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T HE I NSTITUTE OF C HARTERED A CCOUNTANTS OF P AKISTAN Final Examinations Summer 2008 June 6, 2008 ADVANCED AUDITING (MARKS 100) (3 hours) Q.1 Wood Limited (WL) is a listed company. SMSF Chartered Accountants have been the auditors of the company for the last three years. In November 2007, with substantial change in shareholding a new Board of Directors was elected. The new Board made significant changes in the senior management within a week of taking charge. On February 10, 2008, after completing the field work, the auditors sent the financial statements alongwith initialed draft audit report, to WL’s board for its approval. On the same date, a senior partner was assigned to carry out an engagement quality control review. During the review he noted the following: (i) Management representation letter contains a paragraph that “We have taken charge from the previous management on 28 November 2007 and after taking charge, we commenced valuation exercise in respect of plant and machinery in various factories owned by WL. To date, thirty percent of plant and machinery has been valued. The exercise carried out so far shows that fair value of the assets is 20% less than the carrying value, for which an impairment loss has been accounted for. In view of this situation, we are not confident about the fair value of the plant and machinery as presented in the financial statements.” (ii) The valuation is being carried out by the production manager who is a qualified engineer. He had been responsible for year-end valuation review for many years. This is the first time when he has reported an impairment. (iii) The issue of impairment loss, which is of material amount, was a contentious matter between a team member and the job in charge. On inquiry Mr. Manzoor Nazar, the engagement partner, informed that he had accepted the job in charge’s view point. (iv) This matter was also reported to the stock exchanges on December 5, 2007 resulting in a sharp decline in share prices of WL, which otherwise had a good price-growth history. (v) Subsequent to year end, WL has been awarded a very profitable long-term supply contract by Timber Limited (TL), a reputable industrial undertaking. No direct confirmation was obtained from TL. (vi) WL announced a 100% right issue in December 2007 at market price. Because of discouraging response from the minority shareholders, the directors and their associates purchased a large number of right letters from the open market. (vii) The firm’s record reveals that Mr. Manzoor had applied twice for a job in WL during last one and half years. However, there is no current information about his intention. Required: Write a review report on behalf of the reviewer indicating the deficiencies noted in the audit as well as the policies of the firm and submit your recommendations. (16)
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(2) Q.2 You are the engagement partner of a listed company. After completing audit field work, you have provided the draft audit report alongwith the draft financial statements prepared by
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  • Summer '18
  • jane
  • Accounting, Financial audit

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