Workshop One

Auditing & Assurance Services

ACTIVITY 3

Short Questions (10 minutes)

Question 1

Answers are in BOLD. Explanation is provided as helping hand to candidates.

• Budget Constraints: Limited budgets may hinder the deployment of experienced or

technically qualified personnel, including experts. This is particularly crucial in audits
requiring specialized skills for effective risk assessment and questioning of management.

• Tight Deadlines: The pressure of looming deadlines can adversely impact the
performance and judgment of the audit team. Time constraints might lead to insufficient
analysis of complex information, affecting the audit quality.

• Management Pressure and Lack of Cooperation: Resistance or undue influence from

management can challenge the audit team's ability to address complex or controversial
matters effectively.

• Insufficient Understanding of the Entity: A lack of deep knowledge about the entity, its
operating environment, its internal control system, and the applicable financial reporting
framework can limit the team's ability to make informed judgments and question
management's assertions critically.

• Restricted Access to Information: Difficulties in accessing necessary records, facilities,

or personnel can bias the audit evidence-gathering process, leading to an over-reliance
on readily available but potentially less relevant information.

• Overreliance on Automated Tools and Techniques: Excessive dependence on

automation may lead to a lack of critical assessment of the audit evidence, as the
engagement team might not sufficiently scrutinize the information obtained through these
means.

Question 2

Answers are in BOLD. Any 6 elements to be listed. Explanation is not needed but provided
as helping hand for candidates.

1. Leadership Responsibilities for Quality on Audits:

o Reflects the role of audit leadership in setting the right tone at the top,
demonstrating the firm’s commitment to quality, and ensuring that quality is
embedded in all audit processes.

2. Ethical Requirement:
o Emphasizes the need for the audit team to adhere to ethical standards, including
independence and objectivity, throughout the audit engagement.

3. Acceptance and Continuance of Client and Audit Engagements:

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o Pertains to the firm’s policies and procedures for assessing whether to accept or
continue a relationship with a client and whether the firm can comply with ethical
requirements and effectively perform the audit.

4. Assignment of Engagement Team:

o Involves ensuring that the audit team, including any experts, has the appropriate
competence, capabilities, and time to perform the audit in accordance with
professional standards.

5. Engagement Performance:
o Relates to the execution of the audit engagement, including planning and
supervision, to achieve the audit's objectives.

6. Consultation:
o Refers to the processes in place for consultation within the audit team or with others
when complex or contentious issues arise, ensuring that the right expertise is
applied to audit judgments.

7. Engagement Quality Control Review:

o Encompasses the procedures for an objective evaluation of the significant
judgments made by the audit team and the conclusions reached in formulating the
auditor's report.

8. Monitoring:
o Deals with the ongoing processes that the firm has in place to monitor the overall
quality of audit engagements, including the timely identification and resolution of
any deficiencies.

ACTIVITY 4

Short-Answer Questions.

Question 1
1. Integrity
2. Objectivity
3. Professional Competence and Due Care
4. Confidentiality
5. Professional Behaviour

Question 2
1. Self interest threat
2. Self review threat
3. Advocacy threat
4. Familiarity threat
5. Intimidation threat

Discussion Question

Zamzul, Chan & Co

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(i) The request for a competitive quote could introduce a Self-Interest Threat where the
audit firm might consider lowering its fees to secure the new engagement. This cost
reduction pressure could lead the firm to curtail essential audit procedures, which
would undermine the thoroughness and integrity of the audit process, thereby
jeopardizing the quality of the audit. It's critical for the firm to maintain its commitment
to conducting a comprehensive and unbiased audit, irrespective of the fee structure,
to uphold the standards of the profession and the expectations of stakeholders.

(ii) The audit firm must uphold the principle of confidentiality. It cannot disclose any
specific methodologies or data from its work with existing clients or ex-clients to third
parties, including prospective clients, without proper authorization or legal obligation.
The firm should provide only generic information that is not confidential information,
that does not breach any confidentiality agreements.

ACTIVITY 5

(i)

Opportunity An employee in a Malaysian retail company may have the

opportunity to embezzle funds due to inadequate oversight over
the cash handling process.

Incentive/Pressure Individuals commit fraud when they have a financial or personal

pressure that they believe can be resolved through deceit.

Rationalization An accountant in a Penang manufacturing company may

rationalize the misappropriation of assets because they feel
underpaid and believe they deserve more for their hard work.

(ii)
- Duty of care
- Breach of Duty of Care
- Casual relationship
- Damage

Discussion Questions

Lim & Associates

Liability for negligence would typically require the following elements to be established:

1. Duty of Care: Lim & Associates had a duty of care towards both the client and the third
parties who might rely on the financial statements, such as Growth Bank.

