ICMA.

RISK MANAGEMENT AND AUDIT

(BAF-502)
SEMESTER-5
Pakistan FALL 2014 EXAMINATIONS
Monday, the 9th March 2015
Time Allowed: 3 Hours Maximum Marks: 100 Roll No.:

(i) Attempt all questions.

(ii) Answers must be neat, relevant and brief.
(iii) Read the instructions printed inside the top cover of answer script CAREFULLY before attempting the paper.
(iv) In marking the question paper, the examiners take into account clarity of exposition, logic of arguments, effective
presentation and language.
(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 Amna Fabrics Limited (AFL), a renowned textile company is a client of TPG and Co., an audit
firm. During the audit, the audit firm pointed out in the management letter that the present
system of controls in AFL is weak and no proper risk management activities have been taken
place. The board of directors of AFL have taken notice on the observations mentioned in the
management letter and requested the auditors to provide a briefing about the following
concerns in respect of weaknesses as pointed out in management letter:
Required:
(a) Define the term ‘risk’. 02
(b) What is risk management? Elucidate the basic elements i.e. risk identification, risk
assessment, risk planning and risk monitoring, involved in the risk management process. 08
(c) Discuss the major roles and responsibilities of the board of directors with regard to risk
management of an organization. 08

Q. 2 (a) Salt Stones Limited (SSL) is a public limited company incorporated in Pakistan in 2007. SSL
is a wholly owned subsidiary of Minerals and Mines Holdings Limited. Suppose your audit
firm was approached by the group to accept the audit engagement of SSL for the year
ending June 30, 2014. During the evaluation of the client it was identified that the company
owns a salt mine and uses the services of mineral experts for the purposes of preparing its
financial statements. You are in the process of considering the terms of engagement and
preparing a letter of engagement for this client.
Required:
(i) Identify principal matters/ terms to be included in the engagement letter. 05
(ii) Considering the nature of the company’s business, suggest any specific matter to be
included in the engagement letter. 01

(b) Examination of bank reconciliation statements and obtaining confirmations from the banks
are considered as the key audit evidences available to the auditor regarding the balances
maintained with the banks by audit clients.
Required:
List down at least five audit procedures undertaken by the auditor in respect of the
following:
(i) Bank reconciliation statements 05
(ii) Bank confirmations 05

Q. 3 (a) Milk-n-Juice Limited is a large consumer goods company, engaged in producing of milk and
juice products. As a part of its routine operations, the company is required to purchase raw
material from its parent company.
The company’s customers include two entities which have the same directors as those on
the board of Milk-n-Juice. The company offers a special discount to these customers having
special relationship with them. Due to increase in related party transactions the board of
directors of the company is seriously concerned about the related party matters and seeking
your advice in this regard.
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 Marks
Required:
Being the auditor of the company, advise board of directors in respect of the following
queries:
(i) List down the persons/ entities who may be termed as ‘related party’. 06
(ii) Is there any wrong with the Milk-n-Juice Limited dealing with a related party? Why it is
significant for related party transactions to be brought to the attention of shareholders? 02
(iii) Describe the procedures which the auditor may perform to identify the related party
transactions of Milk-n-Juice Limited. 06

(b) Which subsidiary board of International Federation of Accountants (IFAC) is authorized to

develop and promote International Standards on Auditing (ISAs)? State the reasons why
does an auditor need to learn about the key principles and requirements of the International
Standards on Auditing (ISAs)? 04

Q. 4 Suppose, you are an Audit Manager in a medium sized audit firm and M/s. Alpha Designers
Limited is one of your key audit clients. You are in the process of audit planning of the client for
the year ended December 31, 2014 and the initial meeting for briefing the engagement team
has been scheduled next week. You have been requested by the team in-charge to brief the
team on key aspects of the audit risk to be applied while carrying out the audit under the
International Standards on Auditing.
Required:
(a) Discuss audit risk and its components in the meeting with the team. 08
(b) Enumerate the possible overall responses to address the assessed risks of material
misstatement at the financial statement level. 08

Q. 5 (a) (i) The International Auditing Standards (ISAs) prescribe a format for the auditor’s report
and also provide guidance regarding its preparation and contents thereof. In the light
of these guidelines you are required to briefly discuss the requirements in respect of
the following:
 Auditor’s signature 02
 Date of report 03
 Auditor’s address 01
(ii) Under what circumstances it is necessary to include an ‘emphasis of matter
paragraph’ in the audit report? 04

(b) One of the key activities of the internal audit function is often to provide assurance to the
management. Identify certain issues on which internal auditors may provide assurance to
internal management. 06

Q. 6 (a) Suppose you are an Audit Manager of Nasir & Co., an audit firm. Every year the firm inducts
many internees from various professional institutions. Mr. Naeem, a recently qualified
professional accountant joined your firm and has been assigned a cost audit task of a
manufacturing company. Mr. Naeem has few queries about the cost audit requirement and
advantages of separate cost audit therefore, approached you to discuss the following:
(i) Being an Audit Manager explain the need of separate cost audit in addition to external
statutory audit of financial statement. 02
(ii) Are there any additional benefits, if a company arranges to conduct a cost audit?
Enumerate any eight (08) advantages of cost audit. 08

(b) Which persons/ firms cannot act as a Cost Auditor of a company as per the Companies
(Audit of Cost Accounts) Rules, 1998? 06

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