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LESSON PLAN

Code : AUD 610 Course : AUDIT AND ASSURANCE


SERVICES
Credit Unit : 3
Lecturer : MOHD JOHARI MOHD ALWI Tel : +60 17 618 2658
Office : AC617 [Pf 38 (20 A 06 069/0)] : +60 3 3258 7402

Week Topic Hours Reference


1 & 2 1. Statutory and Professional Responsibilities 0.5 Companies Act
Requirements of Companies Act 1965 (as amended): 1965
Requirements of Section 9, 172 and 174
1. MIA By-Laws (on Professional Ethics, Conduct 5.5 MIA By-Law
and Practice) PART A
Part I Section 100
A. General Application of MIA By-Laws Section 110
Fundamental Principles Section 120
Conceptual Framework Approach Section 130
Integrity Section 140
Objectivity Section 150
Professional Competency and Due Care Section 200
Confidentiality Section 210
Professional Behavior Section 220
Section 230
Advertising, Marketing and Promotions
Section 240
B. Professional Accountants in Public Practice
Section 250
Introduction
Section 260
Threats and Safeguards Section 270
Professional Appointment Section 290
- Client Acceptance Section 500
- Engagement Acceptance Section 540
- Changes in Professional Appointment
Conflicts of Interest Chapter 18
Second Opinions
Fees and Other Types of Remuneration
- Fees
- Contingent Fees
- Referral Fees or Commissions
Gifts and Hospitality
Objectivity All Services
Independence Audit and Review Engagement
- Financial Interests
- Loans and Guarantees
- Business Relationships
- Family and Personal Relationships
- Employment with an Audit Client
- Serving as a Director or Officer of an Audit Client
- Long Association of Senior Personnel
(Including Partner Rotation) with an Audit Client
- Provision of Non-Assurance Services to Audit

1
Clients
o Management Responsibilities
o Preparing Accounting Records and
Financial Statements
- Fees
o Fees-Relative Size
o Fees-Overdue
o Contingent Fees
- Gifts and Hospitality
Part II
B. Members in Public Practice
Method of Practice
- Method of Practice
- Establishment and Registration of Member Firm
- Branches
Referrals
3 2. Legal Liability 3 Chapter 20
Liability under Statute liability to shareholders and (Messier et al.
auditees Malaysian text
Liability under Common Law liability to third parties book)
o Candler vs. Crane, Christmas and Co
o Hedley Byrne vs. Heller and Partners
o JEB Fasteners vs. Marks Bloom and Co
o Caparo Industries plc vs. Dickman and Others
o Royal Bank of Scotland vs. Bannerman Johnston
Maclay and Others (2002)
4 3. Quality Control for Audit of Historical Financial 2 ISA 220 Quality
Information Control for an
Definition Audit of Financial
Leadership responsibilities for quality on audits Statements
Ethical requirement
Acceptance and continuance of client relationships ISQC 1 Quality
and specific audit engagement Control for Firms
Assignment of engagement terms that Perform
Engagement performance Audits and
Monitoring Reviews of
Financial
Statements, and
Other Assurance
and Related
Services
Engagements

Chapter 18
4 & 5 4. Fraud and Error 2 ISA 240 The
Definition and characteristics Auditor's
Responsibilities of management and auditor in Responsibilities
relation to fraud and error Relating to Fraud
Reporting responsibilities in an Audit of
Financial
Statements

Chapter 4

2
5 5. Corporate Governance and the External Auditor 2 ISA 260 -
Objective of corporate governance Communications
Importance of corporate governance of Audit Matters
Outline good corporate governance requirements with Those
relating to directors responsibilities Charged with
Audit committees explain structure and role of audit Governance
committee
Chapter 2
Benefits and drawback of audit committee
6 & 7 6. Audit Risk, Materiality and Sampling 6 ISA 315
Concepts of audit risk and materiality Identifying and
Materiality in accounting and auditing Assessing the
Control risk, inherent risk and detection risk Risks of Material
Relationship of materiality and audit risk Misstatement in
Standards and guidelines the Financial
Quantitative level and basis that can be used for Statements,
valuing materiality Through
Factors influencing determination of materiality Understanding the
Entity and Its
Application of audit risk model to audit work
Environment
Consideration of analytical review procedures
Sampling ISA 320 Audit
Materiality
ISA 530 Audit
Sampling
Chapter 3,4, 7 & 8
8 7. Computerised Information System (CIS) 2 AI 315:
Audit objective and scope of work in a computerised Understanding the
environment Entity and Its
Types of cntrols in an IT/ CIS environment Environment and
Auditors evaluation on CIS Assessing the
Computer assisted audit techniques (CAATs) Risks of Material
Misstatement
Chapter 6
8. Balance Sheet Audit 1 Relevant IASs
Requirements of relevant financial reporting standards and IFRSs
Verification of equities, reserves, intangibles and
investments Chapter 13, 14 &
15
9 & 10 9. Completing the Audit 6 AI 520: Analytical
Compliance with the accounting standards and Procedures
Companies Act 1965
Consideration of analytical review procedures in AI570: Going
performing the overall review of the financial statements Concern
Going concern AI560:
o Indicators that the going concern may be in doubt Subsequent
and identifying any mitigating factors Events
o Assessment of the appropriateness of the going
concern assumption AI510: Initial
o Implication on the auditors report where there is Engagements
doubt about the going concern assumption Opening Balances

3
Post balance sheet events, contingencies and AI710:
commitments Comparatives
o Nature and timing of audit procedures to identify
subsequent events that may require adjustments AI540: Audit of
to, or disclosure in the financial statements Accounting
Opening balances and comparatives figures Estimates
o Auditors responsibilities for corresponding figures AI 580:
and comparatives financial statements Management
Audit of accounting estimates Representations
Management representations
o Management representation as audit evidence AI550: Related
implications of contradictory evidence Parties
Related parties transactions
o Specific audit problems and procedures AI701:
concerning related parties and related parties Modifications to
transactions the Independent
Auditors Report
Effect of completion issues on audit report
Chapter 16
11 10. Reports: Audit and Other Reports 1 ISA 700
Formulating an audit opinion on statutory accounts Forming an
Audit report modification and their potential effects Opinion and
Reporting on
Financial
Statements
ISA 705
Modification to the
Opinion in the
Independent
Auditors Report
ISA 706
Emphasis of
Matter Paragraphs
and Other Matter
Paragraphs in the
Independent
Auditors Report
Chapter 17
11. Group Audits 2 ISA 600 - Special
Requirements of relevant accounting standards Considerations-
Matters to be considered before accepting Audits of Group
appointment as principal auditor Financial
Special consideration of planning and controlling Statements
group audit
AI600: Using the
Specific audit problems and procedures relating to:
Work of Another
o Classification of investment
Auditor
o Acquisition and disposal
o Related party transactions
o Inter-company balances
o Goodwill on consolidation impairment
Relationship between principal and other auditor

4
Responsibilities of primary and secondary auditors
and liaison with other auditors
Matters to be considered and procedures to be
performed when using the work of other auditors
Implications for the auditors report on a financial
statements of an entity where the opinion on a
component is modified
12 12. Using the Work of Others 2 AI610:
Consideration to use the work of other auditors, Considering the
expert and internal auditors Work of Internal
Auditing
13. Internal Auditing
Development of internal audit AI620: Using the
Objectives, scope and responsibility of internal auditor Work of an Expert
Similarities and differences between internal and Chapter 19
external audit
Operational audit and compliance audit
o Concepts of operational audit
o Objectives and scope
o Identifying criteria to evaluate performance
12 & 13 14. Audit Related Services 2 ISRE 2400:
Auditors report to audit special circumstances Engagements to
Assurance level for related services Review Financial
Agreed upon procedures Statements
Compilation
ISRE 2410:
Review of financial information
Review of Interim
Financial
Information
Performed by the
Independent
Auditor of the Entity
ISRS4400:
Engagement s to
Perform Agreed-
upon Procedures
Regarding
Financial
Information
ISRS4410:
Engagements to
Compile Financial
Information
ISAE 3400: The
Examination of
Prospective
Financial
Information
Chapter 20
Page 616 649

5
ISAE 3000:
Assurance
Engagements
Other Than Audits
or Reviews of
Historical
Financial
Information
13 & 14 15. Other Services 2 ISAE 3000:
Consultation, Secretarial services and Taxation Assurance
Due diligence review Engagements
Forensic accounting/ auditing Other Than Audits
Types of investigation or Reviews of
Historical
Financial
Information
14 16. Issues in Audit (Case Study) 3 Current articles
Current issues relating to auditors and audit practice from various
including audit expectations and regulation of audits: journals.
New developments in auditing practices and their
implications for the profession
Advertising and solicitation of clients
Peer/ Practice Review
Audit Expectation Gap

(Topics would be subjected to changes)

6
Methods of Instruction

Lectures
Tutorials
Students Presentation

Assessment

Continuous assessment (40%) is as below:


Tests 15%
Quizzes (2 Quizzes) 10%
Group Assignments 15%

Final examination (60%)


Format of the final examination: Answer all 5 questions include 1 case study question

Main Texts

Auditing and Assurance Services Aasmund Eilifsen, William F. Messier, Steven M.


Glover & Douglas F. Prawitt (Third Edition UK Edition)
ISA (International Standards on Auditing)
MASA (Malaysian Approved Standards on Auditing)
MIAs By-Laws (On Professional Ethics, Conduct and Practice)

References

Auditing and Assurance Services William F. Messier, Steven M. Glover & Douglas
F. Prawitt (Second Edition US Edition)
Auditing and Assurance Services An Integrated Approach Alvin A. Arens, Randal J.
Elder & Mark S. Beasley 14th Edition
Companies Act 1965

7
WEEKLY LESSON PLAN
For the Academic Session II of March July 2016

Week Date Topic Assessment Hour


1 &2 29/2 13/3 Entrance Survey
29/2 4/3 Statutory and Professional Responsibilities Exam
1&
MIA By-Laws (On Professional Ethics, 6
2 7/3 11/3 Test Exam
Conduct and Practice)
3 14/3 18/3 Legal Liability Test Exam 3
Quality Control for Audit of Historical
21/3 25/3 Test Exam
Financial Information
4&
Fraud and Error Test Exam 6
5
28/3 1/4 Corporate Governance and the External
Test Exam
Auditor

6 4/4 8/4 Audit Risk, Materiality and Sampling Test Exam 6


Sampling
TBA Test 1 (10%)
9/4 17/4 Semester Break
TBA Test 2 (10%)
7 18/4 22/4 (contd)
Computerized Information System Exam
8 25/4 29/4 3
Balance Sheet Audit Quiz
9& 2/5 6/5
Completing the Audit Quiz Exam 6
10 9/5 13/5
Reports: Audit and Other Reports Quiz Exam
11 16/5 20/5 3
Group Audit Quiz Exam
Using the Work of Others Quiz Exam
12 23/5 27/5 6
Internal Auditing Quiz Exam
28/5 5/6 Special Holiday
13 &14 6/6 19/6 Exit Survey
Audit Related Services Quiz Exam
13 6/6 10/6
Other Services Quiz Exam
14 13/6 17/6 Issues in Audit (Case Study) Exam 3
18/6 22/6 Revision Week
23/6 21/7 Final Examination (60%)

Topics for Tests, Quizzes and Group Assignment


Test Quizzes Group Assignment/
Presentation
(15%) (10%) (15%)
TBA TBA TBA

8
AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

WHAT YOU ALREADY LEARNED IN ACCOUNTING?

Accounting

Accounting is theprocess of identifying, measuring, and communicatingeconomic informationto permit


informed judgments and decisions by users of the information (American Accounting Association).

Identifying Measuring Communicating Economic information for


decision making
(Financial Statements)
Management Assertions
Economic Events Classes of Transactions:
Occurrence
External events, i.e. Internal events i.e. Completeness
transactions, events of value between events that occur entirely within Accuracy
two or more entities. a company. Cutoff
Classification
Account Balances:
Existence
Rights and Obligations
Completeness
Valuation and Allocation
Presentation and Disclosures

Faculty of Accountancy, UiTMKampusPuncakAlam 1 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

WHAT YOU HADLEARNED IN AUDITING (AUD390).

Auditing vs. Financial Statement Audit

Auditing is the accumulation and evaluation of evidence about information to determine and report on
the degree of correspondence between the information and established criteria. Auditing should be done
by a competent, independent person.
Financial statement audit is conducted to determine whether the overall financial statements are stated in
accordance with specified financial reporting criteria [in all material respects].

Established Criteria Information


Approved Accounting Standards Financial Statements incorporate the
assertions about financial information

Degree of Correspondence
[Reasonable Assurance:
In All Material Respects]
To Reasonably Assured, the Chartered Accountants Accumulate and Evaluate Evidence:
To Determine on the Degree of Correspondence
To Report on the Degree of Correspondence

Competent, Independent Person Chartered Accountant

Faculty of Accountancy, UiTMKampusPuncakAlam 2 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

How to Determine on the Degree of Correspondence?

Determine theassertions.

o The management assertions: Types of Assertions:


Classes of Transactions (during the period): Transaction-related audit objectives,
Occurrence
Completeness
Accuracy
Cutoff
Classification
Account Balances (at the period end): Balance-related audit objectives, and
Existence
Rights and Obligations
Completeness
Valuation and Allocation
Presentation and disclosures Disclosure-related audit objectives
Occurrence and Rights and Obligation
Completeness
Classification and Understandability
Accuracy and Valuation

Faculty of Accountancy, UiTMKampusPuncakAlam 3 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Detect material misstatements.

o Types of misstatements = Error (Unintentional Misstatement) &Fraud (Intentional Misstatement)


o Material Auditors are responsible to search for ?misstatements, not ?misstatements
that do not affect users decisions.

