UNIVERSITY OF CENTRAL

PUNJAB

AUDIT AND ASSURANCE

Final Project ( Section A)

Courses Instructor : Prof.Aideed Bashir

Course: AF3253 – Audit and Assurance

Level: BS Accounting and Finance (6th Semester)

Prepared By:

 Abdullah Faisal
 Ahmad Fazeel
 Hafsa Arshad
 Amna Shaukat
 Simulated Audit Report
Kohinoor Textile Mills Limited (KTML)

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Table of Contents
1. Executive Summary
2. Company Overview
2.1 Industry Background
2.2 Operational Scope
2.3 Financial Highlights
2.4 Corporate Governance Structure
3. Audit Planning
3.1 Business and Environment Analysis
3.2 Materiality Assessment
3.3 Preliminary Analytical Review
3.4 Audit Team and Timeline
4. Audit Risk Assessment
4.1 Key Risks Identified
4.2 Audit Assertions Mapping
4.3 Inherent and Control Risk Evaluation
4.4 Risk Response Strategy
5. Internal Control Evaluation
5.1 Control Disclosures Analysis
5.2 Control Weaknesses and Recommendations
5.3 Control Testing Approach
6. Substantive Procedures
6.1 Key Audit Areas
6.2 Detailed Audit Procedures
6.3 Sampling Methodology
7. Key Audit Matters (KAMs)
7.1 Revenue Recognition
7.2 Inventory Valuation
7.3 Foreign Exchange Transactions
7.4 Related-Party Transactions

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 8. Draft Audit Opinion
8.1 Basis for Opinion
8.2 Opinion Scenarios
8.3 Emphasis of Matter
9. Ethical Considerations and Independence
9.1 Independence Requirements
9.2 Ethical Threats and Safeguards
10. References
11. Appendices
11.1 Materiality Calculations
11.2 Risk Map
11.3 Analytical Review Charts
11.4 Sample Size Calculations
11.5 Control Weakness Recommendations

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1. Executive Summary

This simulated audit report provides an exhaustive analysis of Kohinoor Textile Mills Limited (KTML), a
publicly listed textile manufacturer on the Pakistan Stock Exchange (PSX). Conducted as an academic
exercise, the report applies International Standards on Auditing (ISA) to simulate an external audit
engagement, leveraging publicly available financial data from KTML’s 2023 and 2024 annual reports,
PSX filings, and industry reports. The objective is to demonstrate proficiency in audit planning, risk
assessment, internal control evaluation, substantive testing, and professional reporting, aligning with ISA
requirements and IFRS compliance.

Key audit risks identified include revenue recognition due to complex export contracts, inventory
valuation due to obsolescence risks, foreign exchange exposure from international sales, and related-party
transactions due to limited disclosures. Substantive procedures were meticulously designed for critical
financial statement areas—revenue (PKR 48.7 billion), inventory (PKR 12.5 billion), receivables (PKR
8.2 billion), and fixed assets (PKR 25.3 billion)—addressing assertions such as occurrence, completeness,
accuracy, valuation, cutoff, and presentation.

The evaluation of KTML’s internal controls revealed significant gaps in IT systems, inventory
management, and governance oversight, necessitating robust substantive testing to mitigate audit risk.
Key Audit Matters (KAMs) focus on revenue recognition, inventory valuation, foreign exchange
transactions, and related-party transactions due to their materiality, complexity, and judgment
requirements. Assuming no material misstatements are identified through simulated procedures, an
unqualified audit opinion is proposed, indicating that KTML’s financial statements present a true and fair
view in accordance with IFRS and PSX regulations.

Ethical considerations underscore the importance of auditor independence, with safeguards such as team
rotation, independent reviews, and transparent documentation to mitigate familiarity and self-interest
threats. This report serves as a comprehensive learning tool, bridging theoretical auditing concepts with
practical application in a real-world context.

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2. Company Overview

2.1 Industry Background

Pakistan’s textile industry is the backbone of the economy, contributing 8.5% to GDP (approximately
PKR 4.5 trillion) and over 60% of export revenue (USD 15 billion in 2024). Employing 15 million
workers (40% of the industrial workforce), it is the largest industrial sector. Key challenges include:

 Raw Material Volatility: Cotton prices increased 10% in 2024 due to global supply constraints
(e.g., reduced US cotton exports by 15%) and domestic yield fluctuations (20% crop loss from
2023 floods).
 Energy Costs: Electricity tariffs, comprising 25% of production costs, rose 15% in 2024, with
outages averaging 4 hours daily, increasing reliance on captive power plants (e.g., KTML’s 30
MW solar plant).
 Global Competition: Low-cost producers like Bangladesh (labor costs 30% lower) and Vietnam
challenge Pakistan’s market share in low-margin products like yarn and greige fabric.
 Regulatory Compliance: Stringent requirements for labor laws (e.g., minimum wage PKR
32,000/month), environmental standards (e.g., zero-discharge policies), and PSX disclosures
increase compliance costs by 5–10%.

