THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Advanced Auditing Final Examination Summer 2016

General

The overall performance in this attempt was much below the last attempt. The
performance in all the questions except Question 3 was below average. However, the
worst attempted questions were Question 2, 4 and 7. Dealing with practical situations in
audit requires knowledge as well as imagination. The latter was lacking in most cases.

Question 1

This question contained three independent situations and in each case the candidates were
required to explain how the audit team should deal with it. The performance was quite
poor. The most notable issue in this question was that the question required the students to
answer on the approach to be taken but a significant number of candidates put their major
stress on the reporting aspect. Comments on each situation are given below:

Question 1(a)

According to the situation, on the first audit of an entity, the CFO informed the auditors
about an error in the previous year’s financial statements. Most of the candidates only
covered the accounting treatment under IAS – 8 and the implications on the financial
statements. Very few of them raised the key issue i.e. ascertaining whether it was actually
an error and the related implications if it was an intentional misreporting rather than an
error.

Question 1(b)

The overall performance was average as the candidates generally covered the routine
procedures that are performed when there are doubts as regards going concern
assumption. However, very few of them got deeper into the given scenario as they failed
to discuss about the ability and the willingness of the parent company to provide support.

Question 1(c)

According to the situation, 40% of the total sales of a company were made to an
associated company on credit. The overall performance was below average as the
responses in most of the cases were restricted to the issue of sales price and its comparison
with market prices. The credit terms and its related implications were seldom discussed.
Moreover, most of the students did not understand as to what the auditor should do if the
price charged is different from those prevailing in the market and many of them simply
suggested that the report should be qualified.

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 Examiners’ Comments on Advanced Auditing – Final Examination Summer 2016

Question 2

This question was based on a situation whereby there were certain issues with the client
such as low audit fee, frequent requests to change the audit manager and delays in
communication of major decisions.

It was the least scoring question of this session. About 18% of students did not attempt it
altogether. The main mistake was that the candidates mainly focused on the independence
issues and on suggestions for improving the performance of the audit team whereas it was
more of a client issue. Other common mistakes were as follows:

 Regarding the recovery of the fee, most of the students misunderstood the scenario as
if the fee was actually not being received by the firm. In the given context it was an
issue of engagement economics i.e. more resources were being occupied than
warranted by the fee level.
 The matter regarding the rotation of managers was answered with respect to code of
ethics rather than mentioning a need for discussing the matter with the client.
 The issue of last minute adjustments was answered by suggesting how the team should
be trained and supervised.
 A very important step i.e. resolving the issues by discussing them with the client
(CFO, CEO, Audit Committee, Board of Directors) was mostly ignored.

Question 3

This was a relatively well answered question. The answer for this question was directly
from the code of ethics so the students who have gone through the study material were
able to score very good marks. However, in part (b), instead of appreciating conflict of
interest and threat to objectivity, a number of students mentioned self-interest threat and in
some cases intimidation threat. Moreover, a large number of students stated that the
spouse of the partner must liquidate her shareholding.

Question 4

This question contained comparative profit and loss account and balance sheet of a
company along with the audit team’s comments based on analytical review carried out.
The candidates were required to review the comments and specify which explanations
seemed unreasonable or incomplete. The overall performance in this question was quite
poor because of the following:

1. Many students focused on identifying the risks from the comments provided in the
question which was not required.
2. Few of the students went at quiet a length on describing what should be the
materiality, what threshold should be used and the purpose and form of overall
analytical review etc. which was not required at all.
3. Very few students were able to identify the following issues/deficiencies in the
comments prepared by the audit team:

 No comments were offered regarding the fact that the introduction of installment
sales for the first time should have been accompanied by an increase in interest
income and receivables.

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 Examiners’ Comments on Advanced Auditing – Final Examination Summer 2016

 The comment “increase of 3% in inventory balance is in line with prior year” was
unreasonable because the revenues and cost of sales have increased by 9% and
11% respectively.
 Comments as regards addition to fixed assets were missing.
 No comments have been offered on the fact that warrant expense for the year has
increased by 126% whereas the provision in the balance sheet has increased by
18% only.
 Further break-up and analysis was required in case of some items such as other
income, administrative expenses, creditors and accrued expenses.

Question 5(a)

This part of the question was well answered. However, some students focused on control
review and testing instead of substantive procedures. Moreover, many students simply
talked about assessing the reasonableness of the assumptions. How and from what
perspective this aspect has to be reviewed was not discussed.

Question 5(b)

The performance in this part of the question was above average. However, there were
many students who seemed quite satisfied with the client’s policy of making over
provision on the basis of prudence and only covered one aspect of the situation i.e. the
difference between the information on which the provision was based and the information
provided in the directors’ reports whereas the issue of over provisioning was completely
ignored. Some of the students who did discuss the provisioning issue confined themselves
to matters such as qualifying the report or withdrawing from the audit without considering
any efforts to resolve the situation amicably.

Question 6

The overall performance in this question requiring preparation of checklists for (i)
assessing quality of audit engagement with respect to planning of audits and (ii) pre-
engagement activities was average because most of the students mentioned few valid
points accompanied by a lot of duplication and invalid points also. Some of the key
observations are as follows:

1. Areas other than planning were also included, probably to achieve the required
number of points.
2. Many students did not understand the meaning of pre-engagement activities and
confused them with points that are covered in the engagement letter.
3. Most of the students mentioned a few valid points and tried to achieve the required
number of points by mentioning the same points in different words or by including
irrelevant points.

Question 7(a)

This part of the question consisted of two sub-parts, each containing a different scenario
and the candidates were required to explain how the auditor should deal with them.
Performance in each sub-part is discussed below:

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 Examiners’ Comments on Advanced Auditing – Final Examination Summer 2016

(i) According to the situation described in this part, the audit report of a subsidiary
had been qualified. The most common error in this part was that the students
suggested that the auditor should consider the materiality of the subsidiary to the
group instead of mentioning that the impact of the qualification on the group as a
whole should be considered. Further, many students suggested that the matter
should be discussed with the subsidiary’s auditor which was totally irrelevant.

(ii) This was a rare situation in which two joint auditors had a difference of opinion.
One of them wanted to issue a qualified report whereas the other was quite
satisfied and wanted to issue an unmodified report. The overall performance was
quite poor as very few students could clearly specify that if the dispute cannot be
resolved, each of the two auditors may express their own opinion. Many students
did not attempt this sub-part whereas a wide variety of incorrect answers were
observed such as referring the dispute to ICAP/SECP, withdrawing from the
assignment, going for a third party review, etc.

Question 7(b)

In this part, three observations of the auditor were stated and the candidates were required
to identify the implications in each case. This part was mostly well attempted. However,
many students only mentioned that it was a weakness but didn’t identified the implication
thereof i.e. the resultant risk due to the weakness.

Question 8

According to the situation given in this question, the statutory auditor of a company had
been requested to report on the summary financial statements of the same period. The
candidates were required to specify the risks involved in carrying the assignment.

The overall performance was very poor as very few students seemed prepared for such a
question. A variety of incorrect points were observed such as:

1 The assignment cannot be undertaken because of restrictions imposed by code of

2 It involves conflict of interest.

3 It involves self-review threat.

The candidates are advised to refer to ICAP’s suggested answer for guidance on this
question.

(THE END)

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