Aafr & Aars TSB Mock QP With Solution by Sir Hasnain Badami

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Certified Finance and Accounting Professional Stage Examination

21 Nov 2021
3 Hour & 100 marks
Additional reading time – 15 minutes
Final Mock [6 out of 6 for Winter 2021]
[Submission date: 27th Nov 2021]

Advanced Accounting and Financial Reporting


Q.1 Egg Limited (EL) is in process of finalizing its financial statements for the year ended 31 December 2020.
The following information has been gathered for preparing the disclosures relating to taxation:

Profit before tax for the year after making all necessary adjustments was Rs. 120 million. The other relevant
informations related to tax working are as follows:

Details Note Rs. (million) Remarks


Donations - 15 Allowable
Government grants - 20 Exempt
Dividend - 10 Final tax @ 15%
Property income - 20 Separate block of income @ 25%
Revaluation surplus - 90 Revaluation made at 31-12-2020
TFCs [1.5 million of Rs. 100 each] 1 150 See details
Deferred tax liability 2 30.25 See details

Note-1: On 1 January 2020 EL had issued 1.5 million 10% convertible Term Finance Certificates (TFCs) of
Rs. 100 each. Interest is payable annually on 31 December whereas the principal is to be paid at the end of
2023. Two TFCs are convertible into one ordinary share at any time prior to maturity. On the date of issue,
the prevailing interest rate for similar debt without conversion option was 12% per annum. The tax
authorities do not allow any deduction for the imputed discount on the liability component of the convertible
TFCs.
Note-2: Opening deferred tax liability relates to only property, plant and equipment. During the year taxable
temporary difference related to property, plant and equipment is decreased by Rs. 20 million.

Note-3: On 01 January, 2020 EL acquired a subsidiary (80% holding), named Goose Ltd (GL), at
consideration of Rs. 200 million against carrying value of net assets amounting to Rs. 175 million. The fair
value of those assets was 180 million. Due to that fair valuation, taxable temporary differences were
increased by 5 million. During the year, intra group sale between EL and GL and respective closing stocks
are as follows:

Sale Cost Sale price Closing stock held


-----------------------------------Rs. (in Million)-----------------------------------
EL to GL 400 464 116
GL to EL 380 437 65.55

Note-4: The applicable tax rate for EL is 30% for 2020 while it was 35% in 2019 and prior periods. The tax
rate for GL is 33%.

Required:
(a) You are required to calculate current tax, deferred tax asset/liability and reconciliation between tax
expense & accounting profit for inclusion in EL’s separate financial statements for the year ended 31
December 2020, in accordance with the IFRSs. (12)
(b) Calculate the amount of goodwill and deferred tax asset/liability for inclusion in EL’s consolidated
financial statements for the year ended 31 December 2020, in accordance with the IFRSs. (5)
Advanced Accounting and Financial Reporting - Page 2 of 7

Q.2 Alpha’s investments include two subsidiaries, Beta and Gamma. The draft statements of financial position of
the three entities at 30 September 2019 were as follows:
Alpha Beta Gamma
-----------------Rs. (000) ------------------
ASSETS
Non-current assets:
Property, plant and equipment (N-1 & N-3) 380,000 355,000 152,000
Intangible assets (N-1) 80,000 40,000 20,000
Investments (N-1, N-3 & N-4) 497,000 - -
957,000 395,000 172,000
Current assets:
Inventories (N-5) 100,000 70,000 65,000
Trade receivables (N-6) 41,000 66,000 50,000
Cash and cash equivalents (N-6) 10,000 15,000 10,000
151,000 151,000 125,000
Total assets 1,108,000 546,000 297,000
EQUITY AND LIABILITIES
Equity
Share capital (Rs. 10 per shares) 150,000 200,000 120,000
Retained earnings (Notes 1 and 3) 499,000 186,000 60,000
Other components of equity (N-1, N-3 & N-4) 295,000 10,000 2,000
Total equity 944,000 396,000 182,000

Non-current liabilities:
Provision (N-7) 34,000 - -
Long-term borrowings 20,000 50,000 45,000
Deferred tax 35,000 30,000 25,000
Total non-current liabilities 89,000 80,000 70,000

Current liabilities:
Trade and other payables (N-6) 50,000 55,000 35,000
Short-term borrowings 25,000 15,000 10,000
Total current liabilities 75,000 70,000 45,000
Total equity and liabilities 1,108,000 546,000 297,000

1. Alpha’s investment in Beta:


 On 1 October 2016, Alpha acquired 15 million shares in Beta by means of a share exchange of one
share in Alpha for every two shares acquired in Beta. On 1 October 2016, the market value of an
Alpha share was Rs.48. Alpha incurred directly attributable costs of Rs.2 million on acquisition of
Beta. These costs comprised:
a) Rs. 0.8 million – cost of issuing own shares, debited to Alpha’s share premium account
within other components of equity;
b) Rs. 1.2 million due diligence costs – included in the carrying amount of the investment in
Beta in Alpha’s own statement of financial position.
 There has been no change to the carrying amount of this investment in Alpha’s own statement of
financial position since 1 October 2016.
 On 1 October 2016, the individual financial statements of Beta showed the following reserves
balances:
a) -Retained earnings Rs. 125 million.
b) -Other components of equity Rs. 10 million.
 On 1 October 2016, fair values of net assets of Beta were same as their carrying values except the
following:
a) Plant and equipment having a carrying amount of Rs. 295 million had an estimated
market value of Rs. 340 million. The estimated remaining useful economic life of this
Advanced Accounting and Financial Reporting - Page 3 of 7
plant at 1 October 2016 was five years. None of this plant and equipment had been
disposed of between 1 October 2016 and 30 September 2019.
b) An in-process research and development project existed at 1 October 2016 but did not
meet the recognition criteria of IAS 38 – Intangible Assets. The fair value of the research
and development project at 1 October 2016 was Rs. 20 million. The project started to
generate economic benefits on 1 October 2017 over an estimated period of four years.
 The above two fair value adjustments have not been reflected in the individual financial statements of
Beta.
 Alpha uses the proportionate share of net assets method to calculate non-controlling interests in Beta.

2. Impairment review of goodwill on acquisition of Beta: No impairment of the goodwill on acquisition of


Beta was evident when reviews were carried out on 30 September 2017 and 2018. On 30 September 2019, the
directors of Alpha concluded that the recoverable amount of the net assets (including the goodwill) of Beta at
that date was Rs. 450 million. Beta is regarded as a single cash generating unit for the purpose of measuring
goodwill impairment.

3. Alpha’s investment in Gamma:

 On 1 October 2018, Alpha acquired 7.2 million shares in Gamma by means of a cash payment of Rs.
125 million. Alpha incurred costs of Rs. 1 million associated with this purchase and debited these
costs to administrative expenses in its draft statement of profit or loss for the year ended 30 September
2019. There has been no change in the carrying amount of this investment in the financial statements
of Alpha since 1 October 2018.
 On 1 October 2018, the individual financial statements of Gamma showed the following reserves
balances:
a) Retained earnings Rs. 45 million.
b) Other components of equity Rs. 2 million.
 On 1 October 2018, the fair values of the net assets of Gamma were the same as their carrying
amounts with the exception of some land which had a carrying amount of Rs. 100 million and a fair
value of Rs. 130 million. This land continued to be an asset of Gamma at 30 September 2019. The
fair value adjustment has not been reflected in the individual financial statements of Gamma. There
was no impairment of the goodwill arising on acquisition of Gamma in the consolidated financial
statements at 30 September 2019.
 Alpha uses the proportionate share of net assets method to calculate non-controlling interests in
Gamma.

4. Other investments: Apart from its investments in Beta and Gamma, the investments of Alpha included in
the statement of financial position at 30 September 2019 are all financial assets which Alpha measures at fair
value though other comprehensive income. These other investments are correctly measured and updated in
Alpha’s financial statements in accordance with IFRS 9 – Financial Instruments.

5. Intra-group sale of inventories: The inventories of Alpha and Gamma at 30 September 2019 included
components purchased from Beta in the last three months of the financial year at an amount of Rs. 20 million
to Alpha and Rs. 16 million to Gamma. Beta supplied these goods to both Alpha and Gamma at a mark-up
of 25% on the cost to Beta.

6. Trade receivables and payables: Group policy is to clear intra-group balances on a given date prior to
each year end. All group companies had complied with this policy at 30 September 2019, so at that date there
were no outstanding intra-group balances.

7. Provision: On 30 September 2019, Alpha finalized the construction of an energy generating facility. The
facility has an expected useful economic life of 25 years and Alpha has a legal requirement to decommission
the facility at the end of its estimated useful life. The directors of Alpha estimated the costs of this
decommissioning to be Rs. 34 million – based on prices prevailing at 30 September 2044. The present value
of the cost of decommissioning the facility is Rs. 10 million. The directors of Alpha made a provision of Rs.
34 million and charged this amount as an operating cost in the financial statements of Alpha for the year
ended 30 September 2019.
Advanced Accounting and Financial Reporting - Page 4 of 7

Required:
Prepare the consolidated statement of financial position of Alpha at 30 September 2019 (Ignore taxation) (22)

Q.3 Ace Motors is the parent company of an international group which has a presentation and functional
currency of the Rupee. The group operates within the manufacturing sector. On 1 January 2015, Ace Motors
acquired 80% of the equity share capital of Dual Motors, an overseas subsidiary located in Bangladesh. The
functional currency of Dual Motors is Taka.

Ace Motors paid Taka 100 million for 80% of the share capital of Dual Motors on 1 January 2015. The net
assets of Dual Motors at this date had a carrying amount of Taka 60 million. The only fair value adjustment
deemed necessary was in relation to a building which had a fair value of Taka 20 million above its carrying
amount and a remaining useful life of 20 years at the acquisition date. Ace Motors measures the non-
controlling interests (NCI) at fair value for all acquisitions. The fair value of the 20% interest was estimated to
be Taka 22 million at acquisition.

Due to the relatively poor performance of Dual Motors, it was decided to impair goodwill by Taka 6 million
during the year ending 31 December 2018. No dividends have been paid by Dual Motors for several years. At
the start of 2019 Dual Motors sought additional debt finance. As Ace Motors was already looking to divest,
funds were raised from an issue of bonds in Taka, none of which were acquired by Ace Motors.