Opportunities include Pakistan’s GSP+ status, granting duty-free access to the EU (25% of KTML’s
exports), and rising global demand for sustainable textiles (e.g., organic cotton, recycled polyester).
Industry trends show a shift toward value-added products (garments, home textiles), requiring
certifications like OEKO-TEX, GOTS, and ISO 9001.

Explanation: The industry’s economic significance and external pressures (e.g., forex volatility, energy
costs) shape KTML’s financial reporting risks, particularly in cost of sales, revenue recognition, and
inventory valuation, necessitating targeted audit procedures.

2.2 Operational Scope

Kohinoor Textile Mills Limited (KTML), incorporated in 1953 as a private limited company and
transitioned to a public limited company in 1968, is a vertically integrated textile manufacturer
headquartered in Lahore, Pakistan. It is part of the Kohinoor Maple Leaf Group (KMLG), which also

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includes Maple Leaf Cement Factory Limited and Maple Leaf Capital Limited. KTML’s operations
encompass:

 Spinning: 180,144 ring spindles producing 20,000 tons of cotton, polyester, and blended yarns
annually, used in apparel and home textiles.
 Weaving: 1,200 looms manufacturing 20 million meters of greige fabric yearly, serving as input
for dyeing and finishing.
 Dyeing and Finishing: Advanced facilities processing 15 million meters of fabric annually,
meeting international standards (e.g., OEKO-TEX, GOTS).
 Garment Production: Manufacturing 5 million units of apparel annually (e.g., shirts, trousers,
bed linens) for global brands like H&M, Zara, and Marks & Spencer.
 Power Generation: 30 MW solar plant and 10 MW coal-fired plant ensuring uninterrupted
production.

KTML operates two facilities:

 Rawalpindi Plant: Focuses on spinning and weaving, with 3,000 employees and 100,000
spindles.
 Gujar Khan Plant: Handles dyeing, finishing, and garments, with 2,000 employees and 15
million meters processing capacity.

Exports account for 70% of revenue (USA: 30%, Europe: 25%, Asia: 15%), with domestic sales targeting
local retailers. KTML uses an SAP-based ERP system for inventory, sales, and financial reporting,
though disclosures on IT controls are limited. The supply chain relies on local cotton (60%) and imported
raw materials (40%), exposing KTML to forex and supply chain risks.

Explanation: KTML’s diverse, export-driven operations and reliance on imported materials increase
audit complexity, requiring rigorous testing of revenue recognition, inventory management, and foreign
currency transactions.

2.3 Operational Stages

KTML’s operational stages are critical to understanding its business processes and associated audit risks.
Each stage is detailed below with specific considerations for the audit process:

1. Raw Material Procurement

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 o Process: KTML procures 60% of cotton locally from Punjab and Sindh and 40% from
international markets (e.g., USA, Brazil). Polyester and other synthetic fibers are
imported from China and India. Procurement involves supplier contracts, quality
inspections, and ERP-based purchase order systems.
o Audit Considerations:
 Verify supplier contracts for pricing and terms to ensure cost accuracy (IAS 2).
 Test quality control processes to confirm raw material valuation.
 Assess foreign currency transactions for imported materials (IFRS 9).
 Check segregation of duties in procurement to prevent fraud.
o Risks: Overvaluation of raw materials, unrecorded liabilities, or forex misstatements.
2. Spinning
o Process: Raw cotton and synthetic fibers are cleaned, carded, and spun into yarn using
180,144 ring spindles across 10 production lines in Rawalpindi. Output includes cotton,
polyester, and blended yarns (20,000 tons annually). Quality checks ensure compliance
with international standards (e.g., ISO 9001).
o Audit Considerations:
 Observe production processes to verify yarn existence and condition.
 Test costing methods (FIFO) for yarn production accuracy.
 Review work-in-progress (WIP) inventory for proper capitalization.
 Assess controls over production reporting in the ERP system.
o Risks: Overstatement of WIP inventory, incorrect costing, or unrecorded waste.
3. Weaving
o Process: Yarn is woven into greige fabric using 1,200 air-jet looms, producing 20 million
meters annually. The process involves warping, sizing, and weaving, with automated
looms monitored via ERP integration. Fabric is inspected for defects before transfer to
dyeing.
o Audit Considerations:
 Perform physical counts of greige fabric to confirm existence.
 Test allocation of overhead costs (e.g., energy, labor) to ensure accurate
valuation.
 Verify transfer pricing to dyeing units for inter-unit consistency.
 Assess machine maintenance records to ensure proper capitalization (IAS 16).
o Risks: Overvaluation of fabric inventory, improper overhead allocation, or unrecorded
defects.