Risk assessment Risk of Material Misstatement

Business Risk Risk of Material Misstatement (RoMM)


(Risk associated with profitability Inherent Risk (IR) Control Risk (CR)
and business survival) (Susceptibility to) (Risk become greater because the deficiency of
o Credit sales Doubtful/ bad debts Performance review
No review of aging report.
o Cash collection Theft/ lost/ misplaced of Performance review
cash No supervision of cash register machine.
o Most of the job are given Abuse of authority Segregation of duties
to one staff Easy to misappropriate cash.
o Trust given to one staff Abuse of authority Performance review
No independent checking of the work done.
o Documents are not serially Lost/ misplaced of Information processing
numbered documents Documents are not completely recorded.

Faculty of Accountancy, UiTMKampusPuncakAlam 4 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Nature, timing and extent of audit tests.


o Nature of audit tests
Internal control Tests of Controls
Substance Substantive Procedures (Tests of Details & Substantive Analytical Procedures)

o Timing of audit tests


Before y/e Tests of Controls
At/ Near y/e
After y/e Substantive Procedures (Tests of Details & Substantive Analytical Procedures)

o Extent of audit tests Sufficient appropriate evidence


Persuasive evidence = Appropriateness (Relevant x Reliable) x Sufficiency
Appropriateness of Evidence Relevant to the audit objective
Types of Evidence
Tangible Testimonial Computation
External Analytical
Inspection Observation Reperformance Inquiry Recomputation
Confirmation Procedures
Insp Obsv Repef Inqr ExCom Recom AProc

Faculty of Accountancy, UiTMKampusPuncakAlam 5 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Appropriateness of Evidence Reliable (worthy of confidence)


High Low
Reliability Obtained Obtained Obtained
Directly Externally Internally
Auditors direct knowledge 9
Timeliness of evidence 9
Independence of information provider 9
Authority of information provider 9 9
Corroborating documentary evidence 9 9
Degree of objectivity 9 9
Effectiveness of internal controls 9
Sufficiency of Evidence Sample size = f (Risk; Materiality)

Audit Risk (AR) Model Acceptable = IR x CR x Planned


AR RoMM DR
Audit risk model expresses the general relationship of Acceptable AR and the components of the
model (IR, CR&Planned DR) useful when planning risk levels (High, Moderate,Low or
Very Low) for audit procedures.

Conclude whether the audit tests met with the assertions.

Faculty of Accountancy, UiTMKampusPuncakAlam 6 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Report on the Degree of Correspondence


Opinion the financial statements give a true and fair view.
(Source: Tom Lee, Company Auditing, 3rd ed., 1986)
o True The accounting information contained in the financial statements has been quantified and
communicated in such a way as to correspond to the economic events it is intended to
describe. Here, correspondence should be taken to mean that the information is
appropriate, pertinent, and connected to the economic events, in such a way that it
contributes to a firm understanding of the economic events by the users.
o Fair The accounting information has been measured and disclosed in a manner, which is
objective and without prejudice to any particular sectional interests in the company.
o Opinion An assurance (9) / A guarantee (8)
Reasonable assurance, that the financial statements are free of material misstatement.
o Reasonable assurance is intended to indicate that an audit cannot be expected to completely eliminate
the possibility that a material misstatement will exist in the financial statements.
o Reasonable assurance is a high, but not absolute level of assurance.
No Limited Reasonable Absolute
Assurance Assurance Assurance Assurance

0% 80% 100%
Inqr AProc Insp Obsv Repef ExCom Recom
o Reasonable assurance is obtained when the auditor has accumulated and evaluated sufficient
appropriate audit evidence, to reduce theaudit risk to an acceptably low level.

Faculty of Accountancy, UiTMKampusPuncakAlam 7 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Example
Extract from a balance sheet:
(RM)
Accounts Receivable 281,790
Allowance for Doubtful Debts 28,763
253,027
Accounts receivable turnover ratio is 42 days. It is the management policy to grant credit only for
14 days.
Analysis of the aging report gave information that the allowance for doubtful debts is inadequate.
An additional allowance of RM33,897, which is materialis needed to bring the ratio to a more realistic
average of collection period.
True that the accounting information portray by the accounts receivable is appropriate, pertinent, and
connected to the economic events, i.e. sales, return discount allowed, and cash receipts. However, the
accounting information has been measured and disclosed in a manner, which is not objective and with
prejudice to interests of the management in the company.
If the management agree to adjust the allowance for doubtful debts with the additional adjustment of
RM33,897, then the auditors opinion on the accounts receivable is true and fair view.

Faculty of Accountancy, UiTMKampusPuncakAlam 8 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

THE AUDIT PROCESS: HOW FINANCIAL REPORT ASSERTIONS (AUDIT OBJECTIVES) ARE MET

Financial Financial Statement Audit


Statements Audit Evidence Audit Report

Plan and Design Fieldwork: Fieldwork: Issue


Statement of
an Audit Approach Interim Audit Final Audit the Audit Report
Comprehensive
Income
Knowledge of Transaction-Related Transaction-Related Audit Objectives &
Statement of Unmodified
Clients Business Audit Objectives Balance-Related Audit Objectives
Financial Audit Report
Position Business Risk
Fieldwork Complete
Statement of the Audit Modified
Analytical Procedures Internal Control Financial Statements
Cash Flow Audit Report
(Preliminary)
Notes to the Test of Controls Substantive Tests Substantive
Accounts Audit Risk and Tests
Substantive Test
Materiality of Transactions Subsequent
Inherent Risk Events
complete with
Conceptual
Test of Controls Going Concern
Framework Internal Control
(forHIGH RISK)
Control Risk Contingencies
Approved Substantive Tests
Accounting
Standards Fraud Risk Tests of Details of Commitments
Balances

Bookkeeping: Detection Risk Analytical Analytical


Source Documents; Procedures Procedures
Journals; Ledgers; Audit Programmes (Substantive) (Final)
Internal Control and Sampling

Faculty of Accountancy, UiTMKampusPuncakAlam 9 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

ACCOUNTING VS. AUDITING

Accounting Auditing
Definition (Ch.1, p.4, Arens et al.)
Definition (Ch.1, p.5, Arens et al.) Focus on determining
Focus on providing whether recorded information
understandable, relevant, reliable and comparable as reflected in the financial statements,
financial statements. properly reflects the economic events
that occurred during the accounting period.
Accountants responsible
Auditors knowledge
in developing the accounting and internal control systems
of the economic events,
to make sure that the entitys economic events
and accounting and internal control systems
are properly recorded
is limited to that acquired during the audit.
on a timely basis and at a reasonable cost.

Faculty of Accountancy, UiTMKampusPuncakAlam 10 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

ACCOUNTINGVS.INTERNAL CONTROL

Management Responsibility Accounting and Internal Control

Authorization Segregation of Duties


Control
Activities Information Processing Performance Reviews
Physical Controls

Classifying Recording Summarizing Financial Statement


(To Identify & Measure) (Journal & Ledger) (To Communicate)
Management Assertions
Classes of Transactions
Account Balances
Economic Information Presentation and Disclosures

External Events Internal Events


e.g. e.g.
purchase of supply of
raw material from raw material from
suppliers a store to production

Faculty of Accountancy, UiTMKampusPuncakAlam 11 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Components of internal control (COSO framework)


Control Environment

Integrity and Commitment to Board of Directors/ Audit Managements Philosophy and


Ethical Values Competence Committee Participation Operating Style

Organizational Structure Assignment of Authority and Responsibility Human Resource Policies and Practices

Risk Assessment Control Activities Information and Communication Monitoring

Identify factors affecting Adequate People Internal Auditors


risks relevant to the separation of duties
management assertions
Data
Proper authorization of
Assess significance of transactions and activities
risks and Accounting System
likelihood of occurrence Adequate (Manual vs. Automated)
documents and records
Hardware and Software
Determine actions
necessary to manage risks Physical control over
assets and records

Independent checks on
performance

Faculty of Accountancy, UiTMKampusPuncakAlam 12 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Company The Importance of Audit


To establish credibility.
Shareholders Limited liability company Dispersion between
Accountability owners (i.e. shareholders) and management; To
bring together the entrusted management and
Board of Directors shareholders.

Managers Accountability
Executives
Clerks

Company

Shareholders Determine and report on the degree of correspondence


Auditor between the financial statements and Approved
Accounting Standards, in all material respects.
Board of Directors Misstated
Report = Financial
Management Shortcoming in management assertions
Statements
Bias/ Prejudice/ One-sidedness

Faculty of Accountancy, UiTMKampusPuncakAlam 13 [March 2016]

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Faculty of Accountancy, UiTMKampusPuncakAlam 16 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

TOPIC 1 STATUTORY AND PROFESSIONAL


RESPONSIBILITIES

COMPANY LAW [COMPANIES ACT, 1965]


QUALIFICATIONS TO BE AN APPROVED COMPANY AUDITOR [SECTION 8]

(2) Approved by Minister of Finance


o Good character and competent to perform the duties of an auditor = Chartered Accountants
o Pay prescribed fee [Second Schedule], in force for a period of two years after the date of issue
(7) Good character and competent
Under the Accountants Act 1967, MIA shall recognize the following qualifications for admission as
Chartered Accountant:
o Full/Associate members of:
The Malaysian Institute of Certified Public Accountants The New Zealand
The Institute of Chartered Accountants of Scotland Society of Accountants
The Institute of Chartered Accountants in England and Wales The Canadian Institute of
The Institute of Chartered Accountants in Ireland Chartered Accountants
The Association of Chartered Certified Accountants (United Kingdom) The Indian Institute of
The Chartered Institute of Management Accountants (United Kingdom) Chartered Accountants
The Institute of Chartered Accountants in Australia
The Australian Society of Certified Practising Accountants

Faculty of Accountancy, UiTMKampusPuncakAlam 17 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

o Holders of:
Bachelor of Accountancy (Honours), UniversitiTeknologi MARA
Diploma in Accounting, University of Malaya (post graduate)
Bachelor of Accounting, University of Malaya
Bachelor of Accounting (Honours), UniversitiKebangsaanMalaysia
Bachelor of Accounting (Honours), Universiti Utara Malaysia
Bachelor of Accounting (Honours), Universiti Putra Malaysia
Bachelor of Accounting (Honours), Universiti Islam Antarabangsa

Faculty of Accountancy, UiTMKampusPuncakAlam 18 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

DISQUALIFICATIONS FOR THE APPOINTMENT AS AN AUDITOR [SECTION 9]

(1a) Not an approved company auditor.


(1b) Indebted to the company or related company, more than RM2,500.
(1c) Officer of the company or related company, either directly or indirectly.
(1c) Share registrar of the company.
(2) Ex-officer or promoter of the company or related company within 12 months.
(4a) Non-resident partners.
(6) No written consent is obtained by the client

Faculty of Accountancy, UiTMKampusPuncakAlam 19 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

APPOINTMENT [SECTION 172]

(2) General Rule Only the shareholders at an annual general meeting can appointanauditor.

Appointed by
Types of Appointment Companies
Shareholders at
Directors Commission of
General Meeting
Malaysia
(1) First auditor (i.e. before the first AGM) 9
(3) To fill casual vacancy 9
Exceptional
(2) To reappoint retiredauditor 9 to the rule
(8) Successor auditor (i.e. to take the
9
office of removed auditor)

Faculty of Accountancy, UiTMKampusPuncakAlam 20 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

REMUNERATION FEES AND EXPENSES [SECTION 172]

Remuneration fixed by
At General Meeting Companies
Appointed at/ by
Authorized to Directors Commission of
Shareholders Malaysia
the Directors
(16a) Shareholders 9 9
(16b) Directors 9
(16b) Companies Commission of
9
Malaysia

Faculty of Accountancy, UiTMKampusPuncakAlam 21 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

REMOVAL [SECTION 172]

Only the shareholders at a general meeting can remove an auditor.

Notice Resolution
Removal of existing auditor Special 28 days Special 75% majority
Appointment of successor auditor Ordinary 21 days Ordinary 50% +1majority

RESIGNATION [SECTION 172]

Not a sole auditor


At general meeting

Faculty of Accountancy, UiTMKampusPuncakAlam 22 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

DUTIES [SECTION 174]

Ch.3, pp.50 & 51


(1) Report to the members on
o The financial statements.
o The accounting and other records and the registers
(2) State in the report:
o Opinion on the true and fair view of the financial statements.
o The proper keeping of accounting and other records and the registers.
o The defect or irregularity in the financial statements, if any.
(3) Deficiency, failure or shortcoming with the information and explanation, if any.

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RIGHTS [SECTION 174]

(3) Right to obtain information and explanations.


(4) Right of access to accounting and other records, including registers.
(6) Right to attach or endorse the auditors report on the financial statements, and be read at general
meeting.
(7) Right to attend general meeting.
(7) Right to receive all notices and minutes of general meeting.
(7) Right to speak at general meeting.
(8) Right to report to CCM.
Rights upon removal [Section 172]
o (5b) Make representation within 7 days of receiving special notice.
o (5b) Request representation be sent by the company to shareholders.
o (6) Read the representation at general meeting.

Faculty of Accountancy, UiTMKampusPuncakAlam 24 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

MIAS BY-LAWS (ON PROFESSIONAL ETHICS, CONDUCT AND PRACTICE)


IMPORTANCE OF BY-LAWS

Accountants/ Auditors hold positions of trust, and people rely on them and their expertise.
Responsible to act in the public interest (i.e. users of financial statements).

