Professional Academy Of Commerce

Suggested Solution
CAF-9 – Refferel Test#2 AA

Ans. 1

(a)

KL (2marks)

The firm should issue a modified report/opinion due to a material misstatement.

If the lack of disclosure is considered material but not pervasive a qualified opinion should be issued.

If the lack of disclosure is considered pervasive an adverse opinion should be issued.

The basis for qualified/adverse opinion paragraph should state that a material uncertainty related to
going concern exists.

OL ((4marks)

i. A key audit matters (KAM) section is mandatory for listed entities.

ii. OL becoming listed should be included as a KAM.
iii. Statement from the auditor that it has provided those charged with governance with a
statement that the auditor has complied with relevant ethical requirements regarding
independence and communicate with them all relationships and other matters that may
reasonably be thought to bear on the auditor’s independence, and where applicable, related
safeguards;
iv. Statement that from the matters communicated with those charged with governance, the
auditor determines those matters that were of most significance in the audit of the financial
statements of the current period and are therefore presented as the key audit matters.
v. The name of engagement partner.
vi. Further in the audit report of listed companies the auditor is supposed to include a separate
section named “other information” if at the date of audit report the auditor has obtained or
expects to obtain other information whereas in the case of unlisted company this paragraph
is only given if the auditor has obtained any such information.

(b)

KL (maximum marks for KL : 3.5)

Issues

There are doubts over management integrity and a risk of management bias. The firm’s reputation
may also be at risk. There are a number of threats to the firm’s independence and objectivity:

Intimidation (0.5mark)

▪ The finance director has threatened the firm with removal and is putting pressure
on the firm to support a favourable presentation of the financial statements.

Self- interest(0.5mark)

▪ The firm may be fearful it will lose the KL engagement / may be overly reliant on the
fees earned from KL.
 Professional Academy Of Commerce
Suggested Solution
CAF-9 – Refferel Test#2 AA

Conflict of interest (0.5mark)

▪ If the firm modifies its audit opinion it may hasten the collapse of KL however, the
firm must consider the public interest and its own integrity.

Professional competence and due care will be at risk if the firm fails to refer to the lack of
disclosure regarding the uncertainty related to going concern. (0.5mars)

If it fails to refer to the lack of disclosure it may be subject to litigation or disciplinary action.

Actions

▪ The firm should request management to make the relevant disclosure. (0.5mark)
▪ It should consider whether any doubts over management’s integrity impact other parts of
the audit or the reliability of written representations. (0.5mark)
▪ If necessary, additional procedures should be performed but if the threat is too great the
firm should resign from the engagement. (0.5mark)

OL (maximum marks for OL :2.5)

Issues

There are a number of threats to the firm’s independence and objectivity:

Self-interest (0.5mark)

▪ A self-interest threat may be created as the total fee from OL represents 17% of
total revenue of the firm.

Self-review (0.5mark)

▪ the output of the tax services may be reflected in OL’s financial statements
▪ the audit team may place too much reliance on the tax work and be reluctant to
criticise it or point out errors.

Management threat (0.5mark)

▪ There is a risk of making management decisions as part of the tax engagement.

Actions

The firm needs to implement safeguards in respect of the self-interest threat:

▪ The firm will evaluate its independence and need to conduct independent quality control
review(0.5mark)
▪ The firm should reconsider whether the tax services are now prohibited by the Ethical
Standard. The firm should use separate personnel for any permitted tax services and
document informed management. (0.5mark)

Ans. 2

Key Audit Matter How the matter was addressed in our audit
 Professional Academy Of Commerce
Suggested Solution
CAF-9 – Refferel Test#2 AA

Impact of COVID-19 (Corona virus)