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 4. Dyeing and Finishing
o Process: Greige fabric is dyed, printed, and finished at the Gujar Khan plant, with a
capacity of 15 million meters annually. Processes include bleaching, dyeing, and
finishing to meet OEKO-TEX and GOTS standards. Waste management complies with
zero-discharge regulations.
o Audit Considerations:
 Test compliance with environmental regulations to ensure no undisclosed
liabilities.
 Verify costing of chemicals and dyes used in processing.
 Observe quality control tests to confirm finished fabric valuation.
 Review wastewater treatment records for regulatory compliance.
o Risks: Environmental non-compliance penalties, overvaluation of finished goods, or
unrecorded waste.
5. Garment Production
o Process: Finished fabrics are cut, stitched, and packaged into apparel (5 million units
annually) for export markets. The process involves automated cutting machines, sewing
lines, and quality inspections to meet buyer specifications (e.g., H&M’s ethical sourcing
standards).
o Audit Considerations:
 Verify finished garment counts against production records.
 Test labor cost allocations for accuracy (IAS 2).
 Review export contracts for proper revenue recognition (IFRS 15).
 Assess compliance with labor laws (e.g., minimum wage, overtime).
o Risks: Misstatement of finished goods inventory, labor cost errors, or premature revenue
recognition.
6. Sales and Distribution
o Process: 70% of output is exported to over 20 countries, with key markets in the USA
(30%), Europe (25%), and Asia (15%). Domestic sales target retailers like Khaadi. Sales
are managed via ERP, with export documentation (e.g., bills of lading, letters of credit)
handled by a dedicated team.
o Audit Considerations:
 Vouch export sales to shipping documents and bank receipts.
 Test cutoff procedures for year-end sales.
 Recalculate foreign currency revenue using published exchange rates.

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  Review credit terms for domestic and export customers.
o Risks: Fictitious sales, cutoff errors, or forex misstatements.
7. Power Generation
o Process: KTML operates a 30 MW solar plant and a 10 MW coal-fired plant to ensure
uninterrupted production. Energy costs are allocated to production units via ERP. Excess
power is sold to the national grid under net metering agreements.
o Audit Considerations:
 Verify capitalization of power plant assets (IAS 16).
 Test energy cost allocations to production units.
 Review net metering agreements for revenue recognition (IFRS 15).
 Assess depreciation calculations for power assets.
o Risks: Improper capitalization, misallocated energy costs, or unrecorded revenue.

2.3 Financial Highlights

Metric 2023 2024 Change Analysis

PKR 45.2 PKR 48.7 Driven by export growth but requires cutoff and
Revenue +7.7%
billion billion occurrence testing.

PKR 3.8 PKR 4.1 Reflects operational efficiency but sensitive to

Net Profit +7.9%
billion billion cost fluctuations.

PKR 58.3 PKR 62.5 Growth from capital investments, requiring fixed
Total Assets +7.2%
billion billion asset verification.

Debt-to-Equity Moderate leverage, but loan covenant compliance

0.83 0.85 +2.4%
Ratio needs review.

Stable but vulnerable to rising cotton prices (10%

Gross Margin 15.1% 15.0% -0.1%
increase in 2024).

Inventory Indicates potential obsolescence, warranting

4.5 4.2 -6.7%
Turnover valuation testing.

Receivables Stable but 10% overdue receivables (PKR 820

6.0 6.0 Stable
Turnover million) require allowance tests.

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Explanation: Revenue and profit growth reflect market demand, but declining inventory turnover and
overdue receivables signal risks requiring audit focus. Stable margins and leverage suggest financial
stability, but external pressures (e.g., cotton prices) necessitate scrutiny.