The acquisition was not as successful as anticipated therefore Ace Motors sold its entire equity shareholding
in Dual Motors on 30 September 2019 for Rs.150 million.

Rates of exchange between the Rs. and Taka are given as follows:

1 January 2015: Rs.1:0·5 Taka


Average rate for year ended 31 December 2018 Rs.1:0·4 Taka
31 December 2018: Rs.1:0·38 Taka
30 September 2019: Rs.1:0·35 Taka
Average rate for the nine-month period ended 30 September 2019 Rs.1:0·37 Taka

Further details relating to the disposal of Dual Motors are as follows:

Carrying amount of Dual Motors’s net assets at 1 January 2019 Taka 48 million
Dual Motors loss for the year ended 31 December 2019 Taka 8 million
Cumulative exchange gains on Dual Motors at 1 January 2019 Rs.74·1 million
Non-controlling interest in Dual Motors at 1 January 2019 Rs.47·8 million

Required:
a) Regarding acquisition of Dual Motors, calculate the amount of goodwill on 01 January 2015 (acquisition
date) and at 30 September 2019 (disposal date). (5)

b) Calculate the group profit or loss on the disposal of Dual Motors at 30 September 2019 (10)

Q.4 Hi-secure (Pvt) Ltd (HS) is a security company and the original focus of the business is to install security
equipment but it has also expanded into design, maintenance, monitoring and security consultancy services.
The information as below relates to sales during the year:

Detail of sales in form of security package:


During the year HS has started to provide installation and monitoring services in a combination to its
corporate clients. Upon signing a contract with a customer, HS designs and installs security equipment at
clients’ premises. There is no charge for this service. Once the equipment is installed a monitoring
arrangement is then put into action. The typical contract of monitoring will be for five years.
Advanced Accounting and Financial Reporting - Page 5 of 7
The details relating to monitoring contracts being sold during 2020 are as follows:

-150 on 1 January 2020


Number of contracts sold -150 on 1 July 2020
-300 cumulative sales
Revenue per Contract Rs.140,000

Detail of overall services of HS


HS services can be categorized as follows:
1. Security packages (as discussed above)
2. Stand-alone sale of security equipment to clients
3. Monitoring services to clients who have already security equipment installed in their premises.
The details of stand-alone sale price are as follows:
Sale of equipment stand-alone Rs. 60,000 one time
Monitoring contract only Rs. 18,000 per annum

Current treatment by the management:


Earlier, it was the policy of the company to recognize total contract revenue on a straight-line basis over the
period of the contract. During the year, the accountant has also recorded all of the above transactions as per
the old accounting policy. The financial statements are in the process of finalization and the management has
decided to adopt IFRS-15 from current year as a requirement of applicable financial reporting framework.

Required:
a) You are required to calculate the revenue related to security package as per IFRS-15 for the year ended 31
December 2020 (your answer should cover 5 steps in details). (5)
b) Also calculate the adjustment required in revenue amount due to change in accounting policy for the year
ended 31 December 2020. (3)

Q.5 Goal Land (GL) is an internationally successful football club. GL is preparing the financial statements for the
year ending 31 October 2018. GL is currently facing liquidity problems and considering the below mentioned
arrangement:

(a) GL has entered into a contract regarding its stadium whereby it will sell the stadium on 30 November
2019 and immediately lease it back. The directors of GL wish to classify the stadium as a non-current asset
‘held for sale’ in its financial statements for the year ended 31 October 2018 as they believe though the sale is
expected after 1 year (13 months from now) but it is highly probable at that date. The cost to sell is zero.

(b) The sale contract requires the disposal of the stadium will be at its fair value (today market value) of Rs.
30 million and for GL to lease it back over 10 years. The present value of the lease payments at market rates
on 30 November 2019 will be Rs. 26 million. The market value for a stadium of this type is unlikely to
change in the near future. The stadium is being depreciated by 5% per annum using the reducing balance
method.
Information related to cost of stadium: At 31 October 2018, the carrying amount of the stadium, after
depreciation is Rs. 20 million.

Required:
(a) How the above matter will be reported in the financial statements for the year ended 31 October
2018. (4)
(b) Discuss the accounting treatment for the sale and leaseback of the stadium at 30 November 2019.
(4)

Q.6 Financial statements of Gohar Investment Limited (GIL) for the year ended 31 December 2020 are under
preparation. In this respect, following matters are under consideration:
Advanced Accounting and Financial Reporting - Page 6 of 7

(a) GIL has three investment properties on its books. GIL measures the investment properties at fair values
whereas owner-occupied properties are measured at cost less accumulated depreciation and impairment
losses. The details of these properties are as follows.

Name of Investment Properties A B C


Fair values on 01-Jan-2020 Rs. 400 million Rs. 450 million Rs. 750 million
Intention of holding Rental Capital appreciation Rental
Events during the year Note-1 Note-2 Note-3

Note-1: Property A relates to a commercial warehouse that had been let on a commercial basis for a number
of years. During the year property A was re-assigned as office space for the company. The tenants were
notified and vacated the premises on 1 May 2020. Property A was measured at Rs. 380 million on 1 May
2020 and Rs. 370 million on 31 December 2020. GIL charge depreciation at a rate of 2% per annum on a
monthly basis for the owner occupied properties.

Note-2: Property B was acquired in 2014 for Rs. 500 million. In late 2020, resulting from falling property
prices in this area, the directors agreed to dispose of this property. Since September, the property was put on
the market with an asking price of Rs. 440 million. Although there has been some interest in the property, no
firm offers had been made by the year end. Estimated cost of disposal is about Rs. 30 million. The value
remained at Rs. 440 million at 31 December 2020.

Note-3: Property C is valued at Rs.925 million at 31 December 2020 with no change in intention of
management about its use. (9)

(b) On 31 December 2020, one of the directors recently promoted to the board of GIL has been granted the right
to choose either:
 50,000 shares of GIL; or
 Receive a cash payment equal to the current value of 40,000 shares but at the settlement date.

The right has been granted to director based on recent performance and was unconditional at 31 Dec 2020.
The settlement date is 15 Jan 2022. Other information is as follows:
 The market price per share of GIL at 31 Dec 2020 is Rs. 3 per share.
 The estimated fair value of the share alternative is Rs. 2.50 per share

Note: If the director chooses the shares, he must have to keep the shares for a period of four years from the
settlement date. (6)

Required:
Discuss how the above matters should be dealt with in GIL’s financial statements for the year ended 31
December 2020. Show all calculations wherever possible.

Q.7 On 31 December 2020, Hali Ltd (HL) purchased Rs. 10 million 5% bonds in Silk Ltd (SL) at par value. The
bonds are repayable on 31 December 2023 and the effective rate of interest is 8%. HL’s business model is to
collect the contractual cash flows over the life of the asset. At 31 December 2020, the bonds were considered
to be low risk and as a result the 12-month expected credit losses are expected to be Rs. 10,000.

On 31 December 2021, SL paid the coupon interest, however, at that date the risks associated with the bonds
were deemed to have increased significantly. The present value of the repayments for the year ended 31
December 2022 was estimated to be Rs. 462,963 and the probability of default is 3%. At 31 December 2021,
it is also anticipated that no further coupon payments would be received during the year ended 31 December
2023 and only a portion of the nominal value of the bonds would be repaid. The present value of these cash
shortfalls was assessed to be Rs. 6,858,710 with a 5% likelihood of default in the year ended 31 December
2023.
Advanced Accounting and Financial Reporting - Page 7 of 7

Required:
Discuss how the bonds should be accounted for in the financial statements of HL as at 31 December 2020
and for the year ended 31 December 2021, including any impairment losses. (7)

Q.8 Following balances has been extracted from the trial balance of Multan Bank Limited (MBL) for the year
ended 31 December 2020.

Description Rs. (million)


Commission income 14,196
Dividend from investments 1,311
Interest earned 246,424
Other income 827
Other expenses 480
Provision for diminution in the value of investments 7,500
Ex-gain/(loss) 176
(Loss) from derivatives (185)
(Loss) / gain on securities - net (1,566)
Admin expenses 82,709
WWF 567
Taxation expense 12,034
Interest paid 151,798
Bad debts expense 450

Required:
Prepare the asset side of the statement of profit and loss for the year ended 31 December 2020 of MBL, based
on the above balances. (Notes to the financial statements are not required) (8)
CFAP 1 – Advanced Accounting and Financial Reporting
Suggested Answers
Final Mock-6 winter 2021
25th November 2021

SOLUTION -1

(a) Egg Limited


Notes to the financial statement
For the year ended 31 December 2020
Taxation Rs. in million
Current tax (W-1) 38.57
Deferred tax (10.89)
27.68

Reconciliation between tax expense and accounting profit Rs. in million

Accounting profit 120.0


Tax at applicable rate / applicable tax rate 36.00
Donations not allowable (15 × 30%) 4.50
Exempt grant (20 × 30%) (6.00)
Low rate on dividend (10 × 15%) (1.50)
Low rate on property income (20 × 5%) (1.00)
Effect of decrease in tax rate on opening deferred tax
liability [(30.25/0.35) × (0.35 – 0.3)] (4.32)
Tax expense / Average effective tax rate 27.68
Movement in deferred tax liability/asset for separate financial statements
Opening Recognized in Closing
Equity OCI P&L
(Bal.)
----------------------------------- Rs. in million -----------------------------------
Arising in respect
of:
PPE 30.25 27.00 (10.32) 46.92
(90×30%) (30.25/35% =86.43–
20dep+90rev= 156.42×30%)

TFCs 2.73 (0.57) 2.16


[9.11(150– [150 TB - 142.8 CV (w-2)] x
140.89)×30%] 30%
30.25 2.73 27.00 -10.89 49.08

