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Question 1
A. i.
ii. Self-review threat the threat that a professional accountant will not appropriately
evaluate the results of a previous judgment made or service performed by the
professional accountant, or by another individual within the professional accountants
firm or employing organization, on which the accountant will rely when forming a
judgment as part of providing a current service;
Example:
- A firm issuing an assurance report on the effectiveness of the operation of financial
systems after designing or implementing the systems.
- A firm having prepared the original data used to generate records that arethe subject
matter of the assurance engagement.
- A member of the assurance team being, or having recently been, a director or officer of
the client.
- A member of the assurance team being, or having recently been, employed by the client
in a position to exert significant influence over the subject matter of the engagement.
- The firm performing a service for an assurance client that directly affects the subject
matter information of the assurance engagement
Advocacy threat the threat that a professional accountant will promote a clients or
employers position to the point that the professional accountants objectivity is
compromised;
Example:
- The firm promoting shares in an audit client.
- A professional accountant acting as an advocate on behalf of an audit client in litigation
or disputes with third parties.
Explanation =1 marks x 2 = 2 marks
Example = 1 marks x 2= 2 marks
Total = 4 marks
Question 2
A.
(i)
Ethical threat
1. A familiarity threat arises where an
engagement partner is associated with a
client for a long period of time. Azam &
Cos partner has been involved in the
audit of Jasa Baik Bhd for six years and
hence may not maintain her professional
scepticism and objectivity
(ii)
Safeguards to reduce threats to an acceptable
level
Azam & Cos should monitor the relationship
between engagement and client staff, and should
consider rotating engagement partners when a
long association has occurred. In addition, MIA
By-Laws (on Professional Ethics, Conduct and
Practice) recommends that engagement partners
rotate off an audit after five years for listed and
public interest entities.
Therefore consideration should be given to
appointing an alternative audit partner.
It is unlikely that as a sales manager the son
would be in a position to influence the financial
statements and hence additional safeguards
would not be necessary.
C.
i.
Privity of contract
Refers to a contractual or fiduciary relationship of auditor and the party of the contract.
(2 marks)
ii.
iii.
Professional indemnity insurance (PII) is an insurance policies that provide cover for
practitioners against claims for professional negligence. The purpose of PII is to ensure
that practitioners have the means to meet any claims of this nature
(2 marks)
Question 3b
1. discuss among the audit team members the risks of material misstatement due to
fraud such as share insights about the entity and its environment and the entitys
business risks
2. inquire management and others about their views on the risks of fraud and how it is
addressed i.e auditor should inquire managements knowledge of fraud in the entity.
3. Consider any unusual or unexpected relationships that have been identified in
performing analytical procedures in planning the audit.
4. Understand the clients period-end closing process and investigate unexpected
period-end adjustment
(2 marks each with explanation x 4 = 8 marks)
Question 5d
The elements that AEM Bank must proved that defendant is liable to third party due to
negligence and fraud. (Indicate a law case if necessary)
1.
Duty of care: The auditor owed a duty of due care to the plaintiff .(cited 1
case)
(1.5 marks)
2.
Breach of duty of care: The auditor has failure to act in accordance with
due care. The standard of care is that of the reasonable skill and care of another
person carry in the same assignment. .(cited 1 case)
(1.5 marks)
3.
4.
marks)
MIA itself (/). It helps to instill confidence of the public and investors by ensuring all members in
public practice maintain and observe the relevant professional standards (/)
Peer review means that an action of an individual person may be looked at again by someone
of similar competence in that activity (/). More formally it is a process of self-regulation by a
profession or a process of evaluation involving qualified individuals within the relevant field (/).
Peer review methods are employed to maintain standards, improve performance and provide
credibility
(2 marks each = 4 marks)
Question 2
A.
Issue
Threat to independence
Recommendation
Rotation of audit
partner
rise
to
Unpaid
taxation
fees due to Sam &
Co
Fees
outstanding
on
provision of taxation services
may be construed as a loan
to the audit client. Such
outstanding loan may affect
independence
(3 marks each for issue identified and explained; and recommendation provided)
(3 x 3 marks = 9 marks)
B.
Auditors owe a duty of care to clients because they hold themselves out to have special skills.