2.4 Corporate Governance Structure

KTML’s governance structure includes:

 Board of Directors: 7 members, including 2 independent directors, overseeing strategy and

compliance.
 Audit Committee: Comprises 3 members, responsible for financial reporting oversight and
internal audit reviews.
 Internal Audit Function: Reports to the audit committee, conducting quarterly reviews of
financial and operational processes.
 Compliance Framework: Adheres to PSX listing regulations and the Code of Corporate
Governance (Pakistan).

However, disclosures on related-party transaction oversight and board evaluation processes are limited,
raising governance risks.

Explanation: Governance structures influence control risk, with weaknesses in disclosure transparency
necessitating additional audit procedures.

3. Audit Planning

3.1 Business and Environment Analysis

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KTML operates in a dynamic environment shaped by:

 Economic Factors: PKR depreciated 20% in 2024, impacting export revenue (70% of sales) and
import costs (40% of raw materials). Inflation (12% in 2024) increases operating costs.
 Industry Factors: Energy costs (25% of production) and cotton price volatility (10% increase)
challenge profitability. GSP+ status supports EU exports but requires compliance with
sustainability standards.
 Regulatory Factors: Compliance with PSX listing rules, labor laws (e.g., minimum wage), and
environmental regulations (e.g., zero-discharge policies).
 Technological Factors: SAP-based ERP system for inventory and financial reporting, but limited
disclosure on IT controls raises risks.
 Competitive Factors: Pressure to maintain quality certifications (e.g., ISO 9001, OEKO-TEX) to
secure contracts with global brands.

The audit team reviewed KTML’s annual reports, PSX filings, Pakistan Textile Exporters Association
reports, and macroeconomic data from the State Bank of Pakistan to contextualize these factors.

Explanation: This analysis identifies external and operational risks (e.g., forex volatility, IT control gaps)
that shape the audit plan and risk assessment.

3.2 Materiality Assessment

 Quantitative Materiality:
o Benchmark: 5% of profit before tax (PKR 4.1 billion × 5% = PKR 205 million).
o Rationale: Profit before tax is suitable for profit-oriented entities (ISA 320). Alternative
benchmarks:
 1% of revenue (PKR 48.7 billion × 1% = PKR 487 million) – too high for
precision.
 2% of assets (PKR 62.5 billion × 2% = PKR 1.25 billion) – less relevant for
operational focus.
o Performance Materiality: 75% of overall materiality (PKR 205 million × 75% = PKR
153.75 million) to account for aggregation risk.
o Component Materiality: PKR 100 million for significant subsidiaries (e.g., weaving
unit) to ensure comprehensive testing.
 Qualitative Materiality:

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 o Misstatements impacting investor confidence (e.g., related-party disclosures), regulatory
compliance, or sustainability reporting are material, even below quantitative thresholds.

Explanation: Materiality thresholds guide audit scope, ensuring focus on significant accounts and
qualitative factors like governance disclosures.

3.3 Preliminary Analytical Review

The review compares 2023 and 2024 financial data:

 Revenue: 7.7% growth (PKR 45.2 billion to PKR 48.7 billion) aligns with industry export trends
(8% growth) but requires testing for fictitious sales or cutoff errors.
 Inventory Turnover: Declined from 4.5 to 4.2 (industry average: 4.8), indicating potential
overstocking or obsolescence. Slow-moving inventory (15% of total) is a key risk.
 Receivables Turnover: Stable at 6.0, but aging analysis shows 10% of receivables (PKR 820
million) overdue by 90+ days, necessitating allowance testing.
 Gross Margin: Stable at 15%, but rising cotton prices (10% in 2024) could compress margins,
requiring cost of sales scrutiny.
 Debt-to-Equity Ratio: Stable at 0.85, but loan covenants (e.g., interest coverage ratio) require
verification.
 Return on Assets: Improved from 6.5% to 6.6%, indicating efficient asset utilization but
warranting fixed asset testing.

Explanation: Analytical procedures identify anomalies (e.g., inventory turnover decline, overdue
receivables) that inform risk assessment and procedure design.

3.4 Audit Team and Timeline

 Team:
o Lead Auditor: Oversees planning and opinion formulation.
o Senior Auditors (2): Conduct risk assessment and substantive testing.
o Junior Auditors (3): Perform detailed testing and documentation.
 Timeline:
o Planning: 2 weeks (data collection, risk assessment).
o Fieldwork: 4 weeks (control testing, substantive procedures).

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 o Reporting: 1 week (drafting opinion, finalizing report).

Explanation: A structured team and timeline ensure efficient execution, aligning with ISA 300 (Planning
an Audit).