Integrity Objectivity

FUNDAMENTAL PRINCIPLES =
Professional
Competence and Confidentiality
Due Care

Professional
Behavior

Faculty of Accountancy, UiTMKampusPuncakAlam 25 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

110 Integrity
To be straightforward and honest in all professional and business relationships.
Relationships = Straightforward x Honest x (Fair Dealing x Truthfulness)

Integrity
o Not corrupted.
o Information provided in the reports, returns and correspondences are not false, not misleading, not
furnish recklessly, no omission, no obscurity.
Straightforward
Free from ambiguity.
Honest
Not leading into false statement.
Fair dealing
Not bias, not prejudice (justify the judgment with knowledge of the facts).
Truthfulness
Factual.

Faculty of Accountancy, UiTMKampusPuncakAlam 26 [March 2016]


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120 Objectivity
To not allow bias, conflict of interest or undue influence of others to override professional or business
judgments.
Judgments = Unbiased x No Conflict of Interest x No Undue Influences

Objectivity
o Judgments are supported with evidence.
o Verifiability exists in that two auditors working independently of each other will come up with
similar conclusions.
o Absolute independence is impossible (Arens, 2nd. Ed., Ch.1, p.5).
Unbiased
Not prejudice.
No conflict of interest
Private interest vs. public obligation, uphold public obligation.
No undue influence
Mutual respect in auditor-client relationship, uphold professional rapport.

Faculty of Accountancy, UiTMKampusPuncakAlam 27 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

130 Professional Competence and Due Care


To maintain professional knowledge and skill at the level required to ensure that a client or employer
receives competent professional services based on current developments in practice, legislation and
techniques and act diligently and in accordance with applicable technical and professional standards.
Services = (Ordinary, Prudent, Reasonable)(Knowledge x Skill)x Sound Judgment x Act Diligently

Professional Competence and Due Care


o CompetenceAttainment=Qualification; Maintenance=Continuing Professional Education.
o Due care = Carefully and thoroughly perform the procedures on timely basis; Standard of conduct
required of an ordinary, prudent, and reasonable person.
Knowledge
Understand the relevant technical, professional, and business development and sustain with
continuing professional education.
Skill
Hands-on, on the job/ in house training, supervision.
Sound judgment
Judgments are supported with evidence.
Act diligently
Remain constant to the purpose, perform according to standards, understand the inherent limitation
in auditing.

Faculty of Accountancy, UiTMKampusPuncakAlam 28 [March 2016]


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140 Confidentiality
To respect the confidentiality of information acquired as a result of professional and business
relationships and, therefore, not discloses any such information to third parties without proper and
specific authority, unless there is a legal or professional right or duty to disclose, nor use the
information for the personal advantage of the professional accountant or third parties.
Information = Do Not Disclose x Do Not Use

Confidentiality
o The unauthorized disclosure or use of information poses a threat to clients.
o Entitle to use the experience gained from a client on another client.
Alert to the possibility of inadvertent disclosure
o Close family member. o Immediate family member.
o Prospective client. o Within the firm.
Exemption
o Authorized by client. o Professional right to disclose
o Permitted by law Practice review.
Subpoena for legal proceeding. To respond to an inquiry or investigation.
To the public authorities. To protect the professional interest.
o Use as evidence in legal proceeding. To comply with technical standards and ethical requirements.
Pre-requisite to the exemption
o The interests of all parties are not harmed.
o Disclosed information Complete and substantiated.
o Recipient of information Known and with authority.

Faculty of Accountancy, UiTMKampusPuncakAlam 29 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

150 Professional Behavior


150.1 Professional Behavior
To comply with relevant laws and regulations and should avoid any action that discredits the
profession.
Conduct = (Laws x Regulations)(e.g. Companies Act 1965, Banking and Financial
Institutions Act 1989, Capital Market and Services Act 2007)
x Honor Profession (including By-Laws)

Avoid actions that a reasonable and informed third party to conclude adversely affects the
good reputation of the profession.
150.2 Advertising, Marketing and Promotions
In accordance with laws;Professionally dignified; In good taste; Not making exaggerated
claims; Not making disparaging comparison with the work of another Chartered Accountant.
Not bring the profession into disrepute Honest and truthful
o Professionally dignified (honorable) and in o Do not make exaggerated claims
good taste(within the normal social standards). For the services offered.
o In accordance with the relevant legislation. Qualifications.
Experience.
o Do not make disparaging references or
unsubstantiated comparisons(belittle).

Faculty of Accountancy, UiTMKampusPuncakAlam 30 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

INDEPENDENCE

Importance; Relevance; Significant; Why?

o Public interest.
o To enhance the credibility of financial statements.
o To provide high or limited level of assurance.
Audit of financial statements High level of assurance (i.e. reasonable assurance)
Review of financial statements Limited level of assurance

Types of Auditors Independence


(para.(xxxi), p.8)

(a) Independence of Mind


The state of mind that permits the expression of a conclusion without being affected by influences
that compromise professional judgment, thereby allowing an individual to act with integrity, and
exercise objectivity and professional skepticism.

(b) Independence in Appearance

The avoidance of facts and circumstances that are so significant that a reasonable and informed
third party would be likely to conclude, weighing all the specific facts and circumstances that a
firms, or a member of the audit assurance teams, integrity, objectivity or professional skepticism
has been compromised.

Faculty of Accountancy, UiTMKampusPuncakAlam 31 [March 2016]

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Independence = Free from All (Economic x Financial x Relationships)

o Independence means the auditors are able to adhere with the fundamental principles of ethics.

o Independence means the auditors free to determine the scope of audit and to perform the appropriate
scope of work.

o The word independence on its own may lead to misunderstanding.It is impossible for anauditor
exercising professional judgment to be free from all economic, financial and other relationships.

o Therefore, the significance of economic, financial and other relationships should be evaluated in the
light of what a reasonable and informed third party having knowledge of all relevant
information would reasonably conclude to be unacceptable.

o It is the responsibility of the auditor to actively consider independence for every given situation.

Faculty of Accountancy, UiTMKampusPuncakAlam 32 [March 2016]


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100.2 CONCEPTUAL FRAMEWORK APPROACH

(para.100.2-100.7, pp.17-18)

Threats could compromise (the mind)/ perceived to compromised (the appearance) compliance with
fundamental principles of ethics. Threats will inappropriately influence the judgment or behavior.

The conceptual framework approach requires an auditor to identify, evaluate, and address threats to
compliance with the fundamental principles.

If the auditor determines that the threats to compliance with the fundamental principles are not at an
acceptable level, the auditor shall determine whether appropriate safeguards are available and can be
applied to eliminate or reduce the treats to an acceptable level.

Conceptual framework = Identify ThreatsxEvaluate Significance of the ThreatsxApply


Safeguardsapproach to independence
Comply with a set of specific rules
(Rules may be decided arbitrary,i.e. based on whim rather than decided based
on the facts presented)

Faculty of Accountancy, UiTMKampusPuncakAlam 33 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

[2.3] THREATS AND SAFEGUARDS

Types of Threats to Independence = Self-interest x Self-review xAdvocacy xFamiliarity xIntimidation


(para.200.3, p.32)
(para.100.8, p.20)

S S A F I
Self- Interest Self- Review Advocacy Familiarity Intimidation
Threat Threat Threat Threat Threat

Faculty of Accountancy, UiTMKampusPuncakAlam 34 [March 2016]


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(a) Self-interest threat


The threat that a financial or other interest will inappropriately influence the professional accountant
judgment or behavior;

Self-Interest = Inappropriate Judgment x Conflict of Interest

E.g.
Threats due to financial interest Shareholder; Loan from client.
Threats due to other interest Guarantees from client/ director.

(b) 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;

Self-Review=Inappropriate Evaluation of Non-Audit Services x Re-Evaluates Own Work

E.g.
Threats due to auditing own work (i.e. non-audit services)
Preparing of financial statements.
Designing and implementing IT system.
Officer or holding key position.

Faculty of Accountancy, UiTMKampusPuncakAlam 35 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

(c) 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;

Advocacy = (Promote x Support) in Favor of Client


(d) Familiarity threat
The threat that due to a long or close relationship with a client or employer, a professional accountant
will be too sympathetic to their interests or too accepting of their work; and

Familiarity = (Long x Close) Relationship x Too Sympathetic


(e) Intimidation threat
The threat that a professional accountant will be deterred from acting objectively because of actual or
perceived pressures, including attempts to exercise undue influence over the professional accountant.

Intimidation = (Actual x Threatened)(Fear x Harm)

Faculty of Accountancy, UiTMKampusPuncakAlam 36 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Types of Safeguards
(para.200.9-200.15, pp.35-37)

Safeguards

Safeguards created by Safeguards in thework environment


The profession,
The legislation, or Firm-Wide Engagement-Specific Clients
The regulation. Safeguards Safeguards Systems and Procedures

Faculty of Accountancy, UiTMKampusPuncakAlam 37 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

o Safeguards created by
The profession,
The legislation, or
The regulation.
(para.100.10, p.21)

(a) Educational, training and experience requirements for entry into the profession.
(b) Continuing professional development requirements.
(c) Corporate governance regulations.
(d) Professional standards.
(e) Professional or regulatory monitoring and disciplinary procedures.
(f) External review by a legally empowered third party of the reports, returns, communications or
information produced by a professional accountant.

o Safeguards in the work environment Firm-wide safeguards


(para.200.12, p.35)

(a) Leadership of the firm that stresses the importance of compliance with the fundamental principles.
(b) Leadership of the firm that establishes the expectation that members of an assurance team will act
in the public interest.
(c) Policies and procedures to implement and monitor quality control of engagements.
(d) Documented policies regarding the need to identify threats to compliance with the fundamental
principles, evaluate the significance of those threats, and apply safeguards to eliminate or reduce the
threats to an acceptable level or when appropriate safeguards are not available or cannot be applied,
terminate or decline the relevant engagement.

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

(e) Documented internal policies and procedures requiring compliance with the fundamental principles.
(f) Policies and procedures that will enable the identification of interests or relationships between the
firm or members of engagement teams and clients.
(g) Policies and procedures to monitor and, if necessary, manage the reliance on revenue received
from a single client.
(h) Using different partners and engagement teams with separate reporting lines for the provision of
non-assurance services to an assurance client.
(i) Policies and procedures to prohibit individuals who are not members of an engagement team
from inappropriately influencing the outcome of the engagement.
(j) Timely communication of a firms policies and procedures, including any changes to them, to all
partners and professional staff, and appropriate training and education on such policies and procedures.
(k) Designating a member of senior management to be responsible for overseeing the adequate
functioning of the firms quality control system.
(l) Advising partners and professional staff of those assurance clients and related entities from which
independence is required.
(m) A disciplinary mechanism to promote compliance with policies and procedures.
(n) Published policies and procedures to encourage and empower staff to communicate to senior levels
within the firm any issue relating to compliance with the fundamental principles that concerns them.

Faculty of Accountancy, UiTMKampusPuncakAlam 39 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

o Safeguards in the work environment Engagement-specific


(para.200.13, p.36)
safeguards
;
(a) Having a professional accountant who was not involved with the
non-assurance service review the non-assurance work performed or
otherwise advise as necessary.
(b) Having a professional accountant who was not a member of the assurance
team review the assurance work performed or otherwise advise as necessary.
(c) Consulting an independent third party, such as a committee of independent
directors, a professional regulatory body or another professional accountant.
(d) Discussingethical issues with those charged with governance of the client.
(e) Disclosing to those charged with governance of the client the nature of
services provided and extent of fees charged.
(f) Involving another firm to perform or re-perform part of the engagement.
(g) Rotating senior assurance team personnel.

Faculty of Accountancy, UiTMKampusPuncakAlam 40 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Engagement-Specific Safeguards

To Justify Independent Clients Audit Committee

(a) independent accountant to review non-assurance work. (d) to discuss ethical issue.

(b) independent accountant to review assurance work. (e) to disclose scope of work
and fees.
(c) consult independent third party.

(f) independent firm to perform/ re-perform.

(g) internal rotation of senior personnel.


(?) remove from audit team
o Safeguards in the work environment Safeguards within the clients systems and procedures
(para.200.15, p.37)

(a) The client requires persons other than management to ratify or approve the appointment of a firm
to perform an engagement.
(b) The client has competent employees with experience and seniority to make managerial decisions.
(c) The client has implemented internal procedures that ensure objective choices in commissioning
non-assurance engagements.
(d) The client has a corporate governance structure that provides appropriate oversight and
communications regarding the firms services.

Faculty of Accountancy, UiTMKampusPuncakAlam 41 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

[2.3] CONCEPTUAL FRAMEWORK APPROACH TO INDEPENDENCE


(= f (IDENTIFY THREATS, EVALUATE SIGNIFICANCE OF THE THREATS, APPLY SAFEGUARDS)

Significance
Identify Threats to Independence of the Threats?
Safeguards

(a) Self-Interest. E.g. of the threats(para200.4, p.33) Not significant. Not significant, then
o Financial interest e.g. owns shares Explain why? apply the safeguards
o Close business relationships e.g. joint venture To eliminate the
threats, or
o Temporary staff assignment
To reduce the
o Serve on client board threats to an
o Gifts and hospitality acceptable level.
o Loans and guarantees
o Overdue fees Significant. Significant, then
o Percentage or contingent fees Explain why? no safeguard is
o High percentage of fees available
o Lowballing i.e. quote a significantly lower fee To eliminate the
interest or
(b) Self-Review. E.g. of the threats(para200.5, p.33) activities.
o Preparing accounting records and financial statements To decline/
o Valuation services discontinue the
o Tax services engagement.
o Internal audit services

Faculty of Accountancy, UiTMKampusPuncakAlam 42 [March 2016]


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o Corporate finance e.g. advice on debt reconstruction;


negotiate with bank on clients behalf.
o IT services
o Legal services e.g. defend client in legal case; provide
evidence as an expert witness.
(c) Advocacy.E.g. of the threats(para200.6, pp.33-34)
o Legal services
o Corporate finance
o Contingent fees
(d) Familiarity.E.g. of the threats(para200.7, p.34)
o Family and personal relationships
o Employment with assurance client
o Recent service/ employment with assurance client
o Long association with assurance client
(e) Intimidation.E.g. of the threats(para200.8, p.34)
o Family and personal relationships
o Assurance staff members move to employment with client
o Litigation
o Close business relationship

Faculty of Accountancy, UiTMKampusPuncakAlam 43 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

BY-LAWS, SECTION 290 A CONCEPTUAL FRAMEWORK APPROACH TO INDEPENDENCE

290.102 290.117 FINANCIAL INTEREST

Financial interest An interest in equity or other security, debenture, loan or other debt instrument of an
equity, including rights and obligations to acquire such an interest and derivatives
directly related to such interest.