2. Breach of Duty: If it is demonstrated that the verifications of sales transactions were not
thorough enough to uncover the fraudulent activity, especially considering the
transactions were significant and occurred in a short period, this could be considered a
breach of duty. The use of a post office box for correspondence is a red flag that might
have warranted additional scrutiny.

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3. Casual Relationship: There must be a direct link between the auditor's breach of duty
and the harm suffered by the plaintiff, in this case, Growth Bank. If the Growth Bank's
decision to extend the credit line was substantially based on the audited financial
statements and Lim & Associates have been specifically made known to this fact, this
condition could be met.

4. Damages: Growth Bank must prove that it suffered actual monetary loss as a result of
the auditor's negligence.

Based on these elements, a court or tribunal may find Lim & Associates liable if they conclude
that a reasonably prudent auditor would have taken additional steps to verify the authenticity
of the transactions, given the red flags present. Judicial decisions in similar cases often hinge
on the specifics of the auditing standards and the reasonableness of the auditor's actions. If
Lim & Associates followed standard auditing practices and could not have reasonably detected
the fraud, they may not be held liable. Conversely, if they neglected to follow up on potential
signs of fraud, they could be found negligent.

Previous legal precedents, such as the landmark cases of Donoghue v Stevenson (1932) for
establishing the duty of care and Caparo Industries plc v Dickman (1990) for further clarifying
the scope of the duty and the relationship with the party suffering the loss, may be examined
to argue whether the auditors' duty was breached and if they could be held liable for
negligence.

ACTIVITY 7

Question 1

Inherent risk factors, as defined by ISA 315 (Revised 2019), refer to the susceptibility of an
assertion about a transaction, account balance, or disclosure to a misstatement that could be
material, either individually or when aggregated with other misstatements, before
consideration of any related controls. These factors are characteristics of the entity or its
environment that increase the likelihood of such a misstatement occurring.

The concept of inherent risk factors includes, but is not limited to, the following:

1. Complexity: Transactions that are complex in nature tend to have a higher inherent risk
due to the difficulty in applying the correct accounting principles and the increased
potential for error or misinterpretation.
2. Subjectivity: Accounts or transactions that require significant judgment or estimation
carry higher inherent risk, as biases or uncertainties can lead to material misstatements.
3. Change: Entities undergoing significant changes, such as rapid expansion, restructuring,
or changes in technology, face a higher inherent risk as these changes can disrupt internal
controls and lead to errors in financial reporting.
4. Susceptibility to Fraud or Error: Certain types of transactions or balances may be more
prone to intentional manipulation or unintentional errors, increasing their inherent risk.
5. Size and Volume of Transactions: High-value transactions or a large volume of
transactions increase inherent risk due to the potential impact on the financial statements.
6. Complexity of the Industry and Regulatory Environment: Entities operating in
complex regulatory environments or technical industries may have higher inherent risk
due to the specialized knowledge required to prepare accurate financial statements.

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Question 2

In the context of financial statement audits, materiality is a threshold or cut-off point used by
auditors to determine the importance of misstatements in the financial statements. According
to auditing standards, misstatements, including omissions, are considered to be material if
they, individually or in the aggregate, could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial statements.

The implications of setting materiality thresholds are significant for the planning and execution
of an audit:

1. Planning Phase: At the outset of an audit, the determination of materiality levels is critical
for defining the scope and developing an appropriate audit strategy. It helps auditors
decide which areas of the financial statements to focus on, based on where material
misstatements are most likely to occur.
2. Risk Assessment: Areas where potential misstatements could exceed the materiality
threshold will be regarded as higher risk to be materially misstated and require more
attention during the audit.
3. Audit Procedures: The nature, timing, and extent of audit procedures are adjusted based
on materiality. Auditors will allocate more resources and apply more rigorous audit
procedures to areas with a higher risk of material misstatement. Conversely, areas with
risks below the materiality level might be subjected to less intensive audit procedures or
potentially not tested at all.
4. Evaluation of Misstatements: Materiality is also used to evaluate the significance of
identified misstatements. Auditors aggregate misstatements throughout the audit process,
and if their cumulative effect is material, auditors will require adjustments or will qualify
their audit opinion.
5. Performance Materiality: Auditors often set a performance materiality level lower than
the overall materiality for the financial statements. This serves as a safety net to reduce
the probability that the aggregate of uncorrected and undetected misstatements exceeds
materiality for the financial statements.

In conclusion, the determination of materiality levels is a foundation for the auditor’s judgment
in the audit process, affecting the overall approach and ensuring that the audit is conducted
efficiently and effectively, concentrating efforts on areas of greatest potential impact to the
financial statements' users.