W-1: Computation of current tax Rs. in million


Accounting profit 120.00
Donations not allowable 15.00
Exempt government grant (20.00)
Dividend income taxable at lower rate (10.0)
Property income taxable as separate block of income (20.00)
Decrease in taxable temporary diff (i.e. accounting depreciation is excess by 20m) 20.00
Finance cost on TFC (140.89 (W-2) × 12%) 16.91
Interest payment (150×10%) (15.00)
Taxable income 106.91
Tax @ 30% 32.07
CFAP 1 – Advanced Accounting and Financial Reporting
Suggested Answers
Final Mock-6 winter 2021
25th November 2021

Tax @ 15% on dividend [separate block] 1.50


Tax @ 25% on property income [separate block] 5.00
Current tax 38.57

W-2: Computation of liability component Rs. in million


PV of interest amount [1-(1+12%)`-4]/12% = 3.0373 (15 ×3.0373) 45.56
PV of principal [1/(1+12%)`-4] = 0.6355 (150×0.6355) 95.33
Liability component 140.89
Equity component [proceeds - liability comp] = [150-140.89] 9.11
Carrying value of closing liability[140.89+16.91-15] 142.80

(b) Computation of goodwill Rs (million)


Cash consideration
200.00
Less:
FV of Net assets acquired 180.00
Def tax liability due to increase in taxable temporary diff (5x33%) (1.65)
178.35

Goodwill 21.65

Deferred tax asset/liability to be reported in consolidated financial


statements
Liability/(Asset)
-D. Tax liability of EL (separate FS)
49.08
-D. Tax liability of EL (on
acquisition) 1.65
-Unrealized profit on closing stock held by
EL
[65.55/1.15=57*15%=8.55unrealized gain x30% tax rate]
2.57

-Unrealized profit on closing stock held by GL


[116/1.16=100*16%=16unrealized gain x33% tax rate]
5.28
Total deferred tax liability for group
FS 58.58
SOLUTION -2

Alpha Limited
Consolidated statement of financial position
As at 30 September 2019

ASSETS Rs. (000)


Non-current assets:
-Property, plant and equipment [380,000 + 355,000 + 152,000 + 45,000(W-1) -27,000 (W1)+
30,000 (W-2) + 10,000 (decommissioning provision)] 945,000
CFAP 1 – Advanced Accounting and Financial Reporting
Suggested Answers
Final Mock-6 winter 2021
25th November 2021

-Intangible assets [80,000 + 40,000 + 20,000 + 20,000 (W-1)-10,000 (W-1)] 150,000


-Goodwill (W-3) 31,700
-Other investments (W-7) 10,800
------------
1,137,500
------------
Current assets:
-Inventories (100,000 + 70,000 + 65,000 – 7,200 (W-1 Unrealized profit)) 227,800
-Trade receivables (41,000 + 66,000 + 50,000) 157,000
-Cash and cash equivalents (10,000 + 15,000 + 10,000) 35,000
-----------
419,800
-----------
Total assets 1,557,300

EQUITY AND LIABILITIES


Equity attributable to equity holders of the parent:
-Share capital 150,000
-Retained earnings (W-6) 518,300
-Other components of equity 295,000
-------------
963,300
Non-controlling interest (W-5) 189,000
-------------
1,152,300
-------------

Non-current liabilities:
-Provision (34,000-34,000 (W-6)+10,000 (decommissioning provision) 10,000
-Long-term borrowings (20,000 + 50,000 + 45,000) 115,000
-Deferred tax [35,000+30,000+25,000] 90,000
-------------
215,000
-------------

Current liabilities:
-Trade and other payables (50,000 + 55,000 + 35,000) 140,000
-Short-term borrowings (25,000 + 15,000 + 10,000) 50,000
------------
Total current liabilities 190,000
------------
Total equity and liabilities 1,557,300

WORKINGS:

Group Structure:

-Group: Alpha Limited


CFAP 1 – Advanced Accounting and Financial Reporting
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Final Mock-6 winter 2021
25th November 2021

-Subsidiaries:
Subsidiary Name Acquisition date Control percentage
1) Beta 1 October 2016 75%
2) Gamma 1 October 2018 60%

W-1: Net assets of Beta


1 October 30 September
2016 2019
………………. Rs. (000)……………
-Share capital 200,000 200,000
-Retained earnings:
As per accounts of Beta 125,000 186,000
-Plant fair value adjustment 45,000 45,000
-Extra depreciation due to fair value adjustment (45,000 x 3/5) - (27,000)
-Research project fair value adjustment 20,000 20,000
-Extra amortization due to fair value adjustment] - (10,000)
[Oct-2017 to Sep-2019) [20,000 x 2/4]
-Unrealized profit on intra-group sales [36,000- (36,000*100/125)] - (7,200)
-Other components of equity 10,000 10,000
–––––––– ––––––––
Net assets for the consolidation 400,000 416,800
–––––––– ––––––––
The post-acquisition increase in net assets is 16,800 (416,800 – 400,000)

W-2: Net assets of Gamma


1 October 30 September
2018 2019
……………….Rs. (000)………………
Share capital 120,000 120,000
Retained earnings 45,000 60,000
Land adjustment 30,000 30,000
Other components of equity 2,000 2,000
–––––––– ––––––––
Net assets for the consolidation 197,000 212,000
–––––––– ––––––––
The post-acquisition increase in net assets is 15,000 (212,000 – 197,000)

W-3: Goodwill
Beta Gamma
……………Rs. (000)…………
-Costs of investment:
Shares issued to acquire Beta (15/2 x 48) 360,000
Cash paid to acquire shares in Gamma 125,000
-Non-controlling interests at date of acquisition:
Beta [25% x 400,000 (W-1)] 100,000
Gamma [40% x 197,000 (W-2)] 78,800
-Less: Net assets at date of acquisition (W-1/W-2) (400,000) (197,000)
–––––––– ––––––––
Goodwill before impairment 60,000 6,800
Impairment of Beta goodwill (W-4) (35,100) -
CFAP 1 – Advanced Accounting and Financial Reporting
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Final Mock-6 winter 2021
25th November 2021

–––––––– ––––––––
24,900 6,800
–––––––– ––––––––
The total goodwill is 31,700 (24,900 + 6,800)
W-4: Impairment test for goodwill of Beta
Rs. (000)
Net assets of Beta as per the consolidated financial statements (W1) 416,800
Grossed up goodwill on acquisition (60,000 W-3 x 100/75) 80,000
––––––––
496,800
Recoverable amount of Beta as a CGU (450,000)
––––––––
So gross impairment equals 46,800
––––––––
Group share (46,800 x 75%) 35,100
––––––––

W-5: Non-controlling interest (using proportion of net assets method)


Beta Gamma
……..…….Rs. (000)……………
Net assets at 30 September 2019 (W1/2) 416,800 212,000
–––––––– ––––––––
Non-controlling interest (25%/40%) 104,200 84,800
–––––––– ––––––––
The total NCI is 189,000 (104,200 + 84,800).

W-6: Consolidated retained earnings


Rs. (000)
Alpha retained earnings 499,000
Adjustment for acquisition costs of Beta (W-7) (1,200)
Adjustment for decommissioning provision (wrongly expensed out) 34,000
Beta (75% x 16,800 (W-1)) 12,600
Gamma (60% x (15,000 (W-2)) 9,000
Impairment of goodwill (W-4) (35,100)
––––––––
518,300
––––––––

W-7: Break-up of investment in Alpha’ books


Rs. (000)
Investments figure per Alpha statement of financial position 497,000
Less: Investments related to acquisition of Alpha and Beta:
Shares issued to acquire Beta (W-3) [(15m shares /2 shares in exchange) * Rs. 48 per share] (360,000)
Due diligence costs on acquisition of Beta (included in above cost) (W-6) (1,200)
Cash paid to acquire Gamma (W-3) (125,000)
Carrying value of remaining investments 10,800

SOLUTION -3
CFAP 1 – Advanced Accounting and Financial Reporting
Suggested Answers
Final Mock-6 winter 2021
25th November 2021

(i) Goodwill at acquisition and upto disposal of Dual Motors:


Taka (millions)
Consideration 100
FV of NCI 22
Less net assets at acquisition (60 + 20) (80)
––––
Goodwill at acquisition 42
––––
On acquisition, the goodwill in Rs. would be (Taka 42m/0·5) Rs.84 million.

Goodwill at 30 September 2019 would be:


Taka millions rate Rs. millions
Goodwill at 1 January 2015 42 0·5 84
Impairment y/e 31 December 2018 (6) 0·4 (15)
Exchange gain 25·7 (bal)
––– ––––––
Goodwill at 31 December 2018 36 0·38 94·7
Current year exchange gain 8·2 (bal)
––– ––––––
Goodwill at 30 September 2019 36 0·35 102·9
––– ––––––
Workings:

Taka impairment of 6 million is translated at the average rate of Rs.1:0·4 Taka = Rs.15 million.

Goodwill at 31 December 2018 would be translated at last year’s closing rate of Rs.1:0·38 Taka = Rs.94·7m.

Goodwill at 31 September 2019 will be translated at Rs.1:0·35 Taka = Rs.102·9m.

(ii) Gain/loss on disposal of Dual Motors:

(Group profit or loss on disposal on Dual Motors


Rs. millions
Proceeds 150
Net assets at disposal (w-1) (163·6)
Goodwill at disposal (see part i) (102·9)
NCI at disposal (w-2) 48·5
Exchange gains recycled to profit and loss
[74.1 (given)x80%+8.2x80%+13.4x80%] 76·6
––––––
Group profit on disposal 8·6
––––––

W-1:Net Assets at the date of disposal


Rs. millions
-Opening net assets at opening rate (Taka [48 m+(20 m/20yr*16yr) =64m] /ex rate 0·38 168·4
-Loss for 9 months (Taka [loss 8x9/12 =6+ 0.75dep for 9 months = 6.75] / ex rate 0·37 (18·2)
-Current year exchange gain (balance) 13·4
––––––
-Net assets at 30 September 2019 (Taka 64-6.75=57·25] / ex rate 0·35 163·6
––––––
CFAP 1 – Advanced Accounting and Financial Reporting
Suggested Answers
Final Mock-6 winter 2021
25th November 2021

-Allocation of ex-gain of 13.4 between group and NCI is as follows:


-Group (13.4x80%) 10.7
-NCI (13.4x20%) 2.7

W-2: NCI at disposal is calculated as follows:


Rs. millions
NCI at 1 January 2019 per question 47·8
NCI share of loss to 30 September 2019 [Rs. 18.2x20%] (3.6)
NCI share of ex-gains on goodwill for 9 months (i.e. upto 30 September 2019) [8.2x20%] 1.64
NCI share of ex-gains on net assets for 9 months (i.e. upto 30 September 2019) [13.4x20%] 2.68
NCI at 30 September 2019 48·5

SOLUTION -4

High secure (pvt) Ltd

Part (i)

Step 1 - Identify contract: Contract is for sale of bundled contract of equipment and monitoring services.