Direct financial interest A financial interest which is


Owned directly by and under the control of an individual or entity (including
those managed on a discretionary basis by others); or
Beneficially owned through a collective investment vehicle, estate, trust or
other intermediary over which the individual or entity has control.

Indirect financial interest A financial interest beneficially owned through a collective investment vehicle,
estate, trust or other intermediary over which the individual or entity has
no control or ability to influence investment decisions.

Faculty of Accountancy, UiTMKampusPuncakAlam 44 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Identified threats Self-interest


Evaluate significance f (The position of the person holding the financial interest; Direct vs. indirect
of the threats financial interest; The materiality of the financial interest)

Identified threats Self-interest


Evaluate significance The following person has a direct financial interest or a material indirect financial
of the threats interest in the audit client:
A member of the audit team,
Immediate family* of a member of the audit team, or
The firm.

* Immediate family Spouse or dependant.


Close family Parent, child or sibling who is not an immediate family
member.
Apply safeguards No safeguards could reduce the self-interest threat to an acceptable level.

Faculty of Accountancy, UiTMKampusPuncakAlam 45 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Financial Interest (para290.103 & 290.105)

Threat Significance of the Threat Safeguard

Direct FI
Member of Audit Team
Immediate Family
Firm
Material No Safeguard
Indirect FI
Self-Interest 290.103

Direct FI
Close Family

Material
Indirect FI
Immaterial Apply Safeguard
290.105

Faculty of Accountancy, UiTMKampusPuncakAlam 46 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Question 1
A close family of a member of the audit team has a direct financial interest (or a material indirect financial
interest) in the audit client.

Identified threats Self-interest


Evaluate significance f (Direct vs. indirect financial interest; The materiality of the financial interest)
of the threats
Apply safeguards To eliminate the threat The close family disposing as soon as practicable all of
the financial interest.

To reduce the threat to an acceptable level The close family disposing a


sufficient portion of an indirect financial interest so that the remaining is no
longer material.
To apply the following safeguards
o Having an auditor who was not a member of the audit team review the audit
documentation.
o Removing the member from the audit team.

Faculty of Accountancy, UiTMKampusPuncakAlam 47 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

290.118 290.123 LOANS AND GUARANTEE


(e.g. home mortgages, overdraft, car loan, credit card balances)

Identified threats Self-interest


Evaluate significance f (Bank/ Financial institution; Normal lending procedures, terms and conditions)
of the threats
Apply safeguards Reduce the self-interest threat to an acceptable level:
The audit work reviewed by an auditor from a network firm* that is neither
involved with the audit nor received the loan.

* Network firm A firm that belongs to a network. A network is larger


structure:
That is aimed at cooperation, and
That is clearly aimed at profit or cost sharing or share
common ownership, common quality control policies and
procedures, common business strategy, common brand
name, or a significant part of professional resources.

Faculty of Accountancy, UiTMKampusPuncakAlam 48 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Loans and Guarantees (290.118& 290.121)

Threat Significance of the Threat Safeguard

Normal No Threat
Bank 290.120
Member of Audit Team Abnormal
Immediate Family 290.118

Non-Bank No Safeguard
Self-Interest Material
290.121
Non-Bank Immaterial
Firm 290.121

Abnormal
Bank 290.118
Normal Apply Safeguard
290.119

Faculty of Accountancy, UiTMKampusPuncakAlam 49 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Question 2
The auditor obtained a loan from ABC Bank only by submitting the application form. The form is not
supported with the photocopy of the NRIC and evidence of income. Immediate approval is given by the
bank.

Identified threats Self-interest


Evaluate significance f (Bank; Irregularities in lending procedures, terms and conditions)
of the threats
Apply safeguards No safeguards could reduce the self-interest threat to an acceptable level.

Faculty of Accountancy, UiTMKampusPuncakAlam 50 [March 2016]


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290.124 290.126 BUSINESS RELATIONSHIPS

Common financial interest Having a financial interest in a joint venture with the client, controlling
owners, directors or senior management.

Commercial relationship Arrangements to combine one or more services or products of the firm with
one or more services or products of the client and to market the package
with reference to both parties.
Distribution or marketing arrangements under which the firm distributes or
markets the clients products or services, or the client distributes or markets
the firms products or services.

Purchase of Goods/ Service (Nature/ Magnitude)(Normal Course of Business x Arms Length.)

Identified threats Self-interest; Intimidation


Evaluate significance f (Firm; A member of the audit team; Material financial interest; Significant
of the threats business relationship)
Apply safeguards No safeguards could reduce the self-interest/ intimidation threat to an acceptable
level.

Faculty of Accountancy, UiTMKampusPuncakAlam 51 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Business Relationships (290.124& 290.126)

Threat Significance of the Threat Safeguard

Immaterial Apply Safeguard


Firm 290.124
Joint Venture/ Material
Product/ Service/ 290.124 No Safeguard
Distribution/
Self-Interest Marketing Material
& Member of Audit Team 290.124
Intimidation Immediate Family
Immaterial Apply Safeguard
290.124
Firm Nature/ Apply Safeguard
Magnitude
Purchase of
Goods/ Service 290.126
Member of Audit Team Normal/ No Threat
Immediate Family Arms Length
290.126

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Question 3 (a)
The client is a parking management company that leases, manages and owns parking facilities. The client
operates 800 parking lots. The audit firm rented 5 lots, 2 for the partners and 3 for the managers. The lease
rental is charged at a prevailing current rate.

Identified threats Do not create threat to independence


Evaluate significance f (Normal course of business; Arms length)
of the threats
Apply safeguards n/a

Question 3 (b)
The auditor entered into a contact with the client to renovate his house. The renovation involves an extension
of kitchen, new tiles for the whole house, new coat of paint,cornice, lightings and landscape.

Identified threats Self-Interest and Intimidation


Evaluate significance f (Nature of transaction renovation contract of house owned by auditor;
of the threats Magnitude of transaction major renovation)
Apply safeguards To eliminate the threat Cancel the transaction.
To reduce the threat to an acceptable level Reduce the magnitude of the transaction.
To apply the following safeguards
o Removing the member from the audit team.

Faculty of Accountancy, UiTMKampusPuncakAlam 53 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

290.127 290.133 FAMILY AND PERSONAL RELATIONSHIPS

Identified threats Self-interest; Familiarity; Intimidation


Evaluate significance f (Immediate family member vs. Close family member; Role of the family member
of the threats or other individual within the client; Responsibilities of the individual on the audit
team)

Identified threats Self-interest; Familiarity; Intimidation


Evaluate significance f (Immediate family member vs. Close family member;
of the threats Role of the family member or other individual within the client = Director/
Officer/ Employee in a position to exert significant influence over the preparation
of accounting records/ financial statements;
Responsibilities of the individual on the audit team)
Apply safeguards Immediate family member
Eliminate the threat by removing the individual from the audit team.
Close family member
Eliminate the threat or reduce the self-interest threat to an acceptable level:
Remove the individual from the audit team.
Structuring the responsibilities of the audit team so that the individual does not
deal with matters that are within the responsibility of the close family member.

Faculty of Accountancy, UiTMKampusPuncakAlam 54 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Question 4
An immediate family member of a member of the audit team is an employee in a position to exert significant
influence over the clients financial position, financial performance or cash flows.

Identified threats Self-interest; Familiarity; Intimidation


Evaluate significance f (Immediate family member; Position held by the family member/ In a position to
of the threats exert significant influence over the clients financial position, financial
performance or cash flows; Responsibilities of the individual on the audit team)
Apply safeguards Eliminate the threat or reduce the threat to an acceptable level:
Remove the individual from the audit team.
Structuring the responsibilities of the audit team so that the individual does not
deal with matters that are within the responsibility of the close family member.

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

290.134 290.141 EMPLOYMENT WITH AN AUDIT CLIENT

Identified threats Familiarity; Intimidation


Evaluate significance f (Former member of the audit team/ Former partners of the firm; Join the audit
of the threats client and hold a position as director/ officer/ employee in a position to exert
significant influence over the preparation of accounting records/ financial
statements; Still remain significant connection = Individual entitle to benefits and
payments that are material from the firm/ Individual continue to participate of
appear to participate in the firms activities)
Apply safeguards No safeguards could reduce the familiarity/ intimidation threat to an acceptable level.

Faculty of Accountancy, UiTMKampusPuncakAlam 56 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Question 5
A former member of the audit team or partner of the firm has joined the audit client in such a position, and
no significant connection remains between the firm and the individual.

Identified threats Familiarity; Intimidation


Evaluate significance f (The position the individual has taken at the client; An involvement the individual
of the threats will have with the audit team; The length of time since the individual was a
member of the audit team or partner of the firm; The former position of the
individual within the audit team or firm, e.g. whether the individual was
responsible for maintaining regular contact with the clients management)
Apply safeguards Modifying the audit plan,
Assigning individuals to the audit team who have sufficient experience in
relation to the individual who has joined the client, or
Having an auditor review the work of the former member of the audit team.

Faculty of Accountancy, UiTMKampusPuncakAlam 57 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

290.142 TEMPORARY STAFF ASSIGNMENTS

Identified threats Self-review


Evaluate significance f (Short period of time; Involved in providing permitted non-assurance services; Do
of the threats not assuming management responsibilities; Audit client is responsible for directing
and supervising the activities of the loaned firms staff)

Public interest entity Lending of staff is prohibited.


Apply safeguards Eliminate the threat or reduce the threat to an acceptable level:
Conducting an additional review of the work performed by the loaned staff.
Not giving the loaned staff audit responsibility for any function or activity that
the staff performed during the temporary staff assignment, or
Not including the loaned staff as a member of the audit team.

Faculty of Accountancy, UiTMKampusPuncakAlam 58 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

290.143 290.145 RECENT SERVICE WITH AN AUDIT CLIENT

Identified threats Self-interest; Self-review; Familiarity


Evaluate significance f (Served during the period covered by the audit report; The position the individual
of the threats held with the client = Served as director/ officer/ employee in a position to exert
significant influence over the preparation of the clients accounting records or the
financial statements)
Apply safeguards No safeguards could reduce the threat to an acceptable level. Consequently, such
individuals shall not be assigned to the audit team.

Faculty of Accountancy, UiTMKampusPuncakAlam 59 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Question 6
Ali is a former staff of ABC Sdn Bhd. The work performed by Ali in the prior audited period, while
employed by the client, is to be evaluated in the current audit period.

Identified threats Self-interest; Self-review; Familiarity


Evaluate significance f (Served before the period covered by the audit report; The position the individual
of the threats held with the client = Served as director/ officer/ employee in a position to exert
significant influence over the preparation of the clients accounting records or the
financial statements; Length of time since the individual left the client; The role of
the professional on the audit team)
Apply safeguards Reduce the threat to an acceptable level by conducting a review of the work
performed.

Faculty of Accountancy, UiTMKampusPuncakAlam 60 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

290.150 290.155 LONG ASSOCIATION OF SENIOR PERSONNEL (INCLUDING PARTNER ROTATION) WITH
AN AUDIT CLIENT

Identified threats Self-interest; Familiarity


Evaluate significance f (How long the individual has been a member of the audit team; The role of the
of the threats individual on the audit team; The structure of the firm; The nature of the audit
engagement; Whether the clients management team has changed; Whether the
nature or complexity of the clients accounting and reporting issues has changed)

Public interest entity An individual shall not be a key audit partner for more than
five (5) years; Shall not be a key audit partner for the client for two (2) years.
Apply safeguards Eliminate the threat or reduce the threat to an acceptable level:
Rotating the senior personnel off the audit team,
Having a professional accountant who was not a member of the audit team
review the work the senior personnel, or
Regular independent internal or external quality reviews of the engagement.

Faculty of Accountancy, UiTMKampusPuncakAlam 61 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

290.162 290.167 PROVISION OF NON-ASSURANCE SERVICES TO AUDIT CLIENTS


(MANAGEMENT RESPONSIBILITIES)

Identified threats Self-review; Self-interest; Familiarity


Evaluate significance f (Management responsibility:
of the threats Setting policies and strategic direction; Directing and taking responsibility for
the action of the entitys employees; Authorizing transactions; Deciding which
recommendations of the firm or other third parties to implement; Taking
responsibility for the preparation and fair presentation of the financial
statements; taking responsibility for designing, implementing and maintaining
internal control)

Deemed not to be management responsibility routine and administrative:


Executing an insignificant transaction that has been authorized by management;
Monitoring the dates for filing statutory returns; Providing advice and
recommendations to assist management in discharging their responsibilities.
Apply safeguards No safeguards could reduce the threat to an acceptable level.

