
scored very high marks or no marks at all. Most of the students seemed unaware of the
given type of situation and produced wayward answers.

Question 3(c)

This was a relatively straightforward question from the code of ethics and most of the
students were able to secure good marks.

Question 4(a)

This part of the question related to the controls that an entity would employ where it used
internal valuers for determining fair value of investment properties. A large number of the
candidates did not perceive the question correctly and restricted their response only to the
assessment of the expert, his qualification and set of skills. They failed to specify the
controls that are employed in such situations such as controls over the development and
use of evaluation model, segregation of duties, completeness, relevance and accuracy of
data, etc. Further, many candidates discussed totally irrelevant things such as:

Inherent complexities of the fair value estimates;

Complexities involved in hiring an external valuer.
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Question 4(b)

In this part of the question the candidates were required to draft a basis of modification
paragraph. The overall response was average. Many candidates produced the opinion
paragraph instead of basis of modification paragraph. Many candidates took the view that
the situation gave rise to limitation of scope which was not correct because according to
the situation, the auditor had carried out the necessary audit steps. Further, reference to the
note to the financial statements was missing in many cases.

Question 5(a)

In this part of the question, the candidates were required to evaluate three different
situations and explain the steps that the auditor would be required to take in each case.
Comments on each situation are given below:

Question 5(a)(i)

According to the given situation, foreign operations of a company had suffered severely
on account of various external factors and the foreign operations constituted 40% of the
companys operations.

Considering the limited information that was available, there were two key issues that
should have been addressed i.e. possibility of impairment of foreign operations or
possibility of going concern issue. The performance was poor as majority of the students
only discussed the going concern issue which was less likely of the two possibilities.

Question 5(a)(ii)

This sub-part pertained to a situation whereby certain management functions had been
outsourced and were being performed at the service providers premises. The candidates
who had good grasp over the concept of service organization were able to give a
structured and precise answer which yielded them good marks. However, a number of
candidates responded by identifying the possible risks rather than specifying the auditors
response to the associated risks.

Question 5(a)(iii)

A large number of candidates correctly outlined the importance of external / third party
evidence and importance of its direct receipt by the auditor. However, a large number of
the candidates did not appreciate that if auditor is also copied in the original mail, along
with the client, the said email may also be acceptable for the auditor.

Question 5(b)

According to the situation given in this part of the question, the auditor had noted a
significant increase in the number of journal entries near to year-end although the
managements explanation thereof appeared reasonable. The requirement was divided into
two sub-parts as discussed below:

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Question 5(b)(i)

The requirement was to specify the characteristics of journal entries that may be indicative
of fraudulent adjustments. The performance in this part was good. However, many
students described procedures for verification of journal entries instead.

Question 5(b)(ii)

In this sub-part the candidates were required to discuss how they would deal with the
given issue. The overall response was average. Most of the candidates did not explain that
irrespective of the auditor's assessment regarding managements over-ride of controls, the
auditor should test the appropriateness of journal entries recorded in the general ledger.
Further, many students failed to identify the risk of management override of controls and
its implications, altogether.

Question 6

This was a straightforward question where the candidates were required to state the key
matters which the auditor of a holding company communicates to the component auditors
(ISA 600). This was a high scoring questions and a large number of students were able to
secure full marks also.

(THE END)

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