CONFIDENTIAL AC/DEC 2019/AUD589

UNIVERSITI TEKNOLOGI MARA

FINAL EXAMINATION

COURSE AUDITING 1

COURSE CODE AUD589

EXAMINATION DECEMBER 2019

TIME 3 HOURS

INSTRUCTIONS TO CANDIDATES

1. This question paper consists of five (5) questions.

2. Answer ALL questions in the Answer Booklet. Start each answer on a new page.

3. Do not bring any material into the examination room unless permission is given by the
invigilator.

4. Please check to make sure that this examination pack consists of:

i) the Question Paper

ii) an Answer Booklet - provided by the Faculty

5. Answer ALL questions in English.

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

This examination paper consists of 6 printed pages

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QUESTION 1

A. Once agreeing on the audit terms of engagement that are stated in the audit
engagement letter, the auditor will start planning the audit. ISA 300 on Planning an Audit
of Financial Statements requires the auditor to establish the overall audit strategy and
develop an audit plan. During planning, the auditor needs to assess the actual and
potential risks of the client as well as risks the auditor may face in the course of the audit
engagement.

Required:

i. List three (3) principal contents of an engagement letter.

(3 marks)

ii. State three (3) benefits of planning an audit.

(3 marks)

iii. Explain any two (2) components of risk in audit risk model.
(4 marks)

B. MXM Communication Sdn Bhd is your new client which sells and distributes
telecommunication equipment and accessories to retail outlets in Melaka. The following
information has come to your attention while reviewing the client's profile:

The company is managed by Puan Aina, who is also one of the major shareholders. The
company has been in the business since 2014 and its latest expansion is the opening
of two branches, one in Perlis and another one in Sabah. The company has appointed
a new Chief Operating Officer, Encik Herman in January 2019. His main task is to
oversee the business in the two new branches which were launched in December 2018.
Encik Herman is the elder brother of Puan Aina.

Due to the rapid demand of mobile phones in Malaysia, the company has purchased an
exclusive right for the distribution of HEBAT phone which has been the most popular
brand for mobile phones in the past three years. During the first half year of 2019, the
company has exceeded the sales target and the number of employees that were hired
by the company has increased from 30 to 60. The company has also hired two new
graduates to prepare their financial statements.

In June 2019, the company's strongest competitor Memana Phone Sdn Bhd has
obtained the exclusive right and distribution of another popular mobile phone, JAYYID
phone. Despite meeting the sales target, the sales for HEBAT phone has dropped in
July and August 2019 when Memana Phone Sdn Bhd introduced new model of JAYYID
phone at the lower price as compared to HEBAT phone.

Required:

Analyse five (5) risks that could give rise towards material misstatements in the
financial statements of MXM Communication Sdn Bhd.

(10 marks)
(Total: 20 marks)
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CONFIDENTIAL AC/DEC 2019/AUD589

QUESTION 2

A. Audit evidence is information which is used by auditor to derive audit opinion. Audit
evidence includes both information contained in the accounting records underlying the
financial statements and other information. The auditor has to carry out audit procedures
to obtain certain types of audit evidence that are sufficient and appropriate to meet the
specific audit objectives.

Required:

Describe the term "sufficient and appropriate" audit evidence.

(4 marks)

ii. Identify a suitable type of audit evidence for each of the given audit procedure:

Audit Procedure Audit Evidence

a. Compare duplicate sales invoice with sales
journal for customer's name and account.
b. Obtain a letter from the bank confirming the
outstanding balance owed by the client.
c. Count petty cash to make sure the petty
cash balance is properly accounted for in the
book.
d. Calculate the amount of depreciation charge
for disposed assets.
(4 marks)

iii. Analytical procedures can be performed at different phases of audit: planning,

testing and completion of audit. Illustrate the purpose of conducting analytical
procedures at each of the phases.
(6 marks)

B. ISA 230 on Audit Documentation states the auditor shall prepare and maintain audit
documentation that is sufficient to enable an experienced auditor, having no previous
connection with the audit, to understand related matters to the audit work performed.

Required:

i. Explain two (2) purposes for the auditor to maintain audit documentation.
(3 marks)

ii. Compare between 'permanent file' and 'current file'.

(3 marks)
(Total: 20 marks)

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QUESTION 3

The Finance and Accounts Department of Dinamik Utara Sdn Bhd is headed by Michael, the
chief accountant. He is assisted by Syamil (the accountant) and Ernie (the accounts officer).
Four accounts clerks are employed namely Dayang, Alyah, Ferhad and Ella.

Among others, the department undertakes the following job functions:

Processing of cash receipts from customer

It is the company's policy that customers settle their account balances only by cheques.
Dayang is responsible for opening mails containing cheques and payment slips from
customers every morning. She then prepares a listing of the cheques received by recording
the customer's name, cheque number and amount. The cheques are then handed over to
Ernie, who collates and deposits them into the company's bank account at the end of the
week. Dayang uses the listing of cheques received to update the cash receipt journal.