Step 2 Identify Performance Obligations


This contract is a bundled contract. There are multiple performance obligations in the contract.
(i) Sale of Equipment
(ii) Monitoring Services
Step 3 Transaction Price
The transaction price for a bundled contract is Rs. 140,000
Step 4 Allocate the transaction price to the Performance Obligations
The bundle price is split in accordance with the stand alone selling price of each PO
The price that the entity would sell the good or service or a standalone basis.

Rs. (000)
Equipment 60
Monitoring 90
150
Bundle price 140
Discount 10

Discount allocated between equipment and the servicing :


Allocation Discount Net
Rs. (000)
Equipment (60,000/150,000 x10,000) 4 56
Monitoring (90,000/150,000 x10,000) 6 84
140
CFAP 1 – Advanced Accounting and Financial Reporting
Suggested Answers
Final Mock-6 winter 2021
25th November 2021

Step 5 Recognize revenue as PO is completed


Rs. (000)
Equipment (Price 56,000 x 300 contracts) 16,800
Servicing:
Sold on 1st January 2018 (150x84,000 x 12/60 months) 2,520
Sold on 1st July 2018 (150x84,000 x 6/60 months) 1,260
20,580

Part (ii) Adjustment required:


What is already recorded:
AT the moment revenue is recognized on a straight line basis over the period of the contract.
Rs. (000)
Sold 1st January 2020 (150 x Rs.140,000 x 1/5 years) 4,200
Sold 1st July 2020 (150 x Rs.140,000 x 0.5 /5 years) 2,100
6,300

Adjusting Entry:
What should be recognized this period Rs. 20,580,000 LESS already been recognized Rs. 6,300,000.

Rs. (000) Rs. (000)


Debit Credit
Receivables 14,280
Revenue 14,280

SOLUTION -5

(a) IFRS 5 Non-current Assets Held for Sale and Discontinued Operations addresses the accounting for assets which
are classified as held for sale. IFRS 5 requires a non-current asset to be classified as held for sale if its carrying
amount will be recovered principally through a sale transaction rather than through its continuing use. It must be
available for immediate sale in its present condition, and its sale must be highly probable within 12 months of
classification as held for sale. The standard only foresees an exemption to this rule if the sale is delayed by events or
circumstances which are beyond the entity’s control, which is unlikely to be the case in this instance. GL has entered
into a firm sales commitment but the sale will occur after the 12-month threshold. Therefore, the stadium cannot be
classified as held for sale. Additionally, a sale and leaseback transaction is outside the scope of IFRS 5 and is covered
by IFRS 16 Leases.

(b) A sale and leaseback transaction occurs where an entity transfers an asset to another entity and leases that asset
back from the buyer/lessor. The first required criteria are to determine whether a sale has occurred. Under IFRS 16,
an entity must apply the IFRS 15 to determine when a performance obligation is satisfied (If it is concluded that the
transfer of an asset is not a sale, then the seller/lessee will continue to recognize the transferred asset).

GL should account for the sale and leaseback at 30 November 2019 as follows:

The following will be the entries in the financial records:


Dr Cr
……..Rs. in million…..
Cash 30
ROU asset 16·4(w-2)
CFAP 1 – Advanced Accounting and Financial Reporting
Suggested Answers
Final Mock-6 winter 2021
25th November 2021

Stadium 18·92 (w-1)


Lease liability 26
Gain on disposal (balance) 1·48
––––– –––––
46·4 46·4

W-1:
Carrying amount of stadium is Rs. million 20
Less Depreciation for year to 31 October 2019 Rs. (20 x ·05) million (1)
Depreciation for November 2019 Rs. (20 – 1) x ·05)/12) million (0·08)
––––––
18·92
–––––––
W-2:
Present value of lease/fair value of asset = Rs. 26m/Rs. 30 x 100% = 86·67%

The right-of-use asset recorded will be 86·67% x Rs. 18·92 = Rs. 16·4 million.

SOLUTION -6

Part (a)

Property A

IAS 40 for a transfer from investment property carried at fair value to owner−occupied property, the fair value at the
change of use is the 'cost' of the property under its new classification. The 'cost' is then depreciated in accordance
with company rules.

Fair value of A at 1.1.20 400 PPE 380 Dr

Fair value of A at 1.5.20 380 Fair value adjust-P&L 20 Dr

Change 20 Investment Property 400 Cr

Depreciation at 2% for 8 months 5.07 Operating Expenses-Dep exp 5.07 Dr


(380*2%* 8/12)
PPE 5.07 Cr

Operating Expenses-Imp Loss 4.93 Dr

PPE 4.93 Cr

[Imp Loss= 370- (380-5.07) =


(4.93)]
CFAP 1 – Advanced Accounting and Financial Reporting
Suggested Answers
Final Mock-6 winter 2021
25th November 2021

The fair value at 31st December 2020 is only relevant in terms of an impairment review of GIL assets as the property
is now measured at cost under IAS16 rules, the fair value does not need to be disclosed.

Property –B

Property B is held for sale at 31st December 2020. Property B continues to be presented as an IAS 40 investment
property until it is disposed off (i.e. IFRS5 Non Current Assets held for sale and discontinued activities does not apply)

Property B will be adjusted to fair value at 31st December 2020

Fair value B at 1.1.2020 450

Fair value B at 31.12.20 440

Change 10

Operating expenses 10 Debit

Investment Property 10 Credit

Property-C

There is no change in use for Property C. Property C only needs to be restated to Fair Values at the year end.

(Rs. '000) (Rs. '000) (Rs. '000)


Fair value of C at 1.1.20 750 Property C 175
Fair value C at 31.12.20 925 FV gain-P&L 175
Change (gain) (175)

Part (b)

Share-based payment to the new director, which offers a choice of cash or share settlement, is also treated as
the issue of a compound instrument. In this case, the fair value of the services is determined by the fair value
of the equity instruments given.

The fair value of the equity alternative is Rs. 2.50 x 50,000 = Rs. 125,000.
The cash alternative is valued at 40,000 x Rs. 3 = Rs. 120,000.
The difference between these two values – Rs. 5,000 [deemed to be the fair value of the equity component]

At the settlement date, the liability element would be measured at fair value and the method of settlement
chosen by the director would determine the final accounting treatment.

At 31 December 2020, the accounting entries would be:

Profit or loss – directors' remuneration Rs. 125,000


Liability Rs. 120,000
Equity Rs. 5,000
CFAP 1 – Advanced Accounting and Financial Reporting
Suggested Answers
Final Mock-6 winter 2021
25th November 2021

SOLUTION -7

The business model of HL is to collect the contractual cash flows of the bonds over the life of the asset, the bonds
should be measured at amortized cost. It would initially be recognized at fair value equal to the Rs. 10,000,000 paid
on acquisition of the bonds.
31-December-2020:
IFRS 9 requires entities to adopt an expected value approach to the consideration of impairment losses on financial
assets. On acquisition, the bonds are considered low risk and are not credit impaired. The bonds would be classified
as a stage one financial asset as at 31 December 2020. This means that HL Co should create an expected credit loss
equal to 12 months expected credit losses.

HL Co should therefore recognize a default allowance of Rs.10,000 as at 31 December 2020. This will be expensed
to profit or loss and a separate allowance created rather than offset against the Rs.10,000,000 bonds. The allowance
is, however, netted off the Rs.10,000,000 bonds in the statement of financial position of HL Co as at 31 December
2020. The carrying amount of the bonds in the statement of financial position at 31 December 2020 will be Rs.9·99
million (Rs.10 million – Rs.10,000).

31-December-2021:
The bonds are to be measured at amortized cost with the effective rate of interest of 8%, the carrying amount, before
any impairment, will be Rs.10,300,000 at 31 December 2021 calculated as follows:
Op. BAL Interest 8%(P&L) Coupon 5% Cl. Bal
Rs.
10,000,000 800,000 (500,000) 10,300,000

At 31 December 2021, there has been a significant increase in credit risk. As no actual default has yet occurred, the
bonds should be classified as a stage two financial asset. This means that HL Co should make an allowance to
recognize the lifetime expected credit losses. This is defined as the expected credit losses (cash shortfalls) which result
from all possible default events over the expected life of the bonds. The expected default losses are discounted using
the original effective rate of interest of 8%.
Date PV @ default probability Default value (@PV)

31 December 2022 3% x Rs.462,963 13,889


31 December 2023 5% x Rs.6,858,710 342,936
–––––––
Closing loss allowance 356,825
Opening loss allowance (10,000)
Expense for the year 2021 346,825

The loss allowance is deducted directly from the bonds with future interest income recorded on the gross position.
The carrying amount of the bonds at 31 December 2021 would be Rs. 9,943,175 (Rs.10,300,000 - Rs.356,825).

SOLUTION -8

MBL
Statement of profit and loss
For the year ended 31 December, 2020
Rs. (million)
Mark-up / return / profit / interest earned 246,424
CFAP 1 – Advanced Accounting and Financial Reporting
Suggested Answers
Final Mock-6 winter 2021
25th November 2021

Mark-up / return / profit / interest expensed 151,798


Net mark-up / return / profit / interest income 94,626

Provision for diminution in the value of investments


(7,500)
Bad debts written off directly
(450)
(7,950)
Net Mark-up/ Interest Income after provisions 86,676

Non mark-up / interest income


Fee and commission income 14,196
Dividend income 1,311
Foreign exchange income / (loss) 176
(Loss) from derivatives (185)
(Loss) / gain on securities - net (1,566)
Other income 827
14,759

TOTAL INCOME 101,435

Non mark-up / interest expenses


Operating expenses 82,709
Workers' Welfare Fund - charge / (reversal) 567
Other charges 480
Total non mark-up / interest expenses 83,756

Profit before taxation 17,679

Taxation 12,034

Profit after taxation 5,645


Certified Finance and Accounting Professional Stage Examination
18 November, 2021
3 Hour & 100 marks
Final Mock [6 out of 6 for December 2021]
Additional reading time – 15 minutes
[Submission date: 25-11-2021]

Audit, Assurance and Related Services


Q.1 You are an audit manager in Jay and Co. Chartered Accountants. Fashions Limited (FL) is an audit
client of your firm having year ended 31 December 2020. Ms Komal owns 60% of the ordinary shares in
FL and her husband, Jamal, owns 20% shares.