Faculty of Accountancy, UiTMKampusPuncakAlam 62 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

290.167 290.172 PROVISION OF NON-ASSURANCE SERVICES TO AUDIT CLIENTS


(PREPARING ACCOUNTING RECORDS AND FINANCIAL STATEMENTS)

Identified threats Self-review


Evaluate significance f (Management responsibility:
of the threats Originating or changing journal entries, or determining the account
classification of transactions; Preparing or changing source documents or
originating data; Evidencing the occurrence of transactions)

Non-assurance services:
Providing technical assistance on matters such as resolving account
reconciliation problems; Providing technical advice on accounting issues such
as conversion to newly promulgated accounting standards; Analyzing and
accumulating information for regulatory reporting.
Apply safeguards No safeguards could reduce the threat to an acceptable level.

Faculty of Accountancy, UiTMKampusPuncakAlam 63 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

290.220 290.222A FEES


(FEES-RELATIVE SIZE)

Identified threats Self-interest; Intimidation


Evaluate significance f (The operating structure of the firm, e.g. quality control on engagement
of the threats performance, i.e. engagement partner and quality control partner involve in
finalizing the audit working papers; Whether the firm is well established or new;
The significance of the client qualitatively and/or quantitatively to the firm)

Public interest entity > 15% in each year over two consecutive financial periods.
Apply safeguards Reduce the threat to an acceptable level
Reducing the dependency on the client.
External quality control reviews.
Consulting a third party, such as a professional regulatory body or a professional
accountant, on key audit judgments.

Faculty of Accountancy, UiTMKampusPuncakAlam 64 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

290.223 FEES
(FEES-OVERDUE)

Identified threats Self-interest


Evaluate significance f (Remain unpaid for a long time; Overdue fees might be regarded as being
of the threats equivalent to a loan to the client)
Apply safeguards Reduce the threat to an acceptable level
Having additional professional accountant who did not take part in the audit
engagement provided advice or review the work performed.

Faculty of Accountancy, UiTMKampusPuncakAlam 65 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

290.224 290.227 FEES


& 240.3 240.4 (CONTINGENT FEES)

Fees calculated on a predetermined basis relating to Fees is payable if the result is favorable.
o the outcome of a transaction, or
o the result of the services performed by the firm

Identified threats Self-interest


Evaluate significance f (Established by company; Established by a court or other public authority)
of the threats
Apply safeguards General rule No safeguards could reduce the threat to an acceptable level.
No threat, if established by a court or other public authority.

Non-Assurance
Identified threats Self-interest
Evaluate significance f (The range of possible fee amounts; An authority determines the outcome;
of the threats Nature of service; Effect of the event or transaction on the financial statements)
Apply safeguards Reduce the threat to an acceptable level
Having a professional accountant to review the audit work.
Using professionals who are not members of the audit team for non-assurance service.
Clients written agreement as to the basis of remuneration; The work is disclosed
to intended users; Sound quality control; Review by objective third party.

Faculty of Accountancy, UiTMKampusPuncakAlam 66 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

290.230& 260 GIFTS AND HOSPITALITY

Identified threats Self-interest; Familiarity


Evaluate significance f [Nature, value and intent of the offer; Value (Trivial x Inconsequential);
of the threats No intention to influence decision making or to obtain information]
Apply safeguards General rule No safeguards could reduce the threat to an acceptable level.

Faculty of Accountancy, UiTMKampusPuncakAlam 67 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

220 Conflict of Interest

Circumstances giving rise to conflicts of interest that may potentially create threat to compliance with
the fundamental principles
Competing directly with the client.
Having a joint venture or similar arrangement with a major competitor of a client.
Performing services for clients whose interest are
o in conflict with each other.
o in dispute with each other.

Conflict of interest creates threat to objectivity and confidentiality.

f (Compete directly with the client; Joint venture or similar arrangement with major competitor of a client;
Provide services for clients whose interests are in conflict or the clients are in dispute with each other)

Faculty of Accountancy, UiTMKampusPuncakAlam 68 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

230 Second Opinion

Circumstances giving rise to second opinions that may potentially create threat to compliance with the
fundamental principles
Situations where a professional accountant in public practice is asked to provide a second opinion on
the application of accounting, auditing, reporting or other standards or principles to specific
circumstances or transactions by or on behalf of a company or an entity that is not an existing client

Second opinion creates threat to professional competence and due care.


Second opinion is not based on the same set of facts that were made available to the existing
accountant, or is based on inadequate evidence.

f (Not an existing client; Threat to professional skepticism (i.e. professional competence and due care);
Made available the facts and assumptions relevant to the expression of a professional judgment;
Permission to communicate with existing auditor; Opinion is based on the same set of facts that were
made available to the existing auditor)

Faculty of Accountancy, UiTMKampusPuncakAlam 69 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

240 Fees and Other Types of Remuneration


240.1 Fees
f (Fair reflection of the value of work; Skill and knowledge required; Level of training and
experience; Time necessarily occupied by each staff; Degree of responsibility; Urgency of work)
240.5 Referral Fees or Commissions
f (Referring continuing client; Client agreement; Disclose to the client the arrangement to pay/
receive a referral fee)

540 Referrals For


f (Referring continuing client; Do not impair the position of the auditor in the Non-Audit
continuing work for the client; Obtain consent for other professional services to the client)
Service

Faculty of Accountancy, UiTMKampusPuncakAlam 70 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

280 Objectivity All Services


f (Independence of mind and in appearance; Unbias; No conflict of interest; No undue influence)

Faculty of Accountancy, UiTMKampusPuncakAlam 71 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

METHODS OF PRACTICE
(para.500.1-500.13, pp.175-179)
Method of Practice
o (para.500.1-500.6, pp.175-177)

An auditor should not use


o A trade or association name (i.e. not a personal name or not a o Impersonal or fictitious name.
composite of personal name).
Allowed to practice as chartered accountant
o In own name. o In the name(s) of partner(s).
Branches
o (para.500.13, p.166)

Head office and branch(s) are not allowed to be under the management and control of a person who is not
a chartered accountant.

Faculty of Accountancy, UiTMKampusPuncakAlam 72 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

PROFESSIONAL APPOINTMENT
(para.210.1-210.14, pp.38-42)

Client Acceptance(para.210.1-210.5, p.38)


For new and recurring To determine whether acceptance would create any threats
client engagements to compliance with fundamental principles (e.g. threats to integrity or
professional behavior).
E.g. of issues associated with the client that may create threats
o Client involvement in illegal activities (e.g. money laundering).
o Client dishonesty.
o Client questionable financial reporting practices.
Safeguards
o Obtain knowledge and understanding of the client (including its owners, those charged with
governance, managers and those responsible for its business activities)
o Securing the clients commitment to improve corporate governance practices or internal controls.

Engagement Acceptance(para.210.6-210.8, pp.35-36)


To determine whether acceptance would create any threats to compliance with fundamental principles
(e.g. self-interest threat to professional competence and due care)
A threat, if the auditors do not possess, or cannot acquire, the competencies necessary to properly carry
out the engagement.
Safeguards
o Obtain knowledge and understanding of the client and its industry.
o Possess experience with relevant regulatory or reporting requirement.
o Assign sufficient staff with the necessary competencies.
o Use expert where necessary.
o Agree on a realistic time frame for the performance of the engagement.
o Comply with quality control policies and procedures.

Faculty of Accountancy, UiTMKampusPuncakAlam 73 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Changes in Professional Acceptance(para.210.9-210.14, pp.36-38) & (Appendix II, p.175)


To replace another auditor/ To consider tendering for an engagement currently held by another auditor
o Determine whether there are any reasons, professional or otherwise, for not accepting the
engagement, e.g. circumstances that create threats to compliance with fundamental principles that
cannot be eliminated or reduced to an acceptable level by the application of safeguards.
o E.g. threat to professional competence and due care, if the auditors accepts the engagement before
knowing all the pertinent facts.
Auditors can only accept nomination for an engagement after the existing auditor provide reasons,
professional or otherwise, for the proposed change. The details provided by the existing auditor enable the
proposed auditor to come to a decision.
Existing auditor is bound by confidentiality. Existing auditor is permitted to discuss the clients affairs with a
proposed auditor once clients permission (preferably in writing) to do so has been obtained.
o If client refuse to give permission, the proposed auditor shall decline the appointment.
o If client give permission, the existing auditor shall provide honest and unambiguous information.
If the proposed auditor is unable to communicate with the existing auditor, the proposed auditor shall take
reasonable steps to obtain information about any possible threats by other means, e.g.
o Inquiries of third parties.
o Background investigation of
Senior management.
Those charged with governance

Faculty of Accountancy, UiTMKampusPuncakAlam 74 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Procedures for seeking professional clearance By the new firm:


o Upon receipt of a request for reasons, professional or Communicate with the existing
otherwise, from proposed auditor, the existing auditor should auditor for the professional
Reply in writing, normally within 14 working days of
receipts of such request.
reason for the proposed change.
Disclose all such information, if permission is obtained By the existing auditor:
from the client. If the client refused to give permission, Obtain permission form the client.
disclose that fact. Client granted the permission.
o No reply after the expiry of the 14 working days, the proposed o Disclose the professional reason.
auditor should o Reply within 14 days.
Send a reminder by registered mail or dispatched by
hand or by similar means. Client refused the permission.
o Still no reply within 14 working days o Disclose such fact.
Try to communicate by some other means. By the new firm:
Try to obtain information about any possible threats No reply with 14 days
through o Send a reminder (registered
Inquiries of third parties. mails or by hand)
Background investigation of
Still no reply within 14 days
o Senior management.
o Those charged with governance o Other means of communication.
o If the requested information is not obtained/ If client refuse to o Inquire third parties.
give permission, the proposed auditor should consider o Investigate the background of
whether it is appropriate to accept the appointment. the companys management.
o If the proposed auditor comes to a decision to accept the o Decide on the acceptance.
engagement, the existing auditor needs to be informed of this Decided to accept
decision in writing by registered mail or dispatched by hand or
by similar means. o Inform the existing auditor.

Faculty of Accountancy, UiTMKampusPuncakAlam 75 [March 2016]

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Faculty of Accountancy, UiTMKampusPuncakAlam 76 [March 2016]


FINAL EXAMINATION Topic 1

January 2013 (Question 2)

A. Safwan, a chartered accountant in Safwan & Co. (located in Ipoh), was approached by
Amir Arshad, CEO of Rain Plastic Manufacturer Sdn Bhd, to undertake the
computerization of the companys inventory system. Since the companys factory is
located in Kuantan, Safwan decided to ask his friend in Kuantan, Noreen, to take the
engagement. Noreen is a chartered accountant from Nor & Associates and she agreed
to pay 10% of the non-audit fee received as commission to Safwan & Co.

Noreen accepted the offer and conducted the audit accordingly. Amir Arshad was very
impressed with the job well done by Nor & Associates and proposes Nor & Associates
to perform a special assignment to review a small manufacturing company for its
acquisition.

Noreen agreed to accept the assignment and commenced the job without informing
Safwan & Co.

Required:

Discuss the ethical issues in respect of the MIA By-Law (On Professional Ethics,
Conduct and Practice) that have arisen in the above case.
(6 marks)

June 2013 (Question 2)

A. Samiha is an audit manager in Sam & Co. One of the audit clients, U-Dee, is a
company specialising in the transportation of heavy vehicles throughout Peninsular
Malaysia and has been Sam & Cos audit client for five years. Samiha is currently the
audit manager for the audit, while Mr Sam has been the audit partner since the first
year audit. Samiha is planning the audit for the year ending 30 April 2013. Following
an initial meeting with the directors of U-Dee, she has obtained the following
information:

i. U-Dee is preparing for the company to be listed on Bursa Malaysia in the next
two years. Sam & Co. Is assisting in the preparation for the listing.

ii. Sam & Co has been preparing the companys financial statements for the current
and previous years.

iii. U-Dee has indicated that the fee for taxation services rendered in the year to 30
April 2013 will be paid as soon as the tax authority agrees to the companys
taxation liability. You have been advising U-Dee regarding the legality of certain
items as allowable for taxation purposes and the taxation authority is disputing
these items.

Required:

Identify and explain three (3) issues which may threaten the independence of Sam &
Cos auditors when performing the audit of U-Dees financial statements for the year
ending 30 April 2013. Briefly suggest how each threat should be managed.
(9 marks)

1
December 2013 (Question 2)

A. Mr Goon is the senior manager in the audit department of Tan & Co. He is currently
reviewing two situations which have arisen in respect of audit clients, which were
recently discussed at the monthly audit managers meeting:

i. Goodway Bhd is a significant audit client which develops software packages. Its
managing director, Mr Ramesh, has contacted the partners of Tan & Co
regarding a potential business opportunity. The proposal is that Goodway Bhd
and Tan & Co could jointly develop accounting and tax calculation software, and
that revenue from sales of the software would be equally split between the two
firms. Mr Ramesh thinks that Tan & Cos audit clients would be a good customer
base for the product.

ii. Sun Medical Centre is a private hospital which provides elective medical
services, such as laser eye surgery to improve eyesight. The audit of its financial
statements for the year ended 31 December 2013 is currently taking place. The
audit senior overheard one of the surgeons who perform laser surgery saying to
his colleague that he is hoping to finish his medical qualification soon, and that
he was glad that Sun Medical Centre did not check his references before
employing him. While completing the subsequent events audit procedures, the
audit senior found a letter from a patients solicitor claiming compensation from
Sun Medical Centre in relation to alleged medical negligence resulting in injury to
the patient.

Required:

Identify and discuss the ethical and professional issues raised in respect of:

i. Goodway Bhd, and


(5 marks)

ii. Sun Medical Centre


(4 marks)

June 2014 (Question 2)

A. Azam, a partner in Azam & Co, has been the audit engagement partner for Jasa Baik
Bhd (JBB) for the past seven years. Azams son has just accepted a job offer as a
sales manager in JBB and his position entitled him to shares in JBB as part of his
remuneration package. Azam & Co has recently been appointed as JBBs internal
auditor. JBB has suggested that the external audit fee should be renegotiated with at
least 25% of the fee being based on the profit after tax of JBB as they feel that this will
align the interests of Azam & Co and JBB.

