INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF PAKISTAN

Fall (Winter) 2010 Examinations

Monday, the 29th November 2010
RISK MANAGEMENT AND AUDIT (S-503)
STAGE - 5

Time Allowed – 2 Hours 45 Minutes Maximum Marks – 80

(i) Attempt all questions.
(ii) Answers must be neat, relevant and brief.
(iii) In marking the question paper, the examiners take into account clarity of exposition, logic of arguments,
effective presentation, language and use of clear diagram/ chart, where appropriate.
(iv) Read the instructions printed inside the top cover of answer script CAREFULLY before attempting the paper.
(v) Use of non-programmable scientific calculators of any model is allowed.
(vi) DO NOT write your Name, Reg. No. or Roll No. anywhere inside the answer script.
(vii) Question No.1 – “Multiple Choice Question” printed separately, is an integral part of this question paper.

Marks
Q. 2 A local biscuit manufacturing company is currently going through tough times. They have
hired your services as a risk management expert to advise them as to how to manage various
risks being faced by them so that they can continue to trade as a going concern. You have
done your feasibility study and have identified various business risks being faced by the
company. You have classified these risks under the following four categories:

Risks that have high impact and high likelihood of occurrence:

Under this category you identified two types of risk being faced by the company. Firstly,
contaminated food stuff quite regularly enters the production process which affects the quality
and life of biscuits manufactured. Secondly, because of minimal initial outlay to start this
business, new entrants are quite frequent in this line of business and this reduces the
company’s existing market share and/or profit margins.

Risks that have high impact but less likelihood of occurrence:

Under this category you identified two types of risks being faced by the company. Firstly, the
non availability of a basic element of production, like sugar. Secondly, in the past there has
been and there is still a risk of significant damage to property as a result of flood or
earthquake.

Risks that have low impact and low likelihood of occurrence:

Under this category you identified that the company faces the risk of minor damage to
property due to snowfall.

Risks that have low impact and high likelihood of occurrence:

Under this category you identified that company drivers are regularly involved in vehicle
accidents that leaves the business temporarily without the vehicle. Secondly, one of the risk
that the company faces is that its production employees regularly gets ill and are off sick and
unable to work temporarily.
Required:
For each of the risks identified under each category above, describe how the company might 15
transfer, reduce or accept the risk.

PTO

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 Marks
Q. 3 Suppose you have been the senior audit manager of your audit client Delta Force Limited.
You have come across the following situations with regard to the audit of Delta Force Limited
for the year ended 31 October 2010:
Required:
(a) A newly appointed supervisor has approached you and enquired about how to 03
supervise the work of junior audit team members. List the main elements of supervision
as laid down in ISA 220 “Quality Control for an Audit of Financial Statements” (any
three).

(b) During the audit of Delta Force Limited the directors have not provided you with details 06
of transactions in the company’s private bank account, which is used for their
expenses, as the year end balance is unchanged from the previous year. Furthermore,
an extraordinary general meeting was held on 12 July 2010, of which you had been
unaware. A resolution was passed at this meeting to capitalise some reserves. You
believe there might not have been sufficient reserves at that time to meet the
capitalisation. State what rights of auditors, set out in the Companies Ordinance 1984,
have been denied?

(c) During your planning meeting with the finance director, he informed you that his wife, 01
an interior designer, had provided consultancy services in relation to the refurbishment
of the company’s head office. State and explain why this aspect should be considered
by the auditor?

(d) List out factors that should be considered when determining the sample size for “test of 08
details” (substantive tests).

Q. 4 (a) What do control activities ensure? 07

(b) Give three examples of each of the following:–

(i) Test of control 03
(ii) Test of detail 03
(iii) Analytical procedures 03

Q. 5 (a) Describe the role of internal audit ensuring that an organisation achieves its corporate 04
objectives.

(b) List and explain the types of activities normally carried out by internal audit department. 12

Q. 6 You have been recently asked by the partner of your firm to prepare a presentation on cost
audit procedures in a manufacturing concern. Your target audience are recently hired
trainees of your firm.
Required:
(a) List down the main areas of a manufacturing concern that should be audited for cost 05
audit purposes.

(b) Explain as to what information should be collected and checked, by the cost auditor,
with regards to the following areas of a manufacturing concern to conduct the cost
audit:
(i) Cost Accounting System 03
(ii) Factory overheads 04
(iii) Spare parts. 03

THE END
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