FL designs, manufactures and sells designer clothing in Pakistan and the UAE. The company sells its
clothing online and through its own store, which opened in June 2020. In addition, FL has a three-year
contract to sell its designer clothing to Momin Department Store Ltd (MDS), a major retailer in
Karachi.

FL’s website enables customers to order clothing online from the comfort of their own home, as well as
join the company’s VIP membership club. The VIP membership club members pay an annual
subscription, for which they receive exclusive offers and discounts throughout the year.

Revenue
The contract provides MDS with exclusivity, which prohibits FL from supplying the designer clothing
ranges to any other retailer. The income generated from the contract accounts for approximately 20% of
FL’s total revenue, and FL achieves a 25% gross profit margin on these sales. The contract is due for
renewal on 30 June 2021. MDS has written to FL stating that it believes the opening of FL’s new store is
in breach of the exclusivity agreement.

New Premises
The purchase of the premises and fixtures for the new store was financed by a five-year loan from the
company’s bank which requires FL to meet loan covenants set out in the loan agreement. Any breach of
the loan covenants would result in the loan becoming repayable immediately.

Government Grant
FL received Rs. 3,500,000 in grant aid from a government agency in June 2020 towards new equipment
purchased during the year (with an expected useful life of 10 years). This grant was contingent on 10
new positions being created in FL by 31 December 2020. At 31 December 2020, FL was able to employ
only 5 new staff members. FL has had no correspondence with the government agency since the grant
was received in June 2020.

Extracts from the planning meeting with Ms Komal and Jamal and audit engagement partner and
audit manager are as follows:

On 10 February 2021, as part of audit planning Ms Komal and Mr. Jamal highlighted the following:

1) FL is being sued by a competitor who claims that one of FL’s new clothing ranges, ‘FOXY, has
infringed the trademark owned by the competitor for that brand name. The outcome of the claim
will not be known until after the audit report is signed.
2) FL sources its luxury materials internationally; however, its main supplier, FTL, is located in New
York. All purchases from FTL are invoiced and payable in US Dollars. Due to fluctuations in the
foreign exchange rate, cost of the materials from New York has significantly increased. Ms Komal is
therefore trying to source the materials in Pakistan; however, she is concerned about the quality of
the materials and believes that it may be compromised.
3) During November 2020, FL was the subject of adverse publicity regarding the quality of the latest
clothing range, ‘LUNAR’. As a result, FL has decided to sell this particular clothing range at a
discount of 50% in the January sale.
Audit, Assurance and Related Services - Page 2 of 5

4) The management prepared the financial statements for the full year ending 31 December 2020 and
has provided the summary below. Ms Komal explained that the difference between actual and
budgeted performance was due to higher than expected interest costs on the bank loan and
unbudgeted administrative costs associated with operating the new store.
Actual Original Budget Actual
31 December 2020 31 December 2020 31 December 2019
…………………………Rs. in 000………………………………
Revenue 96,000 117,000 108,000
Profit 3,450 7,020 12,000

5) Dividends of Rs. 1,800,000 were declared in January 2020 and dividends of R. 2,200,000 were
declared in January 2021 relating to the 2019 and 2020 financial reporting years, respectively. These
have been accounted for in retained earnings for the respective years.

Required:
You are required to outline the key audit risks associated with the audit of FL’s financial statements and
audit procedures in response to the audit risks. (20)

Q.2 You are a senior manager at Aqeel and Co. Chartered Accountants. You are responsible for reviewing
quality control and ethical matters which arise within the firm. The following matters for three different
clients are under review:

(a) Your firm is planning the audit of AQ Limited (AQL), who specialize in the provision of loans and
financial advice to individuals and companies. Aqeel & Co. has audited AQL for many years.

The directors are planning to list AQL on a stock exchange within the next few months and have asked
if the engagement partner can attend meetings with potential investors. In addition, as the finance
director of AQL is likely to be quite busy with the listing, he has asked if Aqeel & Co. can produce the
financial statements for the current year.

During the year, the assistant finance director of AQL left and joined Aqeel & Co. as a partner. It has
been suggested that due to familiarity with AQL, he should be appointed to provide an independent
partner review for the audit.

The AQL finance director has indicated that once the stock exchange listing has been completed, he
would like the audit engagement team to attend a weekend away at a luxury hotel with his team, as a
thank you for all of their hard work. In addition, he has offered a senior member of the audit
engagement team a short-term loan at a significantly reduced interest rate.

Required:
Discuss the ethical concerns which may affect the independence of Aqeel & Co’s audit of AQL and
explain appropriate safeguards. (4)

(b) Edge Ltd (EL) is a major audit client of Aqeel and Co. It is listed on Pakistan Stock Exchange. The
audit team assigned on EL consists of eight members including IT assistant manager, name Mr.
Rehman, who has recently been hired by Aqeel and Co. Mr. Rehman has just joined a personal pension
plan that invests in all the listed companies on Pakistan Stock Exchange.

Required:
Discuss the professional and ethical issues arising in the above situations and related safeguards. (4)

(c) Alpha Tech Limited (ATL) is a long standing listed audit client of your firm. Mr. Ali has been the
audit engagement partner of ATL in 2014, 2015 and 2018 and earlier to this, he acted as an engagement
quality control reviewer from 2009 to 2012. Your firm is reviewing the eligibility of Mr. Ali to act as
engagement partner for ATL for next year ending 30 June 2021.
Audit, Assurance and Related Services - Page 3 of 5

Required:
In the light of Listed Companies (Code of Corporate Governance) Regulation, 2019 and ICAP’s Code
of Ethics 2019, discuss the validity of Mr. Ali’s appointment to act as engagement partner or any other
possible role for ATL. (7)

Q.3 You are a manager in the audit department of Mian and Co. Chartered Accountants. The following
matters for different clients are under review:

(a) Blue Ltd, an audit client of your firm, is an electrical manufacturer and retailer. The final audit for
the year ended 30 June 2021 is nearing completion and you are reviewing the audit working papers. The
draft financial statements recognize total assets of Rs. 215 million (2020 – Rs. 208 million), revenue of
Rs. 165 million (2020 –Rs. 148.4 million) and profit before tax of Rs. 41 million (2020 – Rs. 56.4
million). Two issues from the audit working papers are summarized below:

Warranty provision
Each year, management makes a provision for electrical goods returned under warranty. It is based on
an estimate of return levels for each product type (washing machines, fridges, ovens, TVs etc) and is
calculated on an annual basis by the sales director. The breakdown for the current provision, as
extracted from the notes to the financial statements, is as follows:
Rs. (Million)
At 1 July 2020 9.5
Provisions charged during the year 1.5
Provisions utilized during the year (1.9)
Unutilized provisions reversed (1.1)
At 30 June 2021 8.0

Non-Current Assets
On review of the board minutes, in April 2021, the company decided to sell some of its retail units. They
are currently on the market for sale, and management is hoping for a quick sale. Non-Current Assets of
Rs. 16,500,000 have been classified as held for sale at the year-end. From discussions with the finance
director, the fair value of the non-current assets less cost to sell is Rs. 13,250,000.

Required:
Evaluate the above matters and describe the audit evidence expected while reviewing an audit file (10)

(b) Red Gas Co (RGC), a main supplier of gas to business and residential customers across the country.
The draft financial statements for the year ended 30 June 2021 recognize profit before tax of Rs. 1,300
million (2020 – Rs. 1,100 million), and total assets of Rs. 19,000 million (2020 – Rs. 18,780 million).
The below mentioned matter has been noted for your attention by the audit senior:

A provision of Rs. 4,300 million (2020 – Rs. 4,880 million) is recognized as a long-term liability in
respect of decommissioning a number of gas production and storage facilities at the end of their useful
lives. The estimate of the decommissioning costs has been based on price levels and technology at the
reporting date, and discounted to present value using an interest rate of 8% (2020 – 6%). The timing of
decommissioning payments is dependent on the estimated useful lives but is expected to occur by 2050,
with the majority of the provision being utilized between 2030 and 2045.

The accounting policy note discusses the methodology being used by the management for determining
the liability and states that this is an area of critical accounting judgments and estimation uncertainty.
Management decided to produce their own estimate for the year ended 30 June 2021. Earlier
management expert was engaged but that was expansive.

Required:
Explain the audit evidence you should expect to find during your file review in respect of the above
matter. (7)
Audit, Assurance and Related Services - Page 4 of 5

Q.4 You are the audit manager responsible for the audit of Rocket Co. Rocket Co. is a listed entity operating
in the engineering industry. The company manufactures machinery for use in the aircraft, defense and
marine sectors. The audit for the year ended 30 June 2021 is at completion stage.

The revenue and profit before tax figures recognized in the draft financial statements are Rs.1,437
million and Rs.139 million, respectively (2020 – Rs.1,489 million and Rs. 175 million respectively).
While reviewing the audit working paper, you came to know about two sales transactions made in the
fourth quarter of the year. These transactions relate to two different customers but delivery of goods was
given to the same location. Further investigations revealed that the goods were delivered to a third party
because both of the customers are building new facilities and neither is sufficiently progressed to receive
the new machinery.
The contract terms explicitly state that Rocket Co is obliged to deliver the goods to the customers for
final inspection and acceptance and the client has not agreed to any consequent amendments to these
terms. The sales invoices were raised and the revenue recognized upon dispatch of the goods to the
storage facility. During discussions with the audit team, the finance director stated that the company had
fulfilled its contractual obligations to provide the goods by a specified date. The revenue attributable to
the two transactions totaled Rs.17 million.