When performing the duties of an auditor, all reasonable care and skill that could be expected of
a professional should be used. For example, refer to Kingston Cotton Mills, London General
Bank and Pacific Acceptance. Moffitt J gave the following comments with respect to the duty
of care in the Pacific Acceptance case:
It is beyond question that when an auditor, professing as he does to possess the requisite skills,
enters into such a contract to perform certain tasks as auditor, he promises to perform such
tasks using that degree of skill and care as is reasonable in the circumstances as they then
exist. That is the limit of his promise. That is the bare legal obligation and in the end the court
must come back in any case to the legal proposition and apply it to the courts view on the facts
found.
(Explanation = 3 marks)
The idea of reasonable care should then be applied to the case of Teduhan Ilmu in the following
way.
1
Engagement of expert
The firm considered it necessary to engage an expert in the first year of the computer
system being operational. This might have been appropriate, but raises questions about
the firms ability to perform the IT section of the audit in subsequent years. The audit
software has been developed for them by the expert, but what about the impact on the
effectiveness of that audit software if the client has changed parts of the system since that
first year? Does the firm have the necessary skills to change the audit software to
incorporate those client-system changes?
Was the audit evidence obtained by the auditor sufficient and appropriate?
Did the auditor document all relevant procedures, including following up any errors noted?
Were the audit procedures appropriate, given the nature of the system, the experts
findings and increased risk occasioned by the introduction of a new and complex system?
Has the specialised audit software been updated for any changes to the software
program?
Question 5
a. Fraudulent financial reporting involves intentional misstatements including omission of
amounts or disclosures in FS to deceive financial users.
It can be caused by the efforts of management to manage earnings in order to deceive FS
users by influencing their perception as to the entitys performance and profitability.
(2 marks)
b. Fraud
Fraud Diamond
Examples
Opportunity
Pressure/Incentive
Capability
1
.
2
.
3
.
4
.
5
.
given
7
.
8
.
d. Ethical issues raised and leading to threats (violation of the MIA By-Laws)
Agreed to management request of not increasing the allowance for doubtful debt
intimidation threat and hence affects the auditors objectivity.
Significant amount of audit fee self-interest threat due to GCBs audit fee which
constitute 20% of the auditors annual earnings and hence objectivity.
(4 marks)
e. Several measures that can be taken by Zubair:
i)
ii)
iii)
iv)
Discuss the management whom he most trusted and believed not being part of the
management who take advantage of their position and work according to their interest.
Report to the members of BOD who have strong values and oppose to the misconduct
by other directors.
Report to the authorities such as MIA on external auditors action to collude with the
management or SC for the misconduct of the directors (eg: Dato Malik).
Report to the authorities for the fraud perpetrated by the finance manager.
(Any 3 measures with explanation x 2 marks = 6 marks)
(Total: 30 marks)
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11
APR 2011
Question 1
Part A
a
b
c
Integrity requires members to be sincere, honest and straightforward in his professional and
business relationships.
Members are required to maintain professional knowledge and skill at the level required to
ensure competent services are provided and to act diligently in accordance with technical
and professional standards.
Members should comply with relevant laws and regulations and should avoid any action that
discredits the profession.
(3 x 2 marks = 6 marks)
Part B
a
Circumstances that have potential threats to auditors independence when accepting audit
engagement:
Familiarity threat
The audit firms long association with the audit client may be over influencing the auditors
professional judgement with regards to the audit
Intimidation threat
The audit firm may be intimated by threats that they may be sued by the audit clien or may
be sued by the audit client or loss of audit engagement
Advocacy threat
The audit firm is promoting the shares of a listed audit client
(any 4 x 1 mark = 4 marks)
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Reasons why the situations could create threats to auditor independence are:
1
Direct financial interests in an audit client by the partner in charge may create selfinterest threat.
Safeguards:
Dispose of the direct financial interest prior to the individual becoming a member of
the assurance team;
Remove the member of the assurance team from the assurance engagement (if
possible).
A close business relationship between the audit firm and the assurance client or its
management which involves a commercial or common financial interest may create selfinterest and intimidation threats.
Safeguards
Family and personal relationships between a member of the audit / assurance team and
a director, an officer or certain employees, depending on their role in management
decisions, of the audit / assurance client, may create self-interest, familiarity or
intimidation threats.
Safeguards
Removing the individual from the assurance team;
Where possible, structuring the responsibilities of the assurance team so that the
professional does not deal with matters that are within the responsibility of the
immediate family member; or
Policies and procedures to empower staff to communicate to senior levels within the
firm any issue of independence and objectivity that concerns them.
The provision of services by the staff of audit firm to a financial statement audit client
that involves the design and implementation of financial information technology
systems that are used to generate information forming part of a clients financial
statements may create a self-review threat.