(Refer note 45 to the annexed financial
statements) (Total marks for procedures=6, 0.5 mark for each procedure )
Our audit procedures included the following:
Due to the COVID-19 situation and i. Obtained an overall understanding of the
lockdown in the country since March changes in financial reporting process and
2020, business activity has been underlying controls in order to determine the
adversely affected. The Company’s appropriate audit strategy
factory and offices were closed that ii. Utilised technology for communication and
resulted in a decline in the Company’s evidence gathering
sales from March 2020. Further, due iii. Utilised audit software for review and
to this closure, various year end supervision of audit work
activities relating to close of financial iv. Obtained management’s plan regarding
books including but not limited to execution of physical inventory check at a
carrying out of physical stock check date subsequent to the year-end
were impacted. v. Observed physical inventory check carried out
Many of the functions and operations by management subsequent to year-end and
were carried out remotely. This tested the roll-back of the inventory
affected the overall audit strategy, the quantities prepared by management on a
allocation of resources in the audit and sample basis
directing the efforts of the vi. For information/record provided by
engagement team. (2marks) management in scanned form, the original
In relation to the accounting and record was checked subsequently when the
reporting obligations, management lockdown was relaxed
assessed the following significant vii. For confirmation received through email, the
areas for incorporating COVID-19 authenticity of the confirmations was ensured
impact in the financial statements: by performing alternate procedure such as
▪ the impairment of tangible and making telephone calls to confirming parties
intangible assets under IAS 36, viii. Evaluated whether any impairment indicators
‘Impairment of non-financial exist that could trigger impairment for
assets’ tangible and intangible assets
ix. Obtained the computation of NRV and
▪ the net realisable value of
checked its reasonableness
inventory under IAS 2 ‘Inventories’
x. Checked the recoverability of deferred tax
▪ deferred tax assets in accordance
asset
with IAS 12, ‘Income taxes’ xi. Evaluated management’s assessment as to
▪ provisions and contingent whether any provisions were required to be
liabilities under IAS 37, including recorded as a result of COVID-19
onerous contracts and xii. Evaluated management’s going concern
▪ going concern assumption used for assessment by reviewing the approved
the preparation of these financial budget/ future cash flow forecast and
statements. assessed whether going concern assumption
The COVID-19 pandemic is a significant is appropriate
development during the year having xiii. Reviewed the adequacy of the disclosures
the most significant impact on audit made by the Company under applicable
strategy and its execution and involved accounting and reporting standards.
assessment of significant management
 Professional Academy Of Commerce
Suggested Solution
CAF-9 – Refferel Test#2 AA

judgments in the preparation of

financial statements. Therefore, we
considered it to be a key audit matter.
(2marks)

Ans. 3

Channel Limited (CL)(4 Marks)

A customer of CL’s owing Rs.350,000 at the yearend has not made any post year-end payments
as they are disputing the quality of goods received. No allowance for receivables has been made
against this balance. As the balance is being disputed, there is a risk of incorrect valuation as
some or all of the receivable balance is overstated, as it may not be paid.
This Rs.350,000 receivables balance represents 1·2% (0·35/28·2m) of revenue, 6·3%
(0·35/5·6m) of receivables and 7·3% (0·35/4·8m) of profit before tax, hence this is a material
issue.
If management refuses to provide against this receivable, the audit report will need to be
modified. As receivables are overstated and the error is material but not pervasive a qualified
opinion would be necessary. A basis for qualified opinion paragraph would be needed and
would include an explanation of the material misstatement in relation to the valuation of
receivables and the effect on the financial statements. The opinion paragraph would be qualified
‘except for’.
Jasmine Limited (JL)(4 Marks)
NC was only appointed as auditors subsequent to JL’s year end and hence did not attend the
year-end inventory count. Therefore, they have not been able to gather sufficient and
appropriate audit evidence with regards to the completeness and existence of inventory.
Inventory is a material amount as it represents 21·3% (0·51/2·4m) of profit before tax and 5%
(0·51/10·1m) of revenue; hence this is a material issue.
The auditors will need to modify the audit report as they are unable to obtain sufficient
appropriate evidence in relation to inventory which is a material but not pervasive balance.
Therefore a qualified opinion will be required.
A basis for qualified opinion paragraph will be required to explain the limitation in relation to
the lack of evidence over inventory. The opinion paragraph will be qualified ‘except for’.