Required:
Evaluate the above situation and discuss the implications for the auditor’s report if management is not
willing to adjust the financial statement, if required. (6)

Q.5 You are an audit manager responsible for the audit of Lifecare Co for the year ended 31 March 2021.
Lifecare Co is an unlisted retail company which is a new audit client of your firm this year. The
company’s draft financial statements recognize profit before tax of Rs. 20.15 million (2020 – Rs. 10.95
million) and total assets of Rs. 130.8 million (2020 – Rs. 120.7million). You are reviewing the audit
working papers and audit supervisor has brought the below mentioned matter to your attention:

Lifecare Co. owns a building which it has used as a warehouse to store inventory. On 1 April 2020 the
building had a carrying amount of Rs. 3,230,000 and a fair value of Rs. 3,480,000. On this date, Lifecare
Co vacated the building and moved the inventory to new larger premises. Management decided to keep
the building in order to rent it out as a storage facility to local customers and to benefit from any
increases in property valuations.
On 31 March 2021, the building had not been let and it had a fair value of Rs. 3,530,000. The draft
financial statements for the current year recognize the building as an investment property at a carrying
amount of Rs. 3,530,000 and include a fair value gain of Rs. 300,000 in profit before tax for the year.
Since reclassification as an investment property, depreciation has not been charged in relation to the
building.

Required:
You are required to evaluate the impact of the above matter on the audit report based on the fact that no
further adjustments have been made to the financial statements. (8)

Q.6 You are the audit manager in Gulshan and co. chartered Accountants. Your firm is the external auditor
of Vital Ltd (VL) and its Pakistani subsidiaries. VL has recently acquired 100% of the share capital of
Chew Ltd (Chew), a company incorporated and operating in China. The directors of VL have requested
that Gulshan & Co accepts appointment as external auditor of Chew and undertakes a one-off
engagement to review and report on the adequacy of internal controls at Chew.

Required:
(a) Set out the specific matters, arising from the acquisition of Chew Ltd that Gulshan & Co should
consider when planning the audit of VL Group. (5)
(b) Describe the audit work Gulshan & Co should perform during the audit of VL Group to gain
comfort over intra-group balances. (4)
Audit, Assurance and Related Services - Page 5 of 5

Q.7 You are an audit manager in Amir & Co. Chartered Accountants. Your firm has been appointed as an
external auditor for Dux Limited for the year ended 30 June 2021. The financial statement of Dux
Limited shows long term borrowings from two different banks. As per the terms and conditions of loan
agreement Dux Limited is liable to provide the audited report of trade debts as on 30 June 2021. Based
on the above fact, your firm is also appointed to provide audited report on the trade debts along with
audit of complete set of financial statements.

It has been decided to issue the audit report on trade debts once the audit of complete set of financial
statements is finalized in order to save the time. While reviewing the annual audit file, the audit team
has shared the details of the matter under consideration:

a) Trade debts represent 60% of the current assets.


b) Company is dealing in 3 specialized products being manufactured for three different customers.
c) No sale has been observed for one of the product since last five months of financial year. Further,
audit team came to know that the related customer is considering filing for bankruptcy.
d) Receivable related to above said customer represents 3% of the total trade debts of Dux Ltd as on 30-
06-2021.
e) The management is planning and hopeful to find the new customer for this product. Prior year’s
audit working papers shows the revenue generated from this product comprises 60% of the total
revenue.
f) Management has not provided any provision for doubtful debts and other disclosures related to the
above matters based on the fact that it is due to the COVID-19 pandemic and is temporary.

Note: The management is not willing to provide any provision as well as other related disclosure in the
annual financial statements based on the reason as provided in point (f).

Required:
(a) You are required to assess the above situation and determine the impact, if any, on the annual audit
report. (5)
(b) Based on the impact on the audit report, if any, as in part (a), discuss the possible impact on the audit
report of trade debts, if any. (5)

Q.8 TL has recently applied for listing on a Stock Exchange in Pakistan. Following information has been
extracted from TL’s financial statements for the year ended 30 June 2019.
Rs.in ‘000’
Issued, subscribed and paid up capital - Ordinary shares 4,000,000
Issued, subscribed and paid up capital - Non redeemable preference shares 600,000
Share deposit money- Non redeemable preference shares 3,000
Un-appropriated profit 30,000
Unrealized gain on re-measurement of available for sale investments (net of tax) 300,000
Surplus on revaluation of fixed assets 120,000
Unpaid dividend on preference shares 75,000

The face value of both types of shares is Rs. 10 each. Preference shares are convertible into ordinary
shares at any time after listing of ordinary shares. The conversion price shall be Rs. 10 per ordinary
share.

The auditor’s opinion on the financial statements for the year ended June 30, 2019 was qualified as
deferred tax asset amounting to Rs. 2 million was not recognized in the financial statements as well as
non-disclosure of a related party transaction. The related party transaction relates to loan to wife of
director amounting to Rs. 6 million. The loan amount is recorded in the books of accounts as ‘other
receivables’.

Required:
On behalf of the auditors of the company, draft a report on factual findings on break-up value of shares
for submission to the client. (15)
CFAP 6 Audit, Assurance and Related Services
Test 6 Suggested Answer
25 November 2021 Winter-2021 Attempt

SOLUTION - 1

Audit risk/factors Audit procedures


1. Management bias and doubts over a) Plan to pay specific attention to more subjective
management integrity: and judgmental areas of the financial statements
such as provisions, inventory valuation, cut−off
The loan has bank covenants attached to it which, and revenue recognition.
if breached, would result in the loan becoming b) Recalculate bank loan covenants based on the loan
repayable in full immediately. There is risk that agreement to determine if the covenants are at risk
directors may therefore be keen to ensure the of being breached.
financial statements are presented in such a way c) Inspect correspondence with FL’s bank to
as to satisfy the loan covenants. ascertain whether any issues have arisen in respect
of the bank covenants or loan repayments.
d) Inspect board minutes for evidence of any conflict
with directors’ personal interests.

2. Inappropriate revenue recognition: a) Ascertain and test the control procedures around
the recording of sales made online.
a) Revenue derived from annual subscriptions to b) Select a sample of subscriptions and ensure that
the VIP membership club, and the three year revenue recognized in the year is matched to the
contract with MDS, may not be recognized in the provision of gifts to customers.
appropriate accounting periods. c) Recalculate any deferred income for the sample
and trace the total figure to the statement of
b) Refunds and credits for cancelled subscriptions financial position.
may not have been recorded correctly. d) Review a copy of the MDS contract to understand
how revenue is generated over the life of the
c) The opening of the new store will mean FL is contract and compare this to the revenue
now also making cash sales which are susceptible recognition policy applied in the financial
to misappropriation and may not be recorded. statements.
e) Select a sample of cancelled subscriptions and test
for correct treatment of refunds and credits.
f) Identify and test the control procedures around
cash sales in the new store.
3. Non-current assets and depreciation a) Select a sample of fixtures and fittings acquired
misstated: and trace the value recorded to purchase invoices.
b) Agree the amount paid for the new premises to the
FL opened a new store in June resulting in new contract completion statement and the cash paid
premises and fixtures and fittings being recorded per the bank statement. Enquire of management as
in the financial statements. to useful lives adopted and consider if these are
a) Assets may have been inappropriately appropriate.
capitalized or recorded inaccurately. c) Physically inspect assets/title deeds for property.
b) Useful lives may not have been appropriately d) Recalculate the depreciation charge for the year on
estimated, and the depreciation charge may not a sample of items and trace the total figure to the
have been recorded pro rate for the period that the income statement.
assets were available for use in the year.
4. Foreign exchange - translation errors: a) Agree the exchange rates applied to an appropriate
independent source.
Purchases, inventory and payables may have been b) Re−perform the calculation of conversion for a
incorrectly stated if translation errors occur for
sample of invoices in US dollars ($).
materials purchased from New York having
invoices in US dollars ($).
CFAP 6 Audit, Assurance and Related Services
Test 6 Suggested Answer
25 November 2021 Winter-2021 Attempt

5. Risk of inventory not being valued at the a) Inspect a sample of items in the clothing range
lower of cost and NRV: ‘LUNAR’ at the year end, and request the
post−yearend sales receipts, to ensure the items
FL operates in an industry that is constantly
have been included at the lower of cost & NRV in
changing with the introduction of new fashion
trends. Also in relation to the adverse publicity accordance with IAS 2.
FL has received in terms of the quality of a b) Ascertain the quantity of inventory specific to the
particular clothing range, Ms Komal has decided “FOXY” brand.
to sell these items at a discount of 50% in the sale c) Obtain copies/printouts of the last goods received
in January. There is a risk that valuation of and dispatch records to perform cut−off testing.
inventory may not be included at the lower of cost
and NRV according to IAS 2.
6. Liabilities and finance costs misstated or a) Agree the amount of the loan received from bank
classified incorrectly: to bank statement or loan agreement.
b) Inspect the financial statements for appropriate
a) FL obtained a new bank loan during the year
classification of the current and non−current
to finance the new store. The loan is for more
than one-year term and therefore there is risk the portions of the liability.
balance may not be split into current and non- c) Recalculate the interest charge based on the
current for classification purposes. agreement and agree to the amount recorded in the
income statement.
b) Finance costs for the year may be calculated
incorrectly.
7. Unrecognized liability or undisclosed a) Ascertain from management how it proposes to
contingent liability: account for/disclose the legal claim and penalties.
FL is being sued by a competitor over a possible b) Consider the appropriateness of their proposals in
trademark infringement. The outcome of the case
light of other audit evidence (e.g. lawyer’s
is unknown until after the audit report is signed. If
the opening of the new store is a breach of the correspondence).
MDS contract this may lead to penalties which c) Inspect financial statements for appropriateness of
need to be recognized or disclosed depending on the disclosure and recording of penalties
the expected outcome.
8. Undisclosed related party transactions: a) Ascertain and test the control procedures around
the recording and identification of RP transactions.
a) The two directors, husband and wife, own 80% b) Enquire of management what transactions have
of the shares in FL and are therefore related occurred between themselves and FL during the
parties of the company. There is risk of non- year.
disclosure of related party relationship and
c) Inspect board minutes for any evidence of related
transactions as per the requirements.
b) There is also a risk of override of controls as a party transactions.
result of being a closely-held entity. d) Request a management representation that all
related party transactions have been appropriately
disclosed. Inspect financial statements for
appropriateness of disclosure.
CFAP 6 Audit, Assurance and Related Services
Test 6 Suggested Answer
25 November 2021 Winter-2021 Attempt

9. Government Grants: a) Obtain and review the terms and conditions of the
grant and also seek any approved change to the
Based on the limited information in this regard, terms
apparently it is clear that the conditions of the
b) Inquire with management as to whether any
grant have not been met and there is a risk that
the grant is now repayable to the governmental correspondence has been received from the agency
agency. Risk that management may not have and whether there is a precedent for this scenario
recorded the same. with this agency.
c) Review FS to account for reversal in light of terms
of grant

10. Dividends declared after the reporting date: a) Review the minutes of board minutes to verify the
amount and date for declaration of dividend.
As per IAS-10 dividend declared after the b) Ensure proper accounting treatments are made in
reporting date is non-adjusting event. There is risk
respect of last year dividend as well as current
in recording the dividends in wrong accounting
period. year.
d) Ensure information about declaration of dividend
is provided in notes to the financial statement.
e) Ensure dividend related to last year is properly
accounted for in the financial statements.

