⬡ Artt Business School · CAF 8 Audit & Assurance

AUDITNEXUS

INTERACTIVE LEARNING GAME

RISK IDENTIFICATION · ISA 315 · CASE STUDIES · PAST PAPERS

7

LEVELS

55+

QUESTIONS

13

RISK TYPES

100%

SYLLABUS

🕵️

YOUR MISSION, AUDIT TRAINEE

Welcome to AMK Chartered Accountants — a Big 4 equivalent firm. You've just joined as an Audit Trainee. Your first assignment: audit Pakistan's biggest companies across 7 industries.

Your senior has warned you: every business hides risks. Your job is to identify them, draft them correctly, and protect the financial statement users.

⬡ MISSION BRIEFING

Navigate 7 levels from audit basics to ICAP past papers. Master the drafting technique, identify risk factors from scenarios, and earn the rank of Audit Partner 🏆. Lose all 3 lives and the engagement fails.

LEVEL 1 BRIEFING

WHAT IS AUDIT?

Study this quick reference before you begin

MCQ

Q1 of 6

🏅

LEVEL CLEARED!

0

SCORE

0/0

CORRECT

❤️❤️❤️

LIVES LEFT

CURRENT RANK

Audit Trainee

💀

ENGAGEMENT FAILED

You ran out of lives. Review the concepts and re-attempt the audit!

🏆 AUDIT COMPLETE!

CAF 8 — RISK IDENTIFICATION · ISA 315 · CASE STUDIES

RISK FACTOR / SITUATION	AUDIT RISK (WHAT TO WRITE)	MEMORY SHORTCUT
13 MASTER RISK SCENARIOS — ICAP EXAM TABLE
Courier + Fuel price hike	Risk of UNDERSTATEMENT of fuel expenses	Fuel UP = Cost should be UP
Bank loans + Flood/Disaster	Risk of OVERSTATEMENT of loans + UNDERSTATEMENT of bad debt expense	Flood = Can't repay = Write off needed
Exports/Imports (foreign currency)	Risk of incorrect EXCHANGE RATE for recording sales and forex gain/loss	$→PKR = Rate matters
Export sales BANNED + stock in inventory	Risk of OVERSTATEMENT of revenue + OVERSTATEMENT of PPE (impairment)	Banned = Can't sell = Revenue + PPE overstated
Selling at LOWER MARGIN / Competitor	Risk of OVERSTATEMENT of inventory + UNDERSTATEMENT of NRV losses	Below cost = NRV writedown needed
Competitor arrived + Revenue INCREASED	Risk of OVERSTATEMENT of revenue + OVERSTATEMENT of PPE	Competitor + UP revenue = Suspicious
Receivable/Debtor days INCREASED	Risk of OVERSTATEMENT of receivables + UNDERSTATEMENT of bad debt expense	Days UP = Slow collection = Overstatement
Inventory days INCREASED	Risk of OVERSTATEMENT of inventory + UNDERSTATEMENT of NRV losses	Days UP = Slow movement = Overstatement
Product banned/declining + stock in inventory	Risk of OVERSTATEMENT of inventory + UNDERSTATEMENT of NRV losses	Can't sell = NRV issue
Highly REGULATED industry	Risk of non-compliance + UNDERSTATEMENT of penalties + Undisclosed contingencies	Regulation = Fines = Must disclose
Sales DECLINING + Negative cash flows	Risk of PPE IMPAIRMENT (value in use may be lower than carrying amount)	Declining revenue = PPE may be impaired
Research & Development (IAS 38)	Research wrongly CAPITALIZED; or Development capitalized without meeting 4 conditions	Research = always expense; Dev = 4 conditions
GOING CONCERN signals	Major customer lost / Debt covenants breached / CL > CA / Negative CFO	12 months ahead — can they survive?