Required:

i. Explain the ethical threats which may affect the independence of Azam & Co
with respect to the audit of JBB.
(4 marks)

ii. For each threat, explain the necessary safeguards to reduce it to an acceptable
level.
(4 marks)

2
B. The followings are the ethical issues arise in situations at Parveen & Co:

i. Parveen & Co is facing competition from a new audit firm, and Parveen & Co is
advertising its services in a national newspaper.

Required:

Explain the rules on advertising for new clients.


(3 marks)

ii. One of the audit managers say that our firm had lost an audit client to a
competitor because of lowballing.

Required:

a. Define lowballing.
(1 mark)

b. Explain whether the By-Laws (On Professional Ethics, Conduct and


Practice) allow professional accountants in public practice to quote a low
fee to obtain new client.
(2 marks)

December 2014 (Question 2)

A. i. Dahlan is the audit manager with Choo & Co for the past ten years. He has been
asked by the partner to review a situation which has recently arisen with respect
to a potential audit client of the firm.

Teras Jaya Sdn Bhds managing director, Juliana, has approached Choo & Co to
invite the firm to tender for its audit. Teras Jaya Sdn Bhd is a small, owner-
managed company providing financial services such as arranging mortgages
and advising on pension plans. The companys previous auditor Ali & Partners
has recently resigned. Juliana states that this is due to a disagreement on the
accounting treatment of commission earned, and because they think our controls
are not very good. You are aware that Teras Jaya Sdn Bhd is being investigated
by the financial services authority for alleged non-compliance with its regulations.
Besides providing audit services, Juliana would like Choo & Co to give business
development advice.

Required:

Discuss the ethical and other professional issues raised in the above scenario.
(5 marks)

ii. Tahir & Co, an audit firm has opened another branch at Kuala Terengganu. Due
to short of staff, the branch is controlled by a senior staff that has several years
of experience but unfortunately is not a member of MIA (Malaysian Institute of
Accountants).

Required:

Discuss the rules under MIA By-Laws under Section 500 Methods of Practice.
(4 marks)

3
June 2015 (Question 2)

A. You are a manager in Nee Lee & Partners for the last five years, an audit firm, with
three branches and 9 partners. Almost half of the firms clients are audit clients; the
remainder are clients for whom Nee Lee & Partners perform tax, accounting and
business advisory services. The firm is considering how to generate more revenue,
and you are asked to evaluate the suggestion made by one of the partners that is in
charge on the business development of the firm. The partner has proposed to place an
advertisement in the national newspapers to attract new clients. The draft
advertisement is given to you for review:

Nee Lee & Partners is the largest local audit firm in Malaysia and has been in
operation for the last 20 years. Nee Lee & Partners offer a range of services in
addition to audit, which are guaranteed to improve your business performance and
will save your company from paying taxes.
If you are unhappy with your auditors, Nee Lee & Partners can offer a second
opinion on the report that has been issued. Introductory offer: for all new clients we
offer a 20% discount when both audit and tax services are provided.
Our rates are approved by MIA.

Required:

Identify and explain on the advertisement suggestions made above, commenting on


the ethical and professional issues raised.
(9 marks)

December 2015 (Question 2)

A. SAB Sdn Bhd had a disagreement with the existing auditors, Aida & Co., on the
previous audit. Currently, SAB approaches you and indicates that they wish to appoint
your firm, Wani & Associates as their new auditors. The Managing Director of SAB has
asked you for advice on the procedures for change in auditors appointment.

Required:

Discuss the procedures that should be taken, for the change in professional
appointment according to the MIAs By-Laws (On Professional Ethics, Conduct and
Practice).

i. by your firm (Wani & Associates) and


ii. by Aida & Co
(7 marks)

B. It is known that the auditors are required to adhere to the Fundamental Principles of
the MIA By-Laws to safeguard the profession.

Required:

Explain the Fundamental Principle on Professional Behavior as prescribed in MIA By-


Laws.
(3 marks)

4
AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

TOPIC 2 AUDITORS LEGAL LIABILITY

Rise in Litigation

< 1970, claims >1970, contributing factors to litigious climate (putting the blame on the auditors):
against auditors o Growing awareness of the responsibilities of auditors by users of financial statements.
were relatively o Out of court settlement in an attempt to avoid costly legal fees and adverse publicity.
uncommon. o Deep pocket syndrome auditors are protected by professional indemnity insurance.

Litigation Settlement by Auditors(Source: Messier et al., 3rded, 2007, Exhibit 20-1, p.669)

Auditors Clients Settlement Amount(USD million)


Ernst & Young Cendant 335
Andersen Waste Management 75
Andersen Sunbeam 110
PricewaterhouseCoopers Microstrategy 51
Ernst & Young Savings & Loans 400
Deloitte YBM Magnex International 76
KPMG Rite Aid 125

Faculty of Accountancy, UiTMKampusPuncakAlam 77 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Basic Rule of Auditors Legal Liability

Auditors are held liable to their clients


and certain third parties (i.e. investors and creditors).

Faculty of Accountancy, UiTMKampusPuncakAlam 78 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Limiting the Magnitude of Liability Through Law Reforms

Sole proprietorship and partnership have some inherent disadvantages, e.g.:


o Absence of separate legal entity. o Lack of business continuity.
o Unlimited liability. o Difficulty to raise capital.

Capping of the auditors liability(i.e. protection covering):


o Proportionate liability An arrangement whereby the clients loss is divided among the auditors
according to their share of responsibility.
o Statutory cap of up to a maximum of 10 times the audit fees or AUD20 million, as in Australia.
o Limited liability partnership(LLP) A business vehicle which is a hybrid company-partnership
with conventional partnership features and limited liability company privileges, in particular the
partners are granted a portion of the status and liability protection generally reserved for companies.
Having continuing legal existence independent of its members as compared to traditional
partnership, the legal existence of which is dependent upon membership. So it can hold and
own assets, enter into contract, sue and be sued,
Enjoying perpetual succession where changes in members will not affect legal entity of LLP,
Enjoying protection of limited liability for its members against unlimited liability without
strict management procedures of an incorporated body; and
Offering a degree of flexibility of partnership arrangement for internal management of
business compared to companies which are required to adhere to statutory management
controls imposed by the Companies Act 1965.

Faculty of Accountancy, UiTMKampusPuncakAlam 79 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Types of Litigation

AuditorsLegal Liability

Statutory Law: Common Law:


Parliament Case Law
(Violation of Statutes) (Auditor fail to provide the services and
not exercise due care)

Company, Banking, Securities Law of Contract Law of Tort


(Breach ofContract) (Negligence)

Client Non-Client
Company Third Parties

Company = S h a r e h o l d e r s A c t i n g a s a B o d y = Client
Company (Shareholder 1 + Shareholder 2 + + Shareholder n) = Third Party

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Breach of Contract Liability to Clients

Auditor fails to perform professional services with due care.


o Standard of due care requires the auditor to perform his professional services with the same degree
of skill, knowledge, and judgmentpossessed by other members of the profession.
o Due care = f (Standards of performance x Professional skepticism;Best practices;
Compliance to policies and procedures)
Auditor fails to carry out contractual arrangements with the client.
o Letter of engagement = Contractual arrangements; Establish the responsibilities for both the auditor
and the client; Stipulate the basis of fees.
o = f (Discontinue audit without adequate cause, Late delivery of the auditors report, Failure to detect
material misstatements)
Client company breaches its obligations under the engagement letterLitigation against the auditors on the
basis of breach of contract.
o Imbalance/ incomplete financial statements. o Oppose S.174.
o No/ incomplete supporting schedules.
Auditors protection Always explain in writing to the client company of the difficulty and uncertainty in
completing the audit; Mention in the letter of representation; Highlight deficiencies in the management letter.

Test of duty of care The client company must prove the following elements, in order to proceed with
legal proceeding:
o Owed duty of care Automatic
o Breached the duty of care Must be proved
o Suffered loss/ damage Must be proved

Faculty of Accountancy, UiTMKampusPuncakAlam 81 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Tort of Negligence Liability to Clients and Third Parties

Tort = A wrongful act other than a breach of contract for which civil action may be taken; compensation
may be awarded to the plaintiff.
Negligence = f (Fail to perform with due care; Deviation from a standard of behavior that is consistent
with that of a reasonable person)
Test of duty of care The plaintiff (i.e. client company or a third party) must prove the following
four (4) elements:
1. Owed duty of care? The auditor owed a duty of care to the plaintiff.
2. Breached the duty of care? The auditor failed to act with duty care to the plaintiff.
3. Connection between There is a causal relationship between the auditors
negligence and damage? negligence and the plaintiff loss or damage.
4. Suffered loss/ damage? The plaintiff suffered actual loss or damage.

Why professional competence and due care is a fundamental principles in the MIAs By-Laws?
o Only a competence auditor can perform an audit with due care.

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1. Duty of Care
Basic rule Auditors always owes a duty of care to the client.
Owing Duty of Care to Third Parties
o Negligence legal action = f (Misrepresented financial statements; Inaccurate audit reporting)
o Difficulty faced by third parties To prove that the auditorsduty of careand this duty of care
areextended to them.
o Ultramaresvs. Touche, et al. (US, 1931)
If an auditor was negligent, the auditor is liable to the third party, if the third party was deemed
to be primary beneficiary.
A primary beneficiary is one about whom the auditor was informed before conducting the
audit (a known third party)
o Chandlervs. Crane Christmas & Co. (UK, 1951)
Legal perception Uphold doctrine of privity of contract; Owed duty of care to the clients.
Doctrine Principle of law
Privity Contractual/ Fiduciary relationship
o Hedley Byrne vs. Heller & Partners (UK, 1963)
Legal perception Owed duty of care to third parties.
Special relationship to establish the existence of duty of care.
Foresee The auditor knew of the identity of the third party that intend to rely on the
financial statements for that purpose.
The auditor had direct knowledge that the financial statements are to be
used for a particular purpose by the third party.

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o Haig vs. Bamford (Canada, 1976)


Foresee The auditor knew the purpose for which the financial statements were prepared,
i.e. the company was a small private company where only a limited class of people
would have accessed to the audited financial statements.

o Scott Group vs. McFarlance (New Zealand, 1978)


Reasonably Although the auditor had no direct knowledge of the identity of the third party,
foresight/ the auditor (i) knew that the audited accounts would become a public record,
Foreseeable and it was (ii) conceivable that a person taking over the company would rely on
the published audited accounts in making the decision.
Test of foreseeability = f (Reasonable foresight; Ought reasonably to have foreseen)
Unlimited class of investing public The court broadened the auditors liability to the extent
that they would potentially owe a duty of care to almost anyone who relying on their audit
opinion/ published financial statements.
o JEB Fasteners vs. Marks, Bloom & Co. (UK, 1982)
Test of foreseeability The auditor knew at the time the accounts were prepared that the
company needed outside financial support and ought reasonably to have foreseen that a
takeover was a possible means of obtaining finance and that a person effecting a takeover
might rely on those published financial statements.

o Caparo Industries plcvs. Dickman& Others (UK, 1990)


The court in favor of the auditors, i.e. the court gave substantial comfort to the auditing
profession as it held that the auditor owed no duty of care to investors (third party) making
investment decisions on the strength of audited accounts.

Faculty of Accountancy, UiTMKampusPuncakAlam 84 [March 2016]


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THREE conditions/ tests to establish a duty of care


Whether the loss or damage was foreseeable(i.e. able to detect misstatement through
careful planning and execution of procedures during the fieldwork),
Whether there existed a relationship of proximity between the parties, and
Whether it is fair, just and reasonable that the law should impose the duty of care on
the one party for the benefit of the other.
(Fair + Just + Reasonable Lawful)
Argument of proximity Is there sufficient proximity between the auditor and potential/
individual shareholders to give rise to a duty of care?
The Court held it was unreasonable to establish a relationship of foreseeability.
Unreasonable to establish a relationship of proximity between the auditors and
o Potential investors, or
o Individual shareholders.
Owe a duty of care to shareholders as a body.The auditors would be liable to the third
party if the audited financial statements were prepared specifically for a particular
purpose and the intention was made clear at the time of the audit engagement.
Proximity = Theintended recipient of the audit report.
Proximity Foreseeability.
Caparo Industries case reaffirmed the privity rule in the earlier Chandler case.