Safeguards
The staff providing the assistance should not be given audit responsibility for any
function or activity that they performed or supervised during their temporary staff
assignment; and
The financial statement audit client should acknowledge its responsibility for
directing and supervising the activities of firm, or network firm, personnel.
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The provision of services by the audit firm to a financial statement audit client that
involves the design and implementation of financial information technology systems
that are used to generate information forming part of a clients financial statements
may create a self-review threat.
Safeguards
The audit client acknowledges its responsibility for establishing and monitoring a
system of internal controls;
The audit client designates a competent employee, preferably within senior
management, with the responsibility to make all management decisions with
respect to the design and implementation of the hardware or software system;
The audit client makes all management decisions with respect to the design and
implementation process;
The audit client evaluates the adequacy and results of the design and
implementation of the system; and
The audit client is responsible for the operation of the system (hardware or
software) and the data used or generated by the system.
(1 mark for explanation + 1 mark for the identified safeguard measure x 5 = 10 marks)
(Total: 20 marks)
Question 2
Part A
Two (2) of the auditors liabilities under Statutory Law are:
1
Companies Act 1965: Duty to report companys financial statement (CA 1965) and become
whistle blower, i.e. to report a breach or non-compliance with any provision of the
Company Acts.
The recent amendment to Section 174 of the Companies Act 1965, which inserted
subsection 8A states that, an auditor who fails to inform the CCM on any serious offence
involving fraud or dishonesty is being or has been committed against the company or this
Act by officers of the company, can be fined up to a maximum of RM250,000 or
imprisonment up to seven (7) years or both. Hence, auditors are expected to be alert of any
error and fraud cases that could have been committed by their client.
Securities Industries Act 1983: (governed the trading of securities on the stock exchange).
The auditors need to report breach of securities law to authorities such as Securities
Commission.
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BAFIA 1989: (licensing and regulation of banking institution). Any violation of BAFIA by the
bankers, the auditor needs to report to the central bank (Bank Negara) immediately.
AMLA 2001: (dealing with law and penalties of money laundering and measure for
preventing such activities). AMLA imposes a legal duty on a reporting institution including
auditor to report unlawful transaction to the Financial Intelligent Unit of Bank Negara.
SCA 1993: (establish Securities Commission as approving and registering body for
prospectus issued in connection with public securities offering). The auditor is responsible to
report non-compliance of the Act by the company or borrower in the case of issuing
debenture
(any 2 x 2 marks = 4 marks)
Part B
a
In this case, it is stated that the firm has performed several audit procedures to determine
whether the management of Total Wellnesss claim on the advice of the legal advisor and
pharmaceutical expert was valid (). However, the depth of such procedures could be
questioned () as to whether the legal advisor and the pharmaceutical expert have provided
substantial or concrete justification ()as why there is no valid ground to such claim by their
overseas partner (cum distributor). Based on the facts given, the audit firm should have
performed more substantive tests to verify the clients claim (). Thus, it would be probable
that Hassan and Co to be liable for being negligent.
( 4 () x 1 mark = 4 marks)
Part C
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By Your Firm:
1. A member who is being asked to act by a prospective client should explain to the
prospective client that he has a professional duty, if ask to act, to communicate with the
existing auditor.
2. A member should request permission from the prospective client to give written authority
to the existing auditor to discuss the clients affairs with the member. If the prospective
client refuses to give the existing auditor permission to discuss the clients affairs with the
proposed auditor, the proposed auditor should not accept such appointment.
3. If permission is granted, the member should then write to the existing auditor seeking
information which could influence his decision as to whether or not he may properly
accept appointment.
4. If the existing auditor fails to respond within a reasonable time, the propective auditor
should contact the existing auditor by other means, e.g telephone etc.
5. Once the prospective auditor has received confirmation that there are no reasons not to
act, or has become satisfied that he can properly act, and is prepared to accept
appointment, he should inform the client.
(4 x 1 mark = 4 marks)
The existing auditor should obtain a written authority from the client to communicate with
the prospective auditor.
The existing auditor should quickly answer the communication from the prospective
auditor.
If there is such matter, he should inform the prospective successor of those factors
within his knowledge of which, in his opinion, the latter should be aware. It is not
sufficient to state that unspecified factors exist.
If client refuses to give the existing auditor permission to discuss the clients affairs with
the proposed successor, the existing auditor should report the fact to the prospective
auditor.
(4 x 1 mark = 4 marks)
(Total: 20 marks)
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