General:

In this paper, the questions were generally designed to assess the ability of the candidates to apply the concepts and theory of auditing to practical business situations. However, it was observed that students were often unable to comprehend the specific requirements of the questions and reproduced the text from International Standard on Auditing. This indicates that the candidates lack the skills and ability to apply the basic concepts to practical situations

Question-wise comments are given hereunder :

Q.1

(a)

The acceptance of engagement to examine the prospective financial statements, in the context of their intended use, validity of assumptions and their relevance to the present performance levels were mainly required. However, the answers were based on general considerations of engagements instead of specific nature of the proposed engagement.

(b)

The candidates were able to score marks on the contents of audit report on prospective financial statements which are similar to a typical audit report based on historical financial statements. However, very few students were able to describe the essential contents like level of assurance given and a specific mention that   financial statements and the auditors report pertain to the future projected results.

Q.2

The auditors are required to review all other information included in the document containing the financial statements audited by them. With the adoption of ISA-720 for practicing chartered accountants, it was expected that the topics of material inconsistency and material misstatements of facts would have been among the issues under discussion of the trainee students. However, there was considerable misunderstanding regarding nature of the auditors’ reports in case of inconsistency and material misstatement of facts. The candidates were unable to distinguish between the basic conditions of inconsistency and misstatement of fact.

Q.3

The examinees were expected to describe the steps needed to verify deferred tax asset. The steps that an auditor normally takes in the verification involve examination of rationale of management’s estimations, review of management’s estimation procedure, auditors own computations and an assessment of subsequent events. Very few answers were able to focus on these critical issues.

Q.4

(a)

The candidates were able to explain the potential threats with varying degrees of understanding of the topic. The performance was generally below the expectations as very few could cover all the potential threats.

(b)

The standards give considerable importance to the position of engagement partner in conduct of an audit. Students must understand the role and importance of the engagement partner with reference to an individual audit engagement. An engagement partner is required to take specific measures towards meeting the independence requirements over and above the procedures already taken by the firm. However, most students mentioned the procedures which are undertaken by the firm in general instead of mentioning the specific measures that are required to be taken by the engagement partner.

Q.5

(a)

The students demonstrated reasonable understanding of initial audit engagement and audit evidence required to be obtained by applying procedures on opening balances.

(b)

This part of the question was based on auditor’s responsibility in respect of comparative figures, which have been qualified by the previous auditor. In such case, the new auditor has to deal with two types of matters i.e. those which have been resolved at the time of issuance of current years audit report and those matters which have not been so resolved. Many students wrote procedures for verification of borrowing costs and related party transactions instead of discussing auditor’s approach on resolved and unresolved matters pertaining to the previous year.

Q.6

(a)

The question contained a situation which involved various types of obvious fraud risks. Candidates were required to describe these risk factors. Majority of the students simply classified the list into two parts; one that indicates risk of fraud and one that does not, without offering any explanation about the rationale of arriving at such a conclusion. The students have been informed time and again that when they are asked to describe an item and make a decision, it is necessary that they should give proper reason for arriving at the decision. In fact, the reason is more important for the examiner than the decision itself.

(b)

Most of the responses to this question did not touch upon the areas of financial statements which are substantially open for management’s discretion e.g. estimations, adjusting entries, operational decisions, etc. A generalized approach was adopted by most of the candidates which resulted in low marks.

Q.7

(a)

Most of the students were able to quote the principles of confidentiality correctly and secured good marks.

(c)

The replies to the question relating to circumstances under which disclosure of client’s information is allowable were generally correct. These include the situations:

•  Where the disclosure is required by law
• Where the disclosure is necessary to comply with technical standards or quality control review program of the Institute
• When authorized by the client

Q.8

Six situations were given in the question and the examinees were required to explain in respect of each, whether the same should be reported to the management or to the Audit Committee. Here again the students committed a common mistake that they did not give reasons for the conclusions drawn by them. Some of the other common mistake were as under: 

• No communication was required to be made in respect of audit procedures applied on sales and as regards efficiency of internal audit function as these matters are not usually related to the client. However, weakness in internal audit function may have to be communicated if applicable.  Many students were of the view that these matters should also be communicated to the management or the Audit Committee.
• According to International standards an auditing, even immaterial un-corrected errors need to be communicated to the Audit Committee. Most students were of the view that these are not required to be communicated.

Q.9

(a)

Students could not properly distinguish between “Tests of Controls” and “Risk Assessment Procedures”. Risk Assessment Procedures are performed to obtain an understanding of the entity and its environment which includes internal controls. This was not clear to most of the students.

(b)

Generally, candidates were aware that operating effectiveness tested in previous audit can be relied upon for a period of two years as prescribed by the International Standard on Auditing. They also explained correctly that in case  there is a change in specific controls during the period under review, the tests of controls need to be performed again.

(c)

The students were able to clearly identify the nature of assurance and evidence that an auditor obtains from substantive tests as compared to the evidence obtained from tests of controls.

Q.10

(a)

This part was a direct question regarding acceptance of an assurance engagement relating to summarized financial statements. Many candidates were able to reply correctly that auditor should not accept the engagement to certify summarized financial statements if it has not audited the detailed financial statements, unless they are in a position to audit the detailed financial statements again.

(b)

This was a relatively simple question. Each student was able to reproduce at least some basic elements of audit report and gained valuable marks.

Q.11

Many students tried to explain how the auditor reviews the entity’s “Risk Assessment Procedures” and its system of “Information and Communication”. In fact, they were required to explain the systems from the users’ point of view without reference to the auditors view point thereon.