Question 1 Solution:

Answer:

PPE

- Obtain list of all additions and disposals made during the year.
- Select sample of additions and disposals and verify such transactions with supporting
documents.
- On sample basis send confirmation to employees to whom laptops are allocated.
- Ensure whether consistent and appropriate depreciation method is used on new laptops.
- Check amount received on disposal of PPE from bank statement.
- Recalculate gain or loss on disposal of desktops
- Ensure that disposed assets have been removed from FAR and Ledger and additions have been
appropriately included in FAR and ledger.
- Ensure whether adequate disclosure has been made in the FS.

Question 2: solution

Impairment of PPE

- Obtain an understanding of management process related to identifying, estimating and

recording impairments for PPE.
- Obtain management working related to impairment of PPE.
- Review the source data used by the management for impairment testing.
- Assess the reasonableness of assumptions taken by the management by checking subsequent
period sales (inflows) and discount rate used.
- Consider involving auditor’s expert.

Inventory

- Obtain aging analysis of inventory to identify any obsolete inventory.

- Check subsequent sales to verify that sales have been made above cost.
- Inspect inventory condition for possible obsolescence.

If there is any impairment, ensure whether adequate disclosure is made in FS and inventory have been
carried at lower of cost or NRV.

Question 3 solution:

Answer

1. Compare ledger balance with bank statement and confirmation balance.

2. Check total of reconciling items (whether un-cleared or unpresented) and ensure that reconciliation
have been made properly and it is matched with ledger balance.
3. Obtain subsequent bank statements and ensure that unpresented cheque have been presented and
unclreaed cheques have been cleared.
4. For uncleared and unpresented cheques perform invoice testing.

Question 4 Solution:

Solution 4:

(i) Tracing of payable amounts recorded in supplier ledgers may not be relevant as it is
directed towards evidence about overstatement of recorded payables.

Suggestion:
▪ Obtain the list of goods received near to year end and check whether payable has been
recorded or not.
▪ Trace supplier statement received from the creditor to the supplier’s ledger.
(ii) Sending direct confirmation to suppliers which are already recorded in books of account
may not be a relevant audit procedure for understatement in payables.

Suggestion:
Select accounts for direct confirmation, showing nil balances and debit balances.
(iii) Tracing material subsequent disbursement from bank ledger is not a reliable audit
procedure as amounts are being traced through bank ledgers which is an internally
generated document.

Suggestion
Trace material subsequent disbursement from third party provided bank statements.
(iv) Obtaining and reviewing unpaid invoices is a relevant audit procedure for understatement
and may be a reliable audit evidence.

Further procedures to be performed

▪ Review the list of account balances for any supplier who are not in the listing of trade
payable, but who would be expected to be in the listing, such as suppliers of frequently
purchased items.
▪ Compare the list of trade payables balances with the listing that was prepared for the
previous year’s audit. Look for explanations as to why any major balances do not appear.

Question 5 solution:

Answer:

- Obtain schedule of revaluation from client showing asset wise cost, carrying amount, fair value,
revaluation surplus and name of revaluer.
- Trace total of revaluation surplus for the year to financial statements.
- Inquire whether the change in policy has been approved by the board of directors.
- If management has used its expert for revaluation of PPE, we should:
o Evaluate the independence of the valuer;
 o Ensure whether data provided to expert is complete and accurate; and
o Evaluate the reasonableness and appropriateness of the assumptions used by the expert.
- Ensure that entire asset class have been revalued.
- Consider using auditors own expert.
- Evaluate whether the change in accounting policy has been properly accounted for and
adequately presented and disclosed.

Question 6 Solutions:

Revenue recognition:
Risk:

CAL has a policy to provide four full services at the end of every six months. Selling motor vehicle and
providing services are two different performance obligations and transaction price should be allocated
accordingly therefore there is a risk that revenue might have been recorded without settlement of
performance obligation and on inappropriate transaction price.

Response:

- Obtain an understanding of management process related to recognition of revenue.

- Ensure that transaction prices have been allocated to different performance obligation
appropriately.
- Ensure that the revenue is not overstated and the amount of car services is recorded only at the
time of provision of such service.