Processing of payments to supplier

Upon receipt of an invoice from the supplier, Alyah verifies its particulars against the copy of
the purchase order received from the purchasing department. Alyah then prepares a two-copy
payment voucher and sends the original copy to Ernie. Ernie, who is the main custodian of the
company's cheque books, prepares a cheque exactly based on the amount stated on the
payment voucher. Ernie is solely authorised to sign cheques of amount below RM100,000
whereas cheques above that amount need to be counter-signed by Syamil.

Processing of salary payments to employees

Salaries are paid by crediting the individual employee's bank account. Ferhad keeps a set of
the blank instruction forms that were pre-signed by Ernie and Syamil. Based on a monthly
listing of staff salary prepared by the personnel department, Ferhad fills in the payment
instruction form and sends it to the bank by hand one week before the pay day. Ferhad also
prepares a two-copy payment voucher and forwards the original copy together with the listing
of staff salary to Ernie for verification.

All duplicate copies of payment vouchers are handed over to Ella for updating the cash
payments journal. Bank reconciliation statements are prepared on a two-month basis by Ella
and verified by Michael.

Required:

a. Examine six (6) internal control weaknesses in the Finance and Accounts Department
of Dinamik Utara Sdn Bhd as illustrated in the above case.
(6 marks)

b. Explain the impact of each of the weaknesses in the Finance and Accounts Department
of Dinamik Utara Sdn Bhd highlighted as your answers in Part A of the question.

(6 marks)

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c. Assess two (2) strengths of internal control system implemented in the Finance and
Accounts Department of Dinamik Utara Sdn Bhd.
(4 marks)

d. Describe two (2) internal control objectives relevant to the activities carried out in the
Finance and Accounts Department of Dinamik Utara Sdn Bhd.
(4 marks)
(Total: 20 marks)

QUESTION 4

A. During the last year's audit of Bistari Endah Bhd's cash and bank balances, significant
cut-off errors were discovered with a number of post year-end cheques being processed
prior to the year end to reduce payables. The Chief Financial Officer has assured the
audit engagement partner that this error will not occur again in this year's financial
statements and that the bank reconciliation has been done carefully. The audit
engagement partner has also requested the auditor to audit the bank reconciliation
statement thoroughly.

Required:

i. State two (2) risk factors that relate to cash and bank balances.
(2 marks)

ii. Illustrate four (4) substantive audit procedures that an auditor would perform to
obtain sufficient and appropriate audit evidence in auditing cash and bank
balances of Bistari Endah Bhd.
(8 marks)

B. Inventory includes goods purchased for resale as well as finished goods produced, work
in progress and raw materials to be used in production. In inventory management
system, several types of documents and records are usually maintained.

i. Explain the function of each of the following documents used for inventory
management:

a. Receiving report, and

b. Materials requisition form.
(4 marks)

ii. Explain three (3) factors that may cause complexity for the auditors in auditing
inventory.
(6 marks)
(Total: 20 marks)

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QUESTION 5

A. ISA 700 on Forming an Opinion and Reporting on Financial Statements states that an
auditor is responsible to express an audit opinion and to describe the basis for that
opinion through a written report.

Required:

Explain three (3) contents of an auditor's report.

(6 marks)

B. Determine the type of audit opinion that you as the auditor would issue and the
reason for such opinion for the following independent situation:

i. Paru Berhad has overvalued its closing inventory. Later, the management has
restated the inventory value after discussing it with you. After certain procedures
have been performed, you have agreed with the restatement made by the
management as it complies with the appropriate standard.

ii. Kamikini Berhad has excluded lease obligation from the company's statement of
financial position. However, you are of the opinion that the item is significant to the
overall financial statements and therefore it should be recognised as a finance
lease in order to comply with the approved accounting standards. The client
disagreed with you and refused to reflect the item accordingly in the financial
statements.

iii. There has been a recent change in the credit risk profile of Sukati Berhad. Due to
this, the management of Sukati Berhad does not allow the auditor to inspect the
company's credit risk policy, citing a reason that the policy is outdated. The auditor
has persistently requested for the draft of any amended credit risk policy, but the
request was left unattended.

iv. Your client, Kilo Berhad, has been using the last in first out (LIFO) method in
valuing its inventory. You have advised your client that the method used for the
inventory valuation is not allowed by the financial reporting framework. However,
the management has ignored your advice on the basis that the nature of their
inventory best suits the adoption of LIFO method.
(8 marks)

C. You are the engagement partner for the audit of Kembara Mulia Berhad. After
completing the audit, an unmodified opinion (standard unqualified) is expressed in the
auditor's report.

Required:

Justify three (3) conditions that should be met for the issuance of an unmodified
opinion (standard unqualified) expressed in the auditor's report.
(6 marks)
(Total: 20 marks)

END OF QUESTION PAPER

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