SUBJECT: ADVANCED AUDIT AND ASSURANCE

Question 1

You are the external auditor of Aftab Electronics. A written representation letter has been prepared in which the directors have been asked to confirm that all sales income has been included in the financial statements and that when there is weak evidence of expenditure, the expenditure has been for the benefit of the company and not for the personal benefit of any

employee or director.

Required

Describe the action you would take and the conclusions you would reach if the directors refused to sign a written representation letter. (5)

Question 2

You are involved as a senior in auditing the financial statements of Habib Limited (HL), a listed company, for the year ended December 31, 20X6. While reviewing draft financial statements you have noted that HL has material investments in two local private limited companies and a joint venture company operating in the UAE. You have identified the following risk indicators:

1. _ the investee companies have different year-ends than the investor company;

2. _ one of the investees is a foreign operation;

3. _ there are significant transactions between the investee and investor companies;

4. _ one of the investee companies has poor operating results and a weak financial condition;

5. _ the investor has guaranteed the debts of one of the investee companies;

6. _ one of the investees financial statements are audited by another firm.

Required

In view of the above risk indicators, identify the possible implications that might be of significance to the audit team in assessing the risk of misstatements affecting the investments made by the company

Question 3

Part (a)

Identify four areas of the financial statements to which a review of subsequent events might be relevant. For each area state what kind of information available after the reporting period might be relevant, and why

Part (b)

You are the manager in charge of the audit of Alco Manufacturing. Your subsequent events review for the year ended 31 Dec 2021 has identified the following events, all of which took place after the reporting period:

a) A writ has been issued against the company by a former sales director who is claiming Rs.1.2m for breach of his service agreement following his dismissal during the year ended 31 Dec 2021. No provision has been made in the financial statements for the year ended 31 Dec 2021 in respect of this claim.

b) A fire at the companys warehouse destroyed its entire inventory. The inventories had a book value of Rs.20 million. This loss has not been included in the financial statements for the year ended 31 Dec 2021.

Required

State the enquiries you would make and the evidence you would seek in order to reach a conclusion on the accounting treatment of the above in the financial statements for the year ended 31 Dec 2021