4. Audit Risk Assessment

4.1 Key Risks Identified

1. Revenue Recognition: Risk of fictitious sales or premature recognition to inflate revenue,

especially in export contracts with complex terms (e.g., FOB vs. CIF, consignment sales).
2. Inventory Valuation: Risk of overvaluation due to obsolete stock, incorrect costing (e.g., FIFO
vs. weighted average), or failure to apply lower of cost or NRV.
3. Foreign Exchange Exposure: PKR depreciation (20% in 2024) impacts export revenue and
receivables, risking misstatement of gains/losses.
4. Related-Party Transactions: Limited disclosure raises risks of undisclosed transactions or
preferential terms, potentially misstating financial position.
5. Fixed Assets: Risk of improper capitalization of maintenance costs or inaccurate depreciation
calculations, affecting asset valuation.
6. Tax Compliance: Risk of misstatement in deferred tax liabilities due to complex tax laws and
export incentives.

Explanation: These risks stem from KTML’s business model, financial trends, and industry dynamics,
guiding audit focus.

4.2 Audit Assertions Mapping

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 Account Risk Assertions Description

Occurrence, Ensure sales are real, fully

Revenue Fictitious/premature sales Completeness, Accuracy, recorded, accurate, in the correct
Cutoff, Presentation period, and properly disclosed.

Existence, Valuation, Verify inventory exists, is

Overvaluation,
Inventory Completeness, correctly valued, fully recorded,
obsolescence
Presentation and properly disclosed.

Existence, Valuation, Confirm receivables exist, are

Receivables Overstated/uncollectible Completeness, collectible, fully recorded, and
Presentation properly disclosed.

Existence, Valuation, Ensure assets exist, are correctly

Fixed Assets Improper capitalization Completeness, valued, fully recorded, and
Presentation properly disclosed.

Foreign Verify correct calculation and

Misstated gains/losses Accuracy, Presentation
Exchange disclosure of forex transactions.

Ensure tax provisions are

Tax Accuracy, Completeness,
Misstated deferred taxes accurate, complete, and properly
Liabilities Presentation
disclosed.

 Occurrence: Transactions recorded actually occurred.

 Completeness: All transactions are recorded.
 Accuracy: Amounts are correctly recorded.
 Cutoff: Transactions are recorded in the correct period.
 Valuation: Balances reflect true economic value.
 Presentation: Balances are properly classified and disclosed per IFRS.

Explanation: Mapping risks to assertions ensures procedures target specific misstatement risks, aligning
with ISA 315.

4.3 Inherent and Control Risk Evaluation

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  Inherent Risk:
o High: Revenue (complex export contracts, cutoff risks), inventory (subjective valuation,
obsolescence).
o Moderate: Receivables (standard processes but overdue balances), fixed assets (routine
but material), tax liabilities (complex calculations).
o Moderate: Foreign exchange (standardized but volatile).
 Control Risk:
o Moderate: KTML’s internal audit function and segregation of duties suggest some
control effectiveness.
o High: Weak disclosures on IT controls, inventory counts, and related-party oversight
increase control risk.

Explanation: High inherent and control risks necessitate extensive substantive testing to achieve low
audit risk (ISA 200).

4.4 Risk Response Strategy

 High-Risk Areas (Revenue, Inventory): Extensive substantive procedures, including tests of

details and analytical reviews.
 Moderate-Risk Areas (Receivables, Fixed Assets): Combination of substantive tests and
control reliance where applicable.
 Low-Risk Areas: Limited substantive testing, focusing on analytical procedures.

Explanation: Tailored responses ensure efficient resource allocation, addressing risks proportionate to
their severity.

5. Internal Control Evaluation

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5.1 Control Disclosures Analysis

KTML’s 2024 annual report discloses:

 Internal Audit Function: Independent team reporting to the audit committee, conducting
quarterly reviews of financial, operational, and compliance processes.
 Segregation of Duties: Implemented in procurement (purchase orders vs. payments), sales (order
processing vs. invoicing), and cash handling (receipts vs. reconciliation).
 ERP System: SAP-based system for inventory tracking, sales processing, and financial reporting,
integrated with production modules.
 Board Oversight: Audit committee (3 members, 2 independent) reviews financial statements,
internal audit reports, and PSX compliance.

However, disclosures lack detail on:

 IT General Controls: User access restrictions, change management, data backup, and
cybersecurity protocols.
 Inventory Controls: Frequency of physical counts, reconciliation processes, or NRV
assessments.
 Related-Party Oversight: Board procedures for identifying, approving, and disclosing related-
party transactions.
 Export Revenue Controls: Verification of foreign currency transactions or cutoff procedures.

