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ICMA.

EXTRA ATTEMPT, MAY 2014 EXAMINATIONS


Monday, the 26th May 2014
RISK MANAGEMENT AND AUDIT
Pakistan (LA-502)
SEMESTER-5

Time Allowed: 03 Hours Maximum Marks: 100 Roll No.:

(i) Attempt all questions.


(ii) Answers must be neat, relevant and brief.
(iii) In marking the question paper, the examiners take into account clarity of exposition, logic of arguments,
effective presentation and language.
(iv) Read the instructions printed inside the top cover of answer script CAREFULLY before attempting the paper.
(v) DO NOT write your Name, Reg. No. or Roll No., or any irrelevant information inside the answer script.
(vi) Question Paper must be returned to invigilator before leaving the examination hall.
Marks

Q. 1 Suppose you have been deputed for carrying out audit of Unique Electric (Private) Limited
(UEL). The company is engaged in manufacturing and sales of specially designed heavy duty
diesel generators of different capacities mostly used by industrial units and commercial
buildings. The technology used in manufacturing is somewhat common; however, some
modifications are made in generators as per the specifications and requirements of the
customers.
This is a family run business, owned by two brothers Mr. Waseem, an Electrical Engineer and
Mr. Naseem, an MBA with specialization in marketing and sales. Both are the directors of the
company having equal shareholding. Mr. Waseem being the elder brother occupies the
position of Chief Executive Officer (CEO) as well. None of the two brothers have any finance
background. The Chief Financial Officer (CFO) is a qualified Chartered Accountant of your
firm. Both the directors are also involved in other business interests/ activities and a
considerable reliance is placed on CFO for all the financial matters due to his competence.
After receiving the orders from customers, the company takes an average 4 to 6 weeks time
for manufacturing and delivery of each generator to the customers. Most of the parts used in
the generators are imported from China, while some parts are available locally. The company
provides one year warranty for each generator and appropriate provisions are required to be
made in the accounts for expected warranty claims and related expenses/ cost of the sold
generators.
The company has enough strength of manpower for normal orders while some orders are
sub-contracted to meet the demands of peak seasons. The sub-contractors bill the company
on monthly basis, however, full liability for the expected work done is accounted for in the
accounts at the year-end.
During the year under audit, the company has initiated an expansion plan because there has
been considerable growth in the business in recent past due to excessive load shedding in
the country. Sufficient space was available in the existing premises for expansion but a
considerable investment was required for import of new machinery. The machinery was
imported during the year and the payments have been made through the bank loan which is
secured against the mortgage of the newly imported machinery and will be payable in ten
equal six monthly instalments. The documentations of loan was duly prepared and
completed.
You are in the process of understanding the entity’s operations, internal control and
environment for the purposes of risk identification/ assessment and audit planning for the
year ending June 30, 2014. This is your first year of audit and the previous auditors have
issued an unmodified opinion. Based on your initial discussions with CFO/ CEO it is expected
that the company is going to make aggressive write offs of long outstanding receivables in
view of high profitability during the year.

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Marks
Required:
(a) Identify and explain at least four (04) key audit risks in respect of the financial
statements of UEL for the year ending June 30, 2014. 08
(b) Suggest a suitable audit response for each of the key audit risks indentified in ‘a’
above. 08
(c) What is meant by ‘professional skepticism’ and why it is necessary for the auditor to
maintain professional skepticism through out the audit of the UEL? 06
(d) List down any five (05) key audit procedures for the following:
(i) Verification of loans obtained during the year. 05
(ii) Verification of provisions against doubtful receivables. 05
(e) In case the provisions made against receivables are found excessive and management
refuses to make an appropriate adjustment/ reversal, then draft the following to be
included in your report:
(i) An appropriate basis of qualification paragraph. 04
(ii) The opinion paragraph based on the above qualification on account of excessive
provisions against doubtful receivables. 04

Q. 2 (a) Milestonedotcom is an online retailer, offers various electronic products including


mobiles phones, televisions, refrigerators and microwave ovens on its website.
Customers select their desired products and pay via credit cards. The system of
revenue recording is complex as it involves information technology and company’s
interface/ interlink for comprehensive operations.
Required:
On the basis of the information mentioned above, identify any five (05) risks which may
be associated with the revenue and general operations of Milestone.com and also
describe the measures which can be taken to mitigate such risks. 10

(b) Risk identification is a continuous process so that new risks and changes affecting
existing risks may be identified before they can cause unacceptable losses. Discuss
any five means of identifying conditions leading to risks (potential sources of loss). 05

Q. 3 (a) As per the International Standards on Auditing, the assertions used by the auditor to
consider different types of potential misstatements that may occur, are divided into
three categories. Briefly discuss the assertions about “classes of transactions and
events for the period” under audit. 05

(b) M/s. Farooq Enterprises, a trading company, has recently engaged M/s. APNG & Co.,
Chartered Accountants to audit its accounts for the year ended December 31, 2013.
You are working as an Auditor of the firm and your Engagement Manager has given
you a task to prepare the audit procedures for M/s. Farooq Enterprise for the test of
control.
Required:
Discuss any four (04) audit procedures for M/s. Farooq Enterprise for the test of control
of the following:
 Cash payment 04
 Payroll 04

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Marks
Q. 4 M/s. SFS & Co., is a Chartered Accountants firm having wide range of clients. Presently the
firm is engaged in the audit assignment of M/s. International Chemical Limited. The Chief
Executive Officer (CEO) of the company advised the audit team to carry out the audit from
the Head Office, situated in Lahore. Moreover, he further apprised that the company has
some business activities in an area which cannot be visited by the audit team due to security
concerns during the course of audit. Being the member of the audit team you have selected
certain items/ transactions for your examination and requested the client to provide the
related evidence and supporting documentations/ records. The client has shown inability to
provide the original supporting evidences due to the risk of misplacement during movement
of documents, however, agreed to make available the photocopies of such records/
documents.
Required:
(a) Suggest a course of action to be followed in the above situation in view of the general
principles applicable to reliability of the information to be used as audit evidence. 05
(b) Briefly explain the general principles for considering the reliability of the information to
be used as audit evidence as per International Standard on Auditing-500. 05

Q. 5 In the light of the International Standards on Auditing-720 ‘The auditor’s responsibility in


relation to other information in documents containing audited financial statements’, answer
the following:
(a) Define the following terms with at least one (01) example:
 Material inconsistency 03
 Misstatement of fact 03

(b) Describe the procedures an auditor needs to perform if a material inconsistency is


identified prior to the date of the auditor’s report. 04

Q. 6 (a) M/s. Pak Shalimar Limited is a manufacturing concern, situated in Korangi and you
have been appointed as a Cost Auditor of the company. Being an auditor elucidate the
matters which you will consider in developing overall plan for cost audit. 05

(b) Specify any seven (07) audit procedures to be performed for verification of unit cost in
case the entity is using a job order cost system. 07

THE END

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