11. Actual vs. Budgeted results: a) Discuss in detail with management about the main
There is a difference between the actual and reasons of such difference in actual vs. budgeted.
budgeted results. This may creates risks in the b) Ask the management to prepare working related to
following forms:
value in use and assess the reasonableness of the
a) -Indication of impairment related to property,
plant and equipment. assumptions being used.
b) -Impairment of inventory due to slow moving c) Inquire the management about increase in interest
items. cost.
c) -Provision for doubtful debts due to low sales
(as a result of low demand) and delay in
payments as compared to the agreed credit
period.
d) -Change in risk profile and credit rating

SOLUTION - 2
[Part (a)]

1) The engagement partner has been asked to attend meeting with potential investors. This creates an
advocacy threat and also a significant threat to independence. No safeguards could reduce the threat to
an acceptable level, therefore should be politely declined.
2) Request for preparation of financial statements may create a possible self review threat. Though AQL is
not a listed entity but in the process of listing, so independence shouldn’t be compromised. Threat should
be assessed and if can be reduced to an acceptable level, separate teams should be allocated.
3) Allocation of assistant finance director as an independent review partner would create a self review threat
and shouldn’t be appointed.
4) The hospitality being offered to audit team would create a self interest threat to independence. No
safeguards could reduce the threat to an acceptable level, therefore should be politely declined.
5) Short term loan being offered to senior audit team member at significantly reduce interest rate would
create a self interest threat to independence therefore loan must be declined.
CFAP 6 Audit, Assurance and Related Services
Test 6 Suggested Answer
25 November 2021 Winter-2021 Attempt

[Part (b)]

Ethical Issue Threat Safeguards


There is a possible self interest threat as a Self 1. The risk that arises to the independence of the
member of the audit team has an indirect interest audit here is not significant.
financial interest in the client. The 2. The firm may consider having an additional
relevant factors are as follows: review on the work.
1. The interest is unlikely to be material
to the client or Mr. Rehman, as the
investment is recent and Rehman’s
interest is in a pool of general
investments made in Pakistan stock
exchange on his behalf.

[Part(c)]

a) As per the code of ethics, seven years are completed therefore Mr. Ali should not be appointed as
engagement partner of ATL.
b) If a key audit partner has served in combination as engagement partner and engagement quality
control reviewer for 4 or more years and engagement partner is engaged for 3 or more years then the
cooling off period should be 5 years in consecutive.
c) In this case, the time off period between various engagements does not constitute 5 years
consecutively and cannot be treated as a valid cooling off period served. Therefore, the next eligibility
will be for 30 June 2024 yearend.
d) In addition, CCG requires rotation of the engagement partner for non-banking companies after 5
years while in this case Mr. Ali is engagement partner only for 3 years, therefore Mr. Ali can serve for
2 more years.

SOLUTION - 3

[Part (a)]

Warranty provision:
Overview:
a) The yearend provisions represent 3.72% of total assets and 19.51% of profit. It is therefore
material to the financial statements.
b) The estimate of returns is clearly subject to significant subjectivity. This increases the risk of
material misstatements due to both error and manipulations.
c) The sales director estimates the returns made, however production manager/quality control
manager should also be involved in the process as they may be aware of an electrical fault, if
any,within the goods.
Evidence expected to be found on file:
a) Copies of sales contracts with customers to include details of terms and conditions and the length
of the warranty period.
b) Discussions with the sales director, to check the assumptions made, and their calculations.
c) Discussions with the production manager/quality control manager to see if the estimated returns
appear reasonable, and if there are any known issues in respect of the goods sold.
d) A copy of the calculation of the warranty provision. The audit team should have carried out an
analytical review, and discussed any significant movements with prior years.
CFAP 6 Audit, Assurance and Related Services
Test 6 Suggested Answer
25 November 2021 Winter-2021 Attempt

e) The audit team, should have recalculated the provision, and discussed any differences.
f) The audit team should review the calculation of the total unutilized provision reversed during the
year, and discuss with management as to why it is no longer needed.

Fixed Assets
Overview:
a) The retail units have been classified as assets held of sale at the year end.
b) The balance is material, as it is 40.24% of profit before tax, and 7.67% of total assets.
c) It is clear the assets are correctly classified as assets held for sale, as they meet the criteria stated in
IFRS 5 “Noncurrent Assets Held for Sale and Discontinued Operations”:
i. Management is committed to sell
ii. The assets are available for immediate sale in their present condition
iii. The sale is highly probable, as management is looking for a quick sale, so should
therefore be sold within 12 months.
Evidence expected to be found on file:
a) A copy of the board minutes, where it was noted, that the company decided to sell some of their
retail units.
b) Evidence that the retail units are already on the market (brochure from the estate agents/evidence
online)
c) Physical inspection of assets to confirm they are saleable in the present condition.
d) Written representation from management to confirm they are committed to selling within 12
months.
e) Details on the carrying value of the assets at Rs. 16,500,000.
f) Confirmation on/ a working that shows depreciation ceased on reclassification of the assets.
g) Evidence to support the fair value of the assets less cost to sell.
h) Discussions with management to on asset’s measurement at the lower of the carrying amount and
fair value less costs to sell, which in this situation is Rs. 13,250,000.
[Part (b)]
Decommissioning provision

Matters to be considered:
a) Whether the provision is material. Here provision represents 22.63% of total assets, hence
material.
b) It is unusual that a decommissioning provision has been reduced in value
c) Provision should have been measured at best estimate and discounted to present value.
d) The reason for the change in interest rate needs to be fully understood.
e) Consideration of accounting entries and whether they indicate an attempt to boost profit for the
year.
f) Whether it is appropriate that management has not used an expert to determine the estimate or
consideration of adequacy of management’s competence.

Evidence expected in audit file:


a) A copy of management’s calculation of the Rs. 4,300 million provision, with all components
agreed to underlying documentation, and arithmetically checked.
b) Notes of a meeting with management, at which the reasons for the reduction in the provision
were discussed.
c) Copies of the source data used to produce management’s estimate.
d) A comparison of the calculation for this year’s provision with previous years, confirming
consistency in the overall approach used by management.
e) Copies of the underlying information relating to the expected costs of the decommissioning.
f) An evaluation of all key assumptions, considering consistency with the auditor’s knowledge of
the business, and a conclusion on their validity.
CFAP 6 Audit, Assurance and Related Services
Test 6 Suggested Answer
25 November 2021 Winter-2021 Attempt

g) An independent estimate prepared by the audit team, compared to management’s estimate, and
with significant variances discussed with management.
h) Alternatively, an estimate prepared by an auditor’s expert, with all workings and assumptions
evaluated by the audit team.
i) A schedule of the movement in the provision, checked for arithmetical accuracy, opening and
closing figures agreed to the draft financial statements and general ledger.
j) Evaluation and a conclusion on the appropriateness of the accounting entries used, especially in
relation to the profit impact of the entries.
k) A copy of the notes to the financial statements which describe the decommissioning provision,
reviewed for completeness and accuracy.

SOLUTION - 4
Concern as an auditor:
a. Management has delivered the goods to the third party and sales invoices are raised and revenue
is recognised. The contract requires that final inspection by customer is mandatory.
b. As per IFRS-15, performance obligations are not completely satisfied by the entity.
c. IFRS-15 requires that revenue should be recorded once the control has been transferred to the
entity. In our case, this occurs when customer has inspected the delivered goods. It should be also
considered whether customer has consented to such delivery and performed inspection.
d. The effect of the matter on the financial statements are calculated as below:
i. 17m/1.437m = 1.18% based on revenue (threshold ranging from 0.5% to 1%)
ii. 17m/139m = 12.23% based on Profit (threshold ranging from 5% to 10%)
e. The matter is material with reference to revenue and profit, if revenue is not adjusted in the
financial statements as per IFRS-15.
Audit Procedures:
a. Discuss with management how the contract term of satisfactory inspection is covered by entity.
b. If not covered, request the management to make adjustment in the financial statements.
c. Obtain confirmation from customer.
d. Evaluate the possible impacts and intentions of the management behind such accounting
treatment.
Reporting:
Overstatement of Revenue in financial statement:
The sale of two items is material to the income statement, so non-adjustment is a material misstatement.
As per ISA 705 a modifications to the Opinion is required. The auditor should express a qualified 'except
for' opinion, as the misstatement is material but not so pervasive as to render the income statement
meaningless.