Explanation: Disclosures provide a foundation but require testing to confirm control effectiveness,
especially in high-risk areas.

5.2 Control Weaknesses and Recommendations

Weakness Impact Recommendation

Limited IT control Risk of unauthorized Implement access controls, change logs, and
disclosures access or data errors regular backups; disclose in reports.

No disclosed inventory Risk of obsolescence or Conduct quarterly physical counts; document

count procedures misstatements NRV assessments.

Weak related-party Risk of undisclosed Establish board approval process; enhance

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 Weakness Impact Recommendation

oversight conflicts disclosure per IFRS 24.

No export revenue cutoff Risk of revenue Implement pre- and post-year-end cutoff checks;
controls misstatement verify with shipping documents.

Limited fixed asset Risk of improper Conduct annual asset verifications; reconcile
verification capitalization with physical inspections.

Explanation: Weaknesses increase control risk, requiring compensatory substantive procedures and
management recommendations.

5.3 Control Testing Approach

 Tests of Controls:
o Inspect segregation of duties in 20 procurement and sales transactions.
o Review internal audit reports for 2024 to confirm scope and findings.
o Test ERP access logs for unauthorized access (if available).
 Sample Size: 30 transactions per control area (95% confidence, 5% tolerable deviation).
 Timing: Conducted during fieldwork phase (weeks 3–4).

Explanation: Control testing validates disclosed controls, informing the extent of substantive procedures.

6. Substantive Procedures

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6.1 Key Audit Areas

1. Revenue (PKR 48.7 billion): Material due to size and export complexity.
2. Inventory (PKR 12.5 billion): High risk due to valuation judgments and turnover decline.
3. Receivables (PKR 8.2 billion): Material with 10% overdue, requiring allowance testing.
4. Fixed Assets (PKR 25.3 billion): Significant due to capital-intensive operations.
5. Tax Liabilities: Material due to complex export incentives and deferred tax calculations.

Explanation: These areas were selected based on materiality, risk, and financial statement impact,
aligning with ISA 330.

6.2 Detailed Audit Procedures

ISA
Area Procedure Evidence Purpose
Reference

Vouch 50 sales invoices to Invoices, delivery Verify occurrence,

Revenue shipping documents, bank notes, bank ISA 500 accuracy, and
receipts, and contracts. statements, contracts completeness.

Test cutoff for 20 sales

Sales journal, shipping Ensure correct period
transactions before/after year- ISA 500
records recognition.
end (Dec 31, 2024).

Recalculate foreign currency Confirm accuracy of

Bank statements, forex
revenue for 15 export ISA 500 forex translations per
reports
contracts using SBP rates. IFRS 9.

Perform analytical review of

Revenue reports, Identify unusual
revenue by customer segment ISA 520
industry benchmarks trends.
(domestic vs. export).

Observe physical counts at

Count sheets, Verify existence and
Inventory Rawalpindi and Gujar Khan, ISA 501
inventory register condition.
testing 40 items.

Test valuation for 30 items by Purchase invoices, ISA 501 Confirm cost accuracy

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 ISA
Area Procedure Evidence Purpose
Reference

comparing to recent supplier

cost records (FIFO method).
invoices.

Recalculate NRV for 20

Market reports, sales Ensure lower of cost
slow-moving items using ISA 501
forecasts or NRV per IAS 2.
market price data.

Review inventory
reconciliation for
Reconciliation reports ISA 501 Verify completeness.
discrepancies in 10 product
lines.

Send confirmations to 25
Confirmation replies, Verify existence and
Receivables major customers, reconciling ISA 505
aging reports accuracy.
responses.

Review subsequent cash

Bank statements, cash
collections for 15 overdue ISA 500 Assess collectibility.
receipts
balances (90+ days).

Test allowance for doubtful

Aging reports, write- Ensure adequate
debts using aging analysis ISA 540
off records provision per IFRS 9.
and 3-year write-off history.

Perform analytical review of

Aging reports, Identify anomalies in
receivables turnover vs. ISA 520
industry data collection trends.
industry average (6.5).

Inspect asset register and Confirm existence and

Asset register,
Fixed Assets verify 20 additions via ISA 500 capitalization per IAS
invoices
purchase invoices. 16.

Recalculate depreciation for

Depreciation Verify accuracy of
15 assets using straight-line ISA 500
schedules depreciation.
method (5–20 years).