⚡ SPEED REVISION

WHAT IS AUDIT? — THE CHAIN

Definition

Official examination of financial statements to ENHANCE CONFIDENCE of users

How assurance is given

Auditor obtains Audit Evidence → evaluates assertions → issues report

Type of assurance

REASONABLE (not absolute). Cannot guarantee 100% accuracy — inherent limitations exist

Assertions

Claims made by MANAGEMENT through the FS. E.g. "Inventory exists" — auditor verifies

Engagement Agreement: Management = (1) Prepare FS + (2) Provide data. Auditor = Conduct audit per ISAs.

COMPANY STRUCTURE & INDEPENDENCE

Hierarchy: Shareholders → appoint BOD → BOD forms management (Sales/Marketing/Finance/Production/HR) + appoints Independent Auditor
TCWG = Those Charged with Governance = BOD members
Auditor audits ALL 5: Balance Sheet + P&L + Cash Flow + Changes in Equity + Notes to FS

Independence Rule 1

Partner does NOT have shares in the client

Independence Rule 2

Partner does NOT have relatives working in the client

THE GOLDEN DRAFTING RULE

TEMPLATE

"Since entity is involved in [situation], there is a risk of [overstatement/understatement] of [FS line item]."

Pick situation from question → Link to specific FS line item → State if OVER or UNDER stated → That's a complete risk answer!

13 MASTER RISK SCENARIOS

RISK FACTOR	AUDIT RISK
Courier + Fuel hike	Understatement of fuel expenses
Loans + Flood	Overstatement of loans + Understatement of bad debt
Exports/Imports	Incorrect exchange rate (forex risk)
Export banned + stock	Overstatement of revenue + Overstatement of PPE
Selling at lower margin	Overstatement of inventory + Understatement of NRV
Competitor + Revenue UP	Overstatement of revenue + Overstatement of PPE
Debtor days ↑	Overstatement of receivables + Understatement of bad debt
Inventory days ↑	Overstatement of inventory + Understatement of NRV
Product banned/declining	Overstatement of inventory + Understatement of NRV
Highly regulated industry	Non-compliance + Undisclosed penalties
Sales decline + negative CFO	PPE Impairment risk
R&D (IAS 38)	Research capitalized / Dev without 4 conditions
Going concern signals	Customer lost / Covenant breach / CL > CA / Negative CFO

IAS 38 — RESEARCH vs DEVELOPMENT

RESEARCH — Always EXPENSE

Future economic benefits NOT probable. Examples: market research, evaluating alternatives. Cannot capitalize.

DEVELOPMENT — Capitalize IF 4 conditions met

1. Technical FEASIBILITY · 2. INTENTION to complete · 3. Ability to USE or SELL · 4. RESOURCES available

GOING CONCERN — 4 KEY INDICATORS

1. Major Customer GONE

Loss of primary revenue source → significant doubt on viability

2. Debt Covenants BREACHED

Debt IMMEDIATELY becomes payable (current) → current ratio deteriorates sharply

3. CL Exceeds CA

Negative working capital → cannot meet short-term obligations

4. Negative Cash Flows

Consistently negative CFO → company consuming cash → sustainability risk

Going concern = Company able to operate for NEXT 12 MONTHS from end of reporting period

ISA 315 — RISK ASSESSMENT PROCEDURES (IIOA)

1. INQUIRY

Ask: CFO, CEO, Those Charged with Governance (TCWG/BOD)

2. INSPECTION

Read: Board minutes, Internal audit reports, Legal notices

3. OBSERVATION

Watch: News, Environmental changes, Warehouse conditions

4. ANALYTICAL PROCEDURES

Calculate: Ratio analysis, % changes, year-on-year comparisons, expected vs actual

ANALYTICAL PROCEDURE EXAMPLES

📊 Debtor days = (Trade Receivables ÷ Revenue) × 365
📊 Inventory days = (Inventory ÷ COGS) × 365
📊 Commission % = (Commission ÷ Sales) × 100 — should be consistent year-on-year
📊 Expected revenue = Prior year × (1 + price increase %) — compare to actual
📊 Sites increasing but dismantling provision decreasing = Understatement of provision
📊 Salary expense decreasing but employees increasing = Understatement of wages
📊 Branches increasing but rent decreasing = Understatement of rent