Caparo 8 Potential Investors 8 Individual Shareholders 9 Shareholders as a Body

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The Landmark Case

Candler Case Hedley Byrne Case JEB Fasteners Case Caparo Industries Case
The clients. Having knowledge of Conceivable knowledge The intended recipients.
the third party. about third parties.
Knew the identity Can figure out the purpose
and and
Knew the purpose Can figure out the identity
Contractual Specific 3rd Party 3rd Party Proximity,
Relationship User of User of Known Recipient of
Financial Statements Financial Statements Financial Statements

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Owing Duty of Care to Third Parties Post Caparo Industries Case

o Case Ruled in Favour of the Auditors


McNaughton Paper Group vs. Hicks Anderson (UK, 1991)
R Lowe Lippmann Figdor and Frank vs. AGC (Advances) Ltd (Australia, 1992)
Esanda Finance vs. Peat Marwick Hungerfords (Australia, 1997)

o Case Ruled Against the Auditors: Auditors Liable to the Third Parties
Columbia Coffee & Tea Pty Ltd. vs. Churchill (Australia, 1993)
Statements in the audit firms Audit Manual which read:
there will be interested parties who read and rely upon our report, and this extends
beyond the persons who employs us in the first instance or to whom the report is
addressed initially. (Source: Messier et al., 3rded, 2007, p.678)
Royal Bank of Scotland Plc vs. Bannerman JohnstoneMaclay (2005)
No disclaimer of responsibility is addedin the audit report.
The auditor isheld owing the duty of care to the third party if the auditor is fully aware of the
business relationship with the third party. Here, the auditor knew (or ought to have known)
that the third party would rely on the audited accounts for lending or investment decisions.
Disclaimer paragraph added in the Malaysian audit reports:
This report is made solely to the members of the Company, as a body,
in accordance with Section174 of the Companies Act 1965 in Malaysia and for
no other purpose. We do not assume responsibility to any other person for the
content of this report. (Source: RPG 11)

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2. Breach of the Standards of Care


Standards of care = The same degree of care that would be used by an ordinary, prudent member of the
public accounting profession.
Negligence represents a deviation from a standard of behavior that is consistent with that of a
reasonable auditor.Reasonable auditor = f [Reasonably (Competent; Careful; Cautious)]
Auditors, to prove that the audit had been carried out competently, the plaintiffs loss from the fraud
would have been avoided, since the control weakness that caused the fraudulent act would have been
rectified. Therefore, it is important for the auditor to report all material internal control deficiencies
to management, and take follow up actions by raising the matter promptly with the board of
directors/ audit committee if management does not respond adequately.
Legal Standard of Care and Professional Standards
o a watchdog, but not a bloodhound Quoted in cases against the auditors for failure to detect fraud.
The law maintained that an auditor is not bound to be a detective or to approach his work
with suspicion. Here, an auditor is entitled to assume that the companys officersare honest,
and to rely upon their representations.
ISA 200, ISA 240 and ISA330 Current auditing standards require the auditor to approach
his work with professional skepticism.
Professional skepticism = f (Objectivity;Critical questioning mind;Do not prejudge that
the management is either honest or dishonest).
o What constitute reasonable standard of care? A competent audit. Here, the court is likely to refer to
The professional standards, and
The standards on quality control.
Hence, auditors to regard professional standards as minimum standards of performance.

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Duty to Detect Fraud


o Auditors duty Auditors need to pay due regard to the possibility of fraud in the planning
and design of audit procedures(Pacific Acceptance case).
o The court did not maintain that the primary responsibility of the auditor in a statutory of
accounts is to detect fraud and irregularities.
o Allegation to detect fraud is determined by reviewing the auditors approach to suspicious
circumstances.
Auditor is not negligent Managements involvement in fraud = Ingenious and carefully laid
schemes of fraud, when there is nothing to arouse the auditor suspicion.
To probe to the bottom If the auditor had been exposed to information that required further
follow up examination and he failed to do so, then the auditor is negligent.
3. Causal Relationship
The proof of causation or connection between the auditors failure to detect a fraud (breach of duty of
care) and the plaintiffs loss (damage) arising from the fraud.
The reliance factor The third party plaintiff had in fact relied on the audited financial statements as a
main document in making the lending or investment decision.
o No/ Poor causal relationship, if the third party
Not aware of the existence of the audited accounts.
Simply being aware or casual perusal of the audited accounts.
o Strong causal relationship
Audited accounts had been the real or substantial factor in inducing the third party decisions.
The third party discussed the audited financial statements with the accountant and investor
analyst regarding the desirability of the investment.

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4. Actual Loss/ Damage

The common types of claims for economic/ financial losses resulted from an auditors negligence:
o Loss of investment.
o Overpayment for investment.
o Overpayment of dividends.
o Loss due to defalcation by management or employees.
Remedy for actions in tort of negligence = Award of damages.
Measure of damages Approximate monetary equivalents that will put the plaintiff in the same position
that he would be if the auditor has discharged his duties properly.
An award of damages would not be granted if the third party had not suffered real or measurable loss.

Contributory negligence
o Apportionment of liability between the auditor and client.
o An argument that the client is partly responsible for its own loss or the loss was not entirely to the
auditors negligence.

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Conclusion The 3rd party must prove the following elements:

1. The auditor owed duty of care to the i.e. Contract; Foresee; Foreseeable; Proximity.
3rd party.
2. The auditor failed to act with duty of e.g. Negligence; Substandard work; Noncompliance
care to the 3rd party. with standards.
3. There is a causal relationship between The decision made by the 3rd party was based on the
the auditors negligence and the flawed audited financial statements; If audit
damage incurred by the 3rd party. iscompetently carried out, the loss would have been
avoided.
rd
4. The 3 party suffered actual loss or e.g. Loss of investment; Overpayment for investment.
damage.

Faculty of Accountancy, UiTMKampusPuncakAlam 91 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Conclusion Case Law on Duty of Care to the 3rd Party


Auditors had no liability to third parties who did not have a privity relationship with the auditor
o Ultramaresv. Touche, et al. (U.S., 1931)
The court ruled in favour of the auditors, thus upholding the doctrine of privity of contract.
o Chandler v. Crane Christmas & Co. (U.K., 1951)
Reinforced the doctrine of privity of contract, that third parties in the absence of a contractual
relationship were not entitled to recover financial damages resulting from an auditors negligence.
The privity standard is no longer strictly used as a defense to exclude liability to third parties
o Hedley Byrne v. Heller & Partners (U.K., 1963)
The courts were more ready to establish the existence of a duty of care between the auditors and the
third party because of the special relationship between them. Here, the test in extending the
auditors duty of care to third parties
The auditor knew the identity of the third party who would rely on the audited accounts
The auditor knew the purpose for which the accounts were prepared
o JEB Fasternersv. Marks, Bloom & Co. (U.K., 1982)
In cases where the auditor did not know the actual identity of the third parties, the court has used
other tests as the criteria for determining the existence of duty of care
Knowledge of the specific limited class
Foreseen (or reasonably foreseeable) third parties
The court broadened the auditors liability to the extent that they could potentially owe a duty of
care to almost anyone who is relying on their audited accounts

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The auditor owed no duty of care to investors making decisions on the strength of audited accounts.
o Caparo Industries plcv. Dickman& Others (U.K., 1990)
Three tests must be met in order to establish whether a duty of care can be imposed
Harm must be a reasonably foreseeable result of the auditor's conduct
A relationship of proximity(Nearness = Space x Time x Relationship)between the auditor and the third party.
It must be fair, just and reasonable to impose liability
Fairness Judgment that do not serve a particular interest group at the expense of others.
Justice Equitable treatment accorded to all interested parties.
Reasonableness Able generate conclusions from premises; not extreme.
The court found that it was unreasonable to establish a relationship of proximity between the
auditors and the third party who was not the intended recipient of the audit report. The court
maintained that the purpose of statutory audit and audited accounts was for the company and the
shareholders. Therefore, the significant element in the Caparo case
The auditors owe a duty of care to shareholders as a body
The auditors were found not to owe a duty of care to potential investors or to individual
shareholders. However, the auditors would be liable to the third party, if
the accounts were prepared specifically for a particular purpose for him/ her
the intention was made clear to the auditors at the time of the audit engagement.
Post Caparo cases ruled against the auditors
o Royal Bank of Scotland Plc v. Bannerman JohnstoneMaclay (U.K., 2005)
The court held that the auditors owe a duty of care to a third party when the auditors
did not disclaim their responsibility relating to the audited accounts to any other persons (other
than the shareholders as a body)
knew (or ought to have known) that the third party would rely on the audited accounts

Faculty of Accountancy, UiTMKampusPuncakAlam 93 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

DUTY TO REPORT BREACHES OF LAWS APPROACHES TO MINIMISING LEGAL LIABILITY


(Messier et al., 3rded, 2007, pp.684-689) (Messier et al., 3rded, 2007, pp.690-691)
Securities Industry Act 1983 At MIA level
Banking and Financial Institutions Act 1989 f (Establish stronger standards; Updating code of ethics;
Securities Commission Act 1993 Educating users)
Anti-Money Laundering Act 2001 At the firm level
f (Instituting sound quality control; Ensuring
auditors independence; Performing diligently;
Fully comply with professional pronouncements;
Issue engagement letters; Professional indemnity
insurance; Being alert to risk factors that may result
in lawsuits; Investigate thoroughly the prospective
clients)

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FINAL EXAMINATION Topic 2

January 2013 (Question 3)

A. Angkasa Wira Bhd was recently declared bankrupt as the company was unable to pay
its mortgage loan totalling RM5 million. It was discovered by the liquidators of the
company that the assets had been overstated by RM800,000 as a result of fictitious
non-current assets being recorded in the financial statements. The liquidators of
Angkasa Wira Bhd are now suing the auditor, Rahana & Co, for breach of contract and
negligence.

The auditors have not carried out adequate procedures to verify the non-current assets
and had relied mainly on the managements non-current assets schedule. However,
the auditors claimed that they are not liable for the loss because the loss was not
caused by their negligence.

Required:

Discuss whether the auditors had been negligent in the audit of Angkasa Wira Bhd,
leading to the bankruptcy of the company.
(8 marks)

June 2013 (Question 2)

B. Your firm has been the auditor of Teduhan Ilmu Publication Berhad (Teduhan Ilmu) for
several years. Teduhan Ilmu is a book retailer listed on Bursa Malaysia and has a 30th
June year end. The auditors reports for the previous years were unmodified.

Back in 2010, Teduhan Ilmu installed a new accounting system specifically designed
to accommodate Teduhan Ilmus accounting and reporting requirements. Both your
firm and Teduhan Ilmus internal audit division reviewed the system prior to
implementation and found it to be satisfactory.

However in March 2013, Teduhan Ilmus internal audit department discovered that,
due to a programming problem, the application of the cost and net realizable value for
stock was inaccurate. This resulted in material misstatements of the profits for the
three preceding years financial statements.

You have a good working relationship with the directors and senior management.
Teduhan Ilmu is your fifth largest client. Its accounting system is complex and you
have engaged an expert to assist in the development of a specialized audit software.
This software is still being used and maintained by your IT audit department.

In April 2013, the shareholders of Teduhan Ilmu commenced legal action against your
firm. They claimed that the past three years audits were negligently performed, given
the problems with the accounting system and the undiscovered material misstatements
in the financial statements.

Required:

Discuss the relevant issues in deciding whether your firm has been negligent in the
performance of its duties as auditor of Teduhan Ilmu.
(11 marks)

1
December 2013 (Question 2)

B. Aina and Associates is the auditor for Bistro Sdn Bhd, a private company. Based on
the audited account of Bistro Sdn Bhd, Ramada Bhd acquired the entire share capital
of Bistro Sdn Bhd. A year after acquisition, Bistro Sdn Bhd went into liquidation.
Ramada Bhd sue the auditor and accused that the audited financial statements has
negligently performed by blindly accepting high inventory valuation placed by Bistro
Sdn Bhd.

i. Discuss whether the auditor is liable to Ramada Bhd.


(6 marks)

ii. Explain any FIVE (5) methods that may be used by an audit firm to minimize its
audit failure.
(5 marks)

June 2014 (Question 2)

C. Required:

In the context of auditors liability, explain the following terms:

i. Privity of contract
ii. Ordinary negligence
iii. Professional indemnity insurance
(6 marks)

December 2014 (Question 2)

B. Zaki is the manager with Zureeda and Partners and has been the auditor for Sepantas
Transport Sdn Bhd (STSB) for the last ten years. During the financial year ended 31
December 2013, STSB has secured hire purchase loan to acquire 20 passenger
buses from HBB Bank Bhd. On 28 April 2014, the license to operate the inter-state bus
service was revoked by Land Public Transport Commission (SPAD). Zaki confronted
the management of STSB on the revocation of license by SPAD but they argued that
they are in the process of negotiating the license with the authority. Despite the issue
of revocation of license by SPAD, Zaki issued an unqualified audit report, since there
is no official letter issued by SPAD to STSB.

Required:

i. Differentiate the auditors liability under Common Law and Statutory Law.
(3 marks)

ii. Based on the case above, discuss whether the auditors are liable to the bank.
(8 marks)

2
June 2015 (Question 2)

B. Azah is the senior auditor for Ali & Partners and she has been the auditor-in-charge for
Pembinaan Sekutu Sdn Bhd (PSSB) for the past three years. She is now assigned to
audit PSSB again for the financial year ended 31 October 2014. During the current
audit, Azah found that the company is facing going concern problem. Due to the going
concern problem, PSSB shareholders fund is negative and the company is not able to
meet its loan obligations. The Chief Executive Officer is able to convince Azah that the
bank is willing to reschedule the loan and the going concern problem will be solved.

Thus, Azah issued a standard unqualified report. However, several months after the
issuance of the financial statement, the auditors were sued by the investors, who relied
on the financial statements, on the ground of negligence.

Required:

i. Differentiate between gross negligence and contributory negligence.


(3 marks)

ii. Explain whether the audit firm was negligent to the client.
(4 marks)

iii. Explain whether a duty of care existed between the auditor and the shareholders.
(4 marks)

December 2015 (Question 2)

C. Auditors are challenged with increasing litigation cases. These cases revealed marked
difference in the judgement that the extent of auditors liability is unclear. Hence, it is
vital that auditors exercise reasonable care and skills.

Required:

i. Explain auditors duties as stipulated by the Companies Act 1965.


(3 marks)

ii. Discuss four (4) factors to reduce lawsuits against auditors.


(4 marks)

iii. Explain the three (3) conditions that should be met in order to establish the duty
of care.
(3 marks)

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

TOPIC 3 QUALITY CONTROL FOR AUDIT

High Risk Factors in Legal Liability


Dishonest clients
Management fraud
Insolventclients
Unlawful acts
Significant audit deficiencies Why? No Quality Control (QC).

NoQC!
Undermined the credibility of the audit function and raised questions about the reliability of financial
reporting.
Attracted substantial criticisms regarding the competence and independence of the auditors.