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 ISA
Area Procedure Evidence Purpose
Reference

Review disposal records for

Disposal records, sales Ensure completeness
10 assets to confirm proper ISA 500
agreements and presentation.
derecognition.

Test capitalization policy for

Purchase orders, board Verify compliance
5 major additions (e.g., ISA 500
approvals with IAS 16.
machinery).

Recalculate deferred tax

Tax Tax schedules, Ensure accuracy per
liabilities for 10 temporary ISA 540
Liabilities financial statements IAS 12.
differences.

Review tax returns for export

Tax filings, incentive Verify completeness
incentives (e.g., duty ISA 500
approvals and compliance.
drawbacks).

Explanation: Procedures are tailored to address specific assertions, using representative samples to
balance coverage and efficiency.

6.3 Sampling Methodology

 Approach: Attribute sampling for controls, variable sampling for substantive tests.
 Sample Size:
o Revenue: 50 invoices (95% confidence, 5% tolerable error).
o Inventory: 40 count items, 30 valuation tests (90% confidence, 5% tolerable error).
o Receivables: 25 confirmations, 15 collection tests (95% confidence).
o Fixed Assets: 20 additions, 15 depreciation tests (90% confidence).
 Selection: Random sampling using ERP-generated transaction lists to avoid bias.

Explanation: Sampling ensures sufficient evidence while maintaining audit efficiency (ISA 530).

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7. Key Audit Matters (KAMs)

7.1 Revenue Recognition

 Why Significant: Revenue (PKR 48.7 billion) is the largest financial statement item, with risks
from complex export contracts (e.g., FOB vs. CIF terms), foreign currency translations (PKR
depreciation), and cutoff errors due to year-end timing.
 Audit Approach:
o Vouched 50 sales invoices to shipping documents, bank receipts, and contracts.
o Tested cutoff for 20 transactions around Dec 31, 2024, ensuring correct period
recognition.
o Recalculated foreign currency revenue for 15 contracts using State Bank of Pakistan
rates.
o Performed analytical review comparing export revenue growth (8%) to industry trends
(8.5%).
 Findings: No material misstatements assumed, but cutoff and forex accuracy require rigorous
testing.

Explanation: Revenue’s materiality and complexity make it a focal point for audit scrutiny.

7.2 Inventory Valuation

 Why Significant: Inventory (PKR 12.5 billion) is material, with risks of obsolescence (turnover
declined from 4.5 to 4.2) and subjective NRV assessments due to volatile cotton prices.
 Audit Approach:
o Observed physical counts at both facilities, testing 40 items for existence.
o Tested valuation for 30 items against supplier invoices, confirming FIFO method.
o Recalculated NRV for 20 slow-moving items (15% of inventory) using market data.
o Reviewed reconciliation reports for 10 product lines to ensure completeness.
 Findings: Assumed accurate valuation, but obsolescence risk necessitates detailed NRV testing.

Explanation: Inventory’s materiality and valuation judgments require extensive procedures to ensure IAS
2 compliance.

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7.3 Foreign Exchange Transactions

 Why Significant: PKR depreciation (20% in 2024) impacts export revenue (70% of sales) and
receivables, risking misstatement of gains/losses.
 Audit Approach:
o Recalculated forex gains/losses for 15 export contracts using published rates.
o Tested hedging disclosures (if any) per IFRS 9.
o Reviewed bank statements for 10 foreign currency transactions to confirm accuracy.
 Findings: Assumed compliance with IFRS 9, but volatility requires thorough testing.

Explanation: Forex exposure affects financial statement accuracy, warranting focused audit procedures.

7.4 Related-Party Transactions

 Why Significant: Limited disclosure in annual reports raises risks of undisclosed transactions or
preferential terms, potentially misstating financial position.
 Audit Approach:
o Reviewed board minutes for 2024 to identify related-party approvals.
o Vouched 10 related-party transactions to contracts and payment records.
o Tested disclosures for compliance with IFRS 24.
 Findings: Assumed adequate disclosure, but transparency gaps require scrutiny.

Explanation: Related-party risks impact governance and financial reporting, necessitating targeted
procedures.

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8. Draft Audit Opinion

8.1 Basis for Opinion

The simulated audit was conducted per ISA, using KTML’s 2023 and 2024 annual reports and PSX
filings. Procedures included:

 Risk assessment per ISA 315.

 Control evaluation and substantive testing per ISA 330.
 Evidence collection per ISA 500, 501, 505, 520, and 540.

The opinion assumes sufficient and appropriate evidence, no material misstatements, and effective
resolution of KAMs.

