The paper had a combination of test on theoretical knowledge and practical application. As expected, candidates did well on the theoretical part but seemed confused while applying their knowledge on real world examples. Although it is little early at this stage but students are advised to try their best to visualize the practical applications of rules, regulations and standards they learn.

Question wise comments are as under;

Q.1

(a)

Very few students knew the prescribed steps required to be followed under the Code of Ethics when a practicing member accepts an audit engagement in place of another member whose audit was in process when removed. A large number of students wrote about client screening process, which is not an ethical requirement.

Only a few candidates knew the provisions of law dealing with vacancy of the office of the auditor because of disqualification subsequent to appointment. Quite a number, without any apparent reason, reproduced the provisions related to disclosure and disposal of investments in client’s equity, at the time of appointment.

The ethical requirements governing an audit are well known to majority. However, when it came to explanation, most candidates mixed up the components of ethical requirements.

Q.2

(a)

This question is another example where students responded without looking at the given facts. Respective responsibilities of management and auditor were asked in case unmodified audit report was issued inspite of the fact that financial statements contained material misstatements. Instead, many students wrote the course of action left with the management and auditors and could not secure any marks.

(b)

The principal qualitative characteristics which are necessary to give true and fair view are understandability, relevance, reliability and comparability. Most students concentrated on the issue of disclosure requirements and could not mention the characteristics.

Q.3

(a)

Students had good understanding of the audit assertions which are addressed by a certain procedure and most of them answered the question correctly.

(b)

Students had very little idea of contents of direct bank confirmation. They gave answers based on general understanding and missed many points.

Q.4

(a)

This was a simple question, which required listing of inherent limitations of internal control system due to which, frauds and errors cannot be eliminated altogether. Majority secured good marks in this part.

(b)

Very few students wrote to-the-point answers. Some students mixed up internal controls with audit verification steps. Few preferred to write general activities rather than those specific with ‘trade debts’. Some found no difference between control activities and other components of internal control system.

Q.5

Candidates had good knowledge about the procedure an auditor of consolidated financial statements of holding company should perform while using the work of the auditor of subsidiary company. However the answers were un-necessarily lengthy, which were inappropriate with the marks allocated to this question.

Q.6

(a)

This question required steps to be taken in case analytical procedures identify relationships which are inconsistent with those established through other available evidence. A good number performed well, however, few of them mentioned definition, types and uses of analytical procedure which were not required.

(b)

This was also an easy question and attempted well by majority of the students. It was evident that they had given due attention to the newly applicable Auditing Standard dealing with internal control system.

(c)

This was also a students’ favourite theoretical question on scope and objectives of internal audit and was answered well.

Q.7

(a)

A number of students did guess work in replying the question and could only identify one condition, that is,  the weakness of accounting and internal control systems. Some submitted needless paragraphs on management’s non co-operation and disagreements as condition that indicates existence of misstatements and errors.  Some other conditions are:

      -    Going concern and liquidity issues

            -    Significant changes in key personnel

            -    Complex transactions

            -    Huge transaction with related parties.

(b)

It was a very easy question and majority obtained good marks.

(c)

A good number of students knew about other forms of documenting management’s representations such as  

• A summary of the oral representation written by the auditor.

• A letter from the auditor outlining the auditor’s understanding of management’s representations duly acknowledged and confirmed by management.

• Relevant minutes of meeting of the board of directors or similar body or a signed copy of the financial statements.

Q.8

(a)

Limitation of scope of auditor’s work is an oft-repeated area. Students were required to list some of the circumstances which may lead to limitation of scope. Some of these are as follows:

• When terms of engagement specify that the auditor will not carry out a necessary audit procedure.

• Entity can impose such limitation by not co-operating with the auditor in performing necessary audit procedures.

• When auditor is practically unable to perform his necessary audit procedures.

• When entity’s records are inadequate for audit purposes.

(b)

Most students had a perception that in all cases of uncertainty other than going concern, only emphasis of matter paragraph is included in auditors report. They were unaware that in case of multiple uncertainties or uncertainty which is material and pervasive the auditors may go to the extent of issuing a disclaimer of opinion.

(c)

Capability to analyze a situation comprehensively was found lacking. Students should have considered the modification of reports at different levels of materiality and its effects on financial statements as a whole.