The auditor's should discuss the reasons for the modified opinion in the ‘basis for qualified opinion
paragraph’, including the nature of the sales transactions, its financial effect on the financial statements
and state that this is in breach of IFRS-15.
SOLUTION - 5
Concern as an auditor:
(a) The management has vacated the building for rental purposes as well as for capital appreciation.
The management has classified the building as an investment property and the total difference in
carrying value and the fair value at reporting date is treated as gain on investment property and
recorded in profit and loss.
(b) The accounting treatment by management is correct in respect of the following:
i) Classification of building as an investment property: The warehouse has been held to
earn rentals as well as for capital appreciation from 1 April 2020 therefore qualifies as an
investment property. IAS 40 defines an investment property as land and/or buildings held to
earn rentals or for capital appreciation, or both. Further, the fact that the property has not yet
CFAP 6 Audit, Assurance and Related Services
Test 6 Suggested Answer
25 November 2021 Winter-2021 Attempt

been let by the reporting date does not impact on this classification. The end of owner-
occupation of the warehouse is evidence of the change in use to an investment property.
ii) No depreciation: Depreciation is not recorded which is correct because once the property
is classified as an investment property, depreciation is not allowed under IAS-40.
(c) The management’s accounting treatment in respect of following is incorrect:
i) Gain on reclassification is not recorded as revaluation surplus: On transfer of an
owner‑occupied property recognized at depreciated historical cost, which has not been
previously impaired, to investment property carried at fair value, IAS 40 requires that any
resulting increase in the carrying amount should be recognized in other comprehensive
income as a revaluation surplus within equity, whereas the management has not recoded the
same.
ii) Gain after reclassification: After reclassification of an asset as an investment property,
gain should be recorded in profit and loss.
(d) The management should reclassify the gain being recorded in profit and loss as following:
i) Lifecare Co should recognize the initial increase of Rs. 250,000 (Rs. 3,480,000 – Rs.
3,230,000) in other comprehensive income rather than in its profit for the year.
ii) The additional increase of Rs. 50,000 (Rs. 3,530,000 – Rs. 3,480,000) which arises during
the current year should be recognized in this year’s profit or loss.
(e) The profit and loss is overstated by Rs. 250,000 and the amount is immaterial as it represents only
1.24% [Rs. 250,000/20.15million] of profit before tax against threshold ranging from 5%.
Audit procedures:
a) Discuss the matter with the management about the reclassification of gain to other comprehensive
income instead of profit and loss.
b) The auditor should consider whether such misstatement is in isolation or management is following
the same practice for other investment properties.
Reporting:
As the overstatement represents 1.24% of profit before tax and therefore immaterial in isolation. The
auditor should consider what will be the impact on audit opinion if this misstatement is combined
other uncorrected misstatements. As this misstatement is immaterial, the auditor’s report would not
need to be modified.
SOLUTION - 6
[Part-a]
a) The group engagement team needs to obtain an understanding of Chew to ascertain whether
Chew is a significant component and assess the risks of material misstatement.
b) Materiality for the group financial statements as a whole and component materiality should be
determined.
c) If Chew is not significant then only analytical procedures at a group level need to be planned.

If reliance is to be placed on a local auditor, the firm must consider whether:


a) They will comply with ethical requirements relevant to group audit.
b) They are competent.
c) The group audit team will be involved in their work to the extent necessary to obtain sufficient
appropriate audit evidence.
d) They operate in a regulatory environment that actively oversees auditors.

Communication will be required with Chew’s auditor on timely basis and will need to cover:
a) The work to be performed,
b) The use to be made of the work, and
c) The form and content of Chew auditor’s communication with the group audit team

[Part-b]
CFAP 6 Audit, Assurance and Related Services
Test 6 Suggested Answer
25 November 2021 Winter-2021 Attempt

a) Intragroup balances should agree because, in the preparation of consolidated accounts, it is


necessary to cancel them out.
b) If they do not cancel out then the group accounts will be displaying an item which has no value
outside the group and profits may be correspondingly under or overstated.

The audit work required to check that intragroup balances agree would be as follows:
a) Obtain and review a copy of the holding company’s instructions to all group members relating to
the procedures for reconciliation and agreement of year end intragroup balances. Particular
attention should be paid to the treatment of ‘in transit’ items to ensure that there is a proper
cutoff.
b) Obtain a schedule of intragroup balances from all group companies and check the details therein
to the summary prepared by the parent company. The details on these schedules should also be
independently confirmed in writing by the other auditors involved.
c) Nil balances should also be confirmed by both the group companies concerned and their
respective auditors.
d) The details on the schedules prepared should also be agreed to the details in the financial
statements of the individual group companies which are submitted to the parent company for
consolidation purposes.
SOLUTION - 7

[Part (a)]

Based on the matters as provided in point (a) to (e), it is clearly evident that 60% of the revenue is
gone. It seems to be impossible that Dux Ltd will be able to sale the product to the same customer
because the customer is considering filing for bankruptcy. Further, the product is of specialized nature
therefore finding new customer will also be difficult.

The company is hopeful in finding the new customer as well as 40% revenue can be generated in next
financial year. Based on the above events and conditions, it can be concluded that going concern
basis of accounting is appropriate but a material uncertainty exist. The financial statement must
include disclosure related to material uncertainty.

It is specifically mentioned that management has informed not to include any additional disclosure.
An adverse opinion will be provided in the audit opinion due to non-disclosure of material
uncertainty. Non disclosure may affect decisions of the users of the financial statements due to its
multiple impacts on the financial statements as follows:
a) 60% of subsequent period revenue is in doubt
b) The existing stock may also be obsolete and required NRV testing.
c) Property, plant and equipment for such a special product may be impaired.
d) Due to loss of revenue, banks may have concern over the performance.
e) Provision for doubtful debts is not provided
So the impact on financial statements is material and pervasive.

[Part (b)]

If there is any modification in the audit report of complete set of financial statement, auditor has to
consider whether such matters have implications for the specific element and for audit report thereon.

In case of adverse opinion on entity’s complete set of financial statements, the auditor can provide an
unmodified opinion on a specific element of those financial statement only if:
a) The auditor is not prohibited by law or regulation
CFAP 6 Audit, Assurance and Related Services
Test 6 Suggested Answer
25 November 2021 Winter-2021 Attempt

b) The opinion of specific element is not published with the auditor report on complete set of
financial statements; and
c) That specific element doesn’t constitute a major portion of complete set of financial
statements.

In our case trade debts (specific element) constitute 60% of current assets therefore can be treated as
major portion of the complete set of financial statements even in the absence of information about the
non-current assets. Therefore an unmodified opinion can’t be provided on audit report of trade debts.

Impact on audit report of trade debts:


1. No provision is provided related to the receivables from the customer that is considering
filing for bankruptcy. The outstanding amount as on the reporting date represents 1.8% [3%
of 60%] of trade debts (threshold ranging from 1% to 2%).
2. Management should record a provision for doubtful debt based on the best judgment.
3. As the management is not willing to provide and provision for doubtful debt as well as
related disclosure, an except for modification will be provided based on the material
misstatement.
4. Further, an ‘other matter paragraph’ will also be provided in audit report on trade debts
describing the fact that an adverse opinion is provided on the complete set of financial
statements. The reason for adverse opinion should also be provided.

SOLUTION - 8

AUDIT REPORT TO BASED ON AGREED UPON PROCEDURES ENGAGEMENT


REPORT ON FACTUAL FINDINGS
The Board of Directors,
TL

Dear Sirs,
We have performed the procedures agreed with you and enumerated below with respect to the book value
per share as of 30 June 2019, as set forth in the accompanying statement. Our engagement was undertaken in
accordance with the International Standard on Related Services applicable to agreed-upon procedures
engagements. The procedures were performed solely to assist you in evaluating the validity of the book value
per share and its submission to regulatory Stock Exchange and are summarized as follows:

1. We obtained the statement of book value per share as prepared by management and compared the
information with the audited financial statements as at 30 June 2019.

2. We checked that the calculation of the book value per share is in accordance with the directives of the
Institute of Chartered Accountants of Pakistan contained in Technical Release 22 “Book Value per Share”
We report our findings below:

(a) The book value per share of the face value of Rs. 10 each, taking into consideration, surplus on
revaluation of fixed assets, works out to Rs. 11.41 per share.

(b) The book value per share of the face value of Rs. 10 each without taking into consideration
surplus on revaluation of fixed assets works out to Rs. 11.15 per share.

Because the above procedures do not constitute either an audit or a review made in accordance with
International Standards on Auditing or International Standards on Review Engagements (or relevant
CFAP 6 Audit, Assurance and Related Services
Test 6 Suggested Answer
25 November 2021 Winter-2021 Attempt

national standards or practices), we do not express any assurance on the book value per share as of 30 June
2019.

Had we performed additional procedures in accordance with International Standards on Auditing or


International Standards on Review Engagements, other matters might have come to our attention that would
have been reported to you.

Our report is solely for the purpose set forth in the first paragraph of this report and for your information and
is not to be used for any other purpose or to be distributed to any other parties. This report relates only to the
item specified above and does not extend to any financial statements of the Company, taken as a whole.

AUDITOR
Date
Address
TL
BOOK VALUE PER SHARE
(With and without surplus on revaluation of fixed assets)
As at 30 June 2019

Break-up value per


Ordinary share Preference share Total (both)
…………………….Rupees in thousand……..………………
Equity
-Issued, subscribed and paid-up capital 4,000,000 600,000 4,600,000
-Share deposit money (preference share related) - 3,000 3,000
-Un-appropriated profit 30,000 - 30,000

-Unrealized gain on revaluation of


available for sale investment -net 300,000 - 500,000

-Deferred tax asset (not recognized) 200,000 - 200,000

-Surplus on revaluation of fixed assets 120,000 - 120,000

-Total equity (with Surplus on


revaluation of fixed assets) 4,650,000 603,000 5,253,000

-Total equity (without Surplus on


revaluation of fixed assets) 4,530,000 603,000 5,133,000

-Number of ordinary shares is issue 400,000,000 - 400,000,000

-Number of convertible preference


share in issue - 60,000,000 60,000,000

-Number of convertible preference


shares to be issued in respect of share deposit
money received - 300,000 300,000

-Shares (absolute value) 400,000,000 60,300,000 460,300,000


CFAP 6 Audit, Assurance and Related Services
Test 6 Suggested Answer
25 November 2021 Winter-2021 Attempt

Break-up value per share (with


surplus on revaluation of fixed assets) 11.63 10.00 11.41

Break-up value per share (without


surplus on revaluation of fixed assets) 11.33 10.00 11.15

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