8.2 Opinion Scenarios

 Unqualified Opinion: Proposed if no material misstatements are found, indicating KTML’s

financial statements present a true and fair view per IFRS and PSX regulations.
 Qualified Opinion: If material misstatements (e.g., revenue overstatement, inventory
overvaluation) are identified but not pervasive.
 Adverse Opinion: If pervasive misstatements (e.g., systemic errors across multiple accounts)
distort the financial statements.
 Disclaimer of Opinion: If evidence is insufficient due to restricted access (unlikely in this
simulation).

8.3 Emphasis of Matter

If significant uncertainties (e.g., pending tax disputes, forex volatility) exist without affecting the opinion,
an Emphasis of Matter paragraph may highlight these issues.

Explanation: The opinion reflects the audit’s outcome, balancing evidence quality, control effectiveness,
and KAM resolution.

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9. Ethical Considerations and Independence

9.1 Independence Requirements

Per ISA 200 and IESBA Code, auditors must maintain independence in mind and appearance, avoiding:

 Financial interests in KTML.

 Personal or business relationships with management.
 Provision of non-audit services (e.g., consulting).

9.2 Ethical Threats and Safeguards

Threat Description Safeguard

Familiarity Long-term engagement reduces Rotate audit team every 5 years; conduct
Threat skepticism independent reviews.

Self-Interest Pressure to retain client Document all procedures transparently; involve

Threat relationship senior partner oversight.

Advocacy Avoid non-audit services; adhere to IESBA

Promoting KTML’s interests
Threat principles.

 Ethical Principles: Integrity, objectivity, confidentiality, professional competence, and due care.

Explanation: Ethical compliance ensures audit credibility, with safeguards mitigating bias risks.

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10. References

 Kohinoor Textile Mills Limited. (2023). Annual Report 2023. Retrieved from KTML website.
 Kohinoor Textile Mills Limited. (2024). Annual Report 2024. Retrieved from KTML website.
 International Auditing and Assurance Standards Board. (2023). International Standards on
Auditing (ISA).
 Pakistan Stock Exchange. (2024). Listed Companies Financial Data. Retrieved from PSX
website.
 International Financial Reporting Standards (IFRS). (2023). IFRS Standards.
 Pakistan Textile Exporters Association. (2024). Textile Industry Report.
 International Ethics Standards Board for Accountants (IESBA). (2023). Code of Ethics.
 State Bank of Pakistan. (2024). Economic Data and Reports.

Explanation: APA-style references ensure traceability and credibility of data sources.

11. Appendices
11.1 Materiality Calculations

 Overall Materiality: PKR 205 million (5% of PKR 4.1 billion profit before tax).
 Performance Materiality: PKR 153.75 million (75% of overall materiality).
 Component Materiality: PKR 100 million for subsidiaries.

11.2 Risk Map

Risk Assertion Audit Procedure

Revenue Overstatement Occurrence, Cutoff Vouch invoices, test cutoff

Inventory Overvaluation Valuation, Existence Physical counts, NRV testing

Receivables Overstatement Valuation, Completeness Confirmations, aging analysis

Fixed Asset Errors Valuation, Existence Inspect register, test depreciation

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 Risk Assertion Audit Procedure

Forex Misstatements Accuracy, Presentation Recalculate gains/losses, test disclosures

Tax Misstatements Accuracy, Completeness Recalculate provisions, review filings

11.3 Analytical Review Charts

 Revenue Growth: 7.7% (2023–2024).

 Inventory Turnover: 4.5 (2023) to 4.2 (2024).
 Receivables Aging: 10% overdue (PKR 820 million, 2024).
 Gross Margin Trend: Stable at 15%.
 Debt-to-Equity Trend: 0.83 (2023) to 0.85 (2024).

11.4 Sample Size Calculations

 Revenue: 50 invoices (95% confidence, 5% tolerable error).

 Inventory: 40 count items, 30 valuation tests (90% confidence, 5% tolerable error).
 Receivables: 25 confirmations, 15 collection tests (95% confidence).
 Fixed Assets: 20 additions, 15 depreciation tests (90% confidence).

11.5 Control Weakness Recommendations

 IT Controls: Implement user access restrictions, change logs, and daily backups.
 Inventory: Conduct quarterly physical counts; document NRV assessments.
 Related-Party Transactions: Establish board approval protocols; enhance IFRS 24 disclosures.
Explanation: Appendices provide detailed support for audit findings, enhancing transparency
and reproducibility.

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