Foreign exchange:

Company is involved in import of high quality spare parts therefore there is a risk that appropriate
exchange rate might not have been used while recording liability and inventory.

Foreign exchange translation risk

- Check that appropriate exchange rates are used in translation of foreign currency.

Check on a sample basis that any gains/losses arising on the translation of foreign currency are correctly
recognized as per the requirements of International Financial Reporting Standards.

Question 7 solutions:

Solution 7

(i) Provision against litigation

Even though the change in provision against litigation is not significant but due to the high
inherent risk, further steps needs to be taken as follows:

1. Circulate confirmation to legal advisors of the company.

2. Review correspondence between legal advisor and client
3. Scrutinize payments of legal expenses to ensure that all legal cases have been
identified by the client.
 4. Review the minutes of the board meetings.
5. Consider about obtaining advice of firm’s own legal advisor.
6. Verify the basis for recording of provision.

(ii) Trade payables

Despite the increase in cost of sales, trade payables have decreased. There is a risk of
understatement of payable. Consequently the following procedures may be performed:

▪ Obtain a list of creditors from client check mathematical accuracy and check total to
financial statements.
▪ Obtain subsequent bank statement and check subsequent payments and trace them
back to list of creditors.
▪
Circulate balance confirmation requests to trade creditors.
▪ Ensure that all regular suppliers are included in the list of trade creditors.
▪ For sample pf purchases inspect invoices and trace it to payable ledger to ensure that
invoices have been appropriately recorded.
▪ Scrutinize subsequent payments and ensure that appropriate accruals were made
against those payments.

(ii) Loans to employees

Despite the reduction of entitlement of loan, it has increased from previous year. Considering
this inconsistency, following procedures may be performed:

▪ Discuss the increase in loan amount with management.

▪ Check payment of amount of loan given to employees during the year with payment
voucher having acknowledgment of employees.
▪ Obtain confirmation of loan balances from employees.
▪ Verify approval of new loan given to employees.
▪ Ensure that recoveries are being made as per policy and are recorded.

(i) Trade debtors and sales:

Sales has increased by 15% but debtors have only increased by 6%. Cash balance
have also been decreased as compared to last year. Considering this inconsistency
following procedures may be performed:
▪ Discuss the reason for inconsistency with the management.
▪ Obtain list of debtors and sales ledger from the client, check mathematical accuracy
and trace total to financial statements.
▪ Scan the sequential number of sales invoices in the sales journal; ensure that the
missing numbers are not unrecorded sales and have an appropriate explanation for.
▪ For a sample of debtors Circulate confirmation requests.
▪ Select a sample of recorded sale revenue transactions and vouch the selected transactions
to sale invoice to ensure transactions recorded are based on sale invoices. Trace sale
invoice to customer order and bill of lading to ensure sales have actually happened and
goods have been shipped to customers
(v) Cost of sales
Despite 15% increase in sales, cost of sales has increased by only 10%. Considering this
fluctuation, following steps may be performed:

▪ Obtain breakup of cost from client, check mathematical accuracy and trace it to
financial statement.
▪ For sample of purchases inspect invoices.
▪ Perform cut-off test for purchases by selecting 4 GRN before and after year end and
compare it with purchase order to ensure they are recorded in appropriate period.
▪ Check that the correct quantity of material, labour and overheads has been used.
▪ Evaluate whether overheads have been appropriately calculated and allocated

(v) Expenses
Even though the finance cost would also have reduced due to reduction in loan. However,
expenses as a % of sales have remain constant despite increase in revenue by 15%.
Considering this inconsistency, following steps may be performed:
▪ Enquire from management for inconsistencies. Whether expenses are of fixed nature
or it includes variable element as well.
▪ Ask the client for the detailed breakup of the expenses and check mathematical
accuracy and trace total to financial statements.
▪ For a sample of expenses vouch supporting documents to ensure that they have been
appropriately recorded.
▪ Perform cutoff on expenses.
(vi) Taxation
Tax rate was exactly 35% of the profit before taxation in last year which have reduced to
32%. Considering this fluctuation, following steps may be performed.
▪ Obtain and review the tax working prepared by the management
▪ Check the enacted tax rates.