QC is a system that relates to


the concepts of professional competence, and
the meeting of professional standards (technical and ethical) in providing professional services,so that
no audit failures and audit risks are reduced to an acceptably low level.

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

QC is addressed at QC
The professional level MIA
The firm level across the board
The engagement level specific ISQC 1 ISA 220
Firm Level Engagement Level

Objectives of QC Elements to Achieve the Objectives of QC

To provide with reasonable assurance that the firm 1. (LRQC) Leadership Responsibilities for QC
Comply with professional standards. 2. (ER) Ethical Requirements
Comply with applicable regulatory and legal 3. (ACCE) Acceptance and Continuance of Clients
requirements. and Engagements
Issue appropriate reports. 4. (HR) Human Resources
5. (EP) Engagement Performance
6. (M) Monitoring

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Element of Policies and procedures should be Implementing the QC


QC established
LRQC To promote an internal culture that quality is Recognize and reward high quality work.
essential. Communicate by training, seminars, meetings,
formal or informal dialogue, mission statements,
The managing board of partners assumes newsletters, briefing memoranda.
ultimate responsibility of QC system. Sufficient resources for the development and
Set the right tone at the top. support QC.
Commercial considerations never override
quality of work.

Faculty of Accountancy, UiTMKampusPuncakAlam 99 [March 2016]

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Element of Policies and procedures should be Implementing the QC


QC established
ER To promote reasonable assurance that the Knowledge about client engagement and scope
firm and personnel comply with of service enable to comply with professional
Fundamental principles of ethics. competence and due care.
Maintain independence (of mind and in Notify possible threat to independence.
appearance)
QC.

Faculty of Accountancy, UiTMKampusPuncakAlam 100 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Element of Policies and procedures should be Implementing the QC


QC established
ACCE To decide whether Evaluate prospective client; Ongoing review
To accept or continue a client existing client.
relationship. Identity and reputation of owners, key
To decide whether to perform a specific management, related parties.
engagement for that client. Nature of client
Client attitude to internal control and ethics.
Likelihood of association with a client Aggressive interpretation of accounting
whose management lacks integrity is standards.
minimized Limitation on the scope of audit.
Clients insistence of low fee.
Clients involvement in unlawful or criminal
activities.
Clients reasons for new/ change in
appointment.
Competency and due care.
Necessary resources?
Conflict of interest?

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Element of Policies and procedures should be Implementing the QC


QC established
HR To provide the firm with reasonable Designate an Engagement Partner for each
assurance that engagement.
The hiring process, hired those with the On-the-job coaching coaching by more
appropriate characteristics of competency. experienced staff.
Thepersonnel assignto the engagements
have the degree of technical training and
proficiency.
The personnel participate in continuing
professional education and advancement
activities of professional bodies and
regulatory agencies.

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Element of Policies and procedures Implementing the QC


QC should be established
EP To provide the firm with Engagement team = Engagement Partner +Audit Supervisor
reasonable assurance that +Audit Senior (experienced) +Audit Assistant (less experienced)
the work performed meets On-the-job coaching
applicable Team understand objectives and Team work.
Professional standards. properly brief.
Regulatory requirements. Supervision and review
Firms standards of quality.
Instructions have been properly Ensure adequate
carried out. documentation.
To achieve consistency in
the quality of engagement. Consider significant matters. Experienced oversee
Ensure sufficient appropriate evidence. less experienced.
Consultation
Discuss with those inside and outside firm.
To solve contentious (i.e. To improve professional
controversial) and difficult issue. judgment and reduce risk.
Resolving difference of opinion
Differences over technical, ethical, Differences within
or other matters. team.
Differences between the engagement Differences with
partner and QC reviewer. those consulted.
Issue audit report only when the issue is resolved.

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Engagement QC review
To provide an objective evaluation of the significant judgments
and conclusions reached in issuing the audit report.
Complete the engagement QC review before issue audit report.

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Element of Policies and procedures should be Implementing the QC


QC established
M To provide the firm with Designate the responsibility to a person with experience and
reasonable assurance that the authority.
policies and procedures To ensure QC remains relevant, adequate, and complied with.
established for each element of Consider changes and improvements to QC
QC are suitably Periodic inspection if selected completed engagements.
Designed. Monitoring procedures:
Relevant. Analyze and assess:
Operating effectively. o Professional pronouncements.
Complied with. o Independence confirmations.
o CPE and other professional development.
o Decisions on ACCE.
o Interviews of firm personnel.
Pre- and post-completion review of engagements
(selected only).
Communicate QCs weaknesses, level of understanding
or compliance.
Corrective actions and improvements to QC.
Prompt modification to QC policies and procedures.

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TOPIC 4 FRAUD AND ERROR

FRAUD AND ERROR

How to Get Something from Others Illegally?

You physically force someone to give you what you want.


This type of theft we call robbery.
Violent and traumatic.
Attract media attention.
You trick someone (even your employer) out of their assets.
Impact of Corporate Fraud/ Scandals
This type of theft we call fraud.
Loss of investors/ public confidence
Deception (falsify, mislead), confidence, trickery.
on companys management,
auditors and regulatory system.
Concealment of Fraud
Drop in stock market.
Falsification of documents. (Signature; Contents).
Destruction of documentation. (Shred).
On-book frauds involve manipulation of accounting records. (Personal purchase, debited as entertainment;
issued shipping document for false purchase)
Off-book frauds involve misrepresentation of physical, commercial or personal realities. (Purchase
of goods at high price = Price + Kickback)

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Concealment of Fraud will Misstate the Financial Statements

Difference
o Amount In the presentation of financial statements
o Classification In the application of accounting standards
o Presentation
Omission and Commission
o Transaction
o Account
Disclosure
9 Not in accordance with accounting standards.

Misstatement

Error Fraud

9
9 9
Immaterial Material

Faculty of Accountancy, UiTMKampusPuncakAlam 110 [March 2016]


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Material Misstatement Result from Error

Errors are unintentional misstatements and may involve:


o Mistakes in gathering or processing data
o Unreasonable accounting estimates arising from
Oversight of facts
Misinterpretation of facts
o Differences in the application of accounting standards

Material Misstatement Result from Fraud

Fraud are intentional misstatements and may be classified as


o Fraudulent financial reporting
Manipulation, falsification, or alteration of accounting records or supporting documents
Misrepresentation or intentional omission of transaction in the accounts
Misapplication of accounting standards
o Misappropriation of assets theft of assets
Embezzling cash receipts
Stealing assets
Payment for goods or services not received

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Responsibilities of Management and Auditor

Management (Integral)
Internal control To detect, prevent and
Responsibilities of:
correct on timely basis, fraud and error
Auditor (Incidental)

Responsibilities of Installing an effective accounting system.


Management Establishing an effective internal control system.
Establishing an internal audit function.
Appointing audit committee
Establishing and implementing code of conduct among the employee and management.
Responsibilities of Due to inherent limitation in conducting the audit (i.e. conducted on test basis, use of
Auditor judgment, inherent limitation of internal control) the risk that some material
misstatement will not be detected. Furthermore, fraud may involve sophisticated and
carefully organized schemes. An audit does not guarantee that all material misstatement
will be detected. Therefore, it is not fair to blame the auditor for not detecting the fraud.

Risk Assessment: Assess/ identify the factors related to fraud occurrence.


Detection: Plan and perform appropriate procedures in accordance to ISAs (i.e. with
due care).
Professional Skepticism: Maintaining an attitude of professional skepticism
throughout the audit.

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Conditions Indicative of Material Misstatement Due to Fraud Fraud Triangle/ Fraud Diamond
Pressure An oppressive condition of
economic distress

Able to do and hide Opportunity Rationalization Able to logically justify


the wrongdoing the action

Capability An oppressive condition of


economic distress

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Incentive/Pressure

Incentives or pressures on the part of management or other employees to materially misstate the financial
statements.
(A reason to commit fraud)
E.g.
Financial stability or profitability is threatened by economic
Significant declines in customer demand affect companys operating conditions
Increasing business failures in either the industry or overall economy
Excessive pressure
Excessive pressure exists on management to meet the financial target and stability, especially
in the industry of high degree of competition.
Excessive pressure on management to meet the requirement or expectation of third parties such
as investment analyst, investors, bankers.
Financial need that cannot be satisfied with salary
Drug or alcohol dependencies Greed
Gambling losses To increase standard of living
Overextended credit
Frustration
Not being promoted A feeling of alienation from other employees
Perception of being underpaid A lack of devotion to the company
Dislike for a supervisor Boredom with the work

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Opportunity

Circumstances that provide an opportunity to materially misstate in the financial statements.


(A favorable opening for covering up)
E.g.
The nature of the industry or the entitys operations
Significant estimatesprovide opportunity to engage in fraudulent financial statements
subjective judgments or uncertainties that are difficult to corroborate.
Lack of control elements
Authorisation
Documentation and filing
Safeguard.

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Attitude/Rationalisation

A situation in which individuals are able to rationalise committing dishonest act


(Ability to justify the fraud to oneself)
E.g.
The budget/ forecast imposes sufficient pressure on them to meet the goals or target
The practice by management of committing to managers or sales representatives to achieve overly
aggressive or unrealistic forecasts
I am only borrowing the money temporarily, and Ill pay it back.
Im not hurting anyone.
What Im doing is not that serious.
The money is for a good purpose.
Everyone is a little dishonest.

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Capability

The traits (ciri yang khusus) and abilities (keupayaanfizikal/ mental) to be the right person to succeed in
defrauding the company)

Opportunityopensthedoorwaytofraud,
Incentiveandrationalizationcandrawthe person towardthe doorway.
Butthepersonmusthavethecapabilitytorecognizetheopendoorway
asanopportunityand totakeadvantageofit bywalkingthrough,
notjustonce,butagainandagain

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Why is it difficult to detect fraud?

The nature of audit evidence.

PERSUASIVE = Appropriateness of Evidence x Sufficiency of Evidence


EVIDENCE
Reliability Sample Size
auditors direct knowledge
timeliness
independence of provider
qualification of individual providing the information
degree of objectivity
effectiveness of clients internal controls
Relevant
Audit Assertions x Types of Audit Evidence
1. Transactions (1. Insp + 2. Obsv + 3. Repef
2. Balances + 4. Inqr+ 5. ExCom
3. Disclosures + 6. Recom + 7. AProc)

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Fraud Risk Identification Process (Figure 3-4, p.87)

Fraud risk factors (fraud diamond/ triangle)


o Fraudulent financial reporting (FFR)
Management
o Misappropriation of assets (MoA)
Management and staff

Discussion among the audit team


o Audit planning memorandum
o Sharing of knowledge about the client
o Emphasize professional skepticism
o Having knowledge of external and internal influences that might create PRESSURE/ incentive
(Symptom of Fraud)

Inquiries of management/ staffs/ third parties


o Policies and control procedures to mitigate specific risk factors
o Internal auditor
Assessment of the risk of fraud (FFR &MoA)
Management response to the internal audit findings (timely or delay)

Faculty of Accountancy, UiTMKampusPuncakAlam 119 [March 2016]

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Lack of Supporting Schedule

Staff Advance
20X1 20X1
Jan Balance b/d 2,130 Jan Receiptsin Jan 900
Jan Advances for Jan 350 Feb Receiptsin Feb 520
Feb Advances for Feb 460 Mac Receiptsin Mac 370
Mac Advances for Mac 240

Dec Balance c/d 4,680

9,850 9,850
20X2
Jan Balance b/d 4,680

Who are those staff that are still owing RM4,680?

A shortcoming in the supporting schedule could indicate fraud.

Faculty of Accountancy, UiTMKampusPuncakAlam 120 [March 2016]


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Tests of Details of Balances

Plausibility, i.e.
acceptable relationship
Balance Sheet Income Statement
Non-CurrentAssets (FixedAssets) Expenses
o Motor Vehicles o Lease Rental
Proton Saga Photocopier
Toyota Hi-Ace o Repair and Maintenance
o Furniture and Fittings Air-Conditioners
Executive Tables and Chairs Proton Saga
Cabinets Computers
Air-Conditioners Roof Leaking
o Office Equipment BMW
Computers Toyota Hi-Ace

Faculty of Accountancy, UiTMKampusPuncakAlam 121 [March 2016]

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Tests of Controls Purchase Cycle

Source: Purchase Journal

Date Supplier RM Check Check Check Check Check


Supplier Receiving Purchase Payment Supplier
Invoice Report Order Voucher Receipt

10 Jan ABC bin 1,000 9 8 9 9 8


20X1 XYZ

14Aug ABC bin 1,800 9 8 9 9 8


20X1 XYZ

Highlight the irregularities of the internal control in the management letter


For the supplier, ABC bin XYZ:
o Receiving reports were not issued.
o No official receipts for each payment made.

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Auditor Response to Risk of Material Misstatement Due to Fraud

Overall Response
o Increase professional skepticism.
for material transactions.
to corroborate management explanations.
o Assign staff with more experience/ specialized skill and knowledge.
o Review managements selection of accounting policies.
review accounting estimates for bias.
review complex transactions.
Periodic Inventory-Taking System
Response at Assertion Level
o Change the timing for test of details of balances Palm Oil
Storage
toyear end/near year end. Tank
o Apply more substantive tests of transactions.
o Increase sample size.
Oil level

Thermometer
Measuring
Tape
Fakulti Perakaunan, UiTM 69

Communicate the matter to management/those charged with governance

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TOPIC 5 CORPORATE GOVERNANCE AND EXTERNAL AUDITOR

The Definition of Corporate Governance (CG)


(Finance Committee on Corporate Governance, 1999)
The process and structure used
to direct and manage the business and affairs ofthe company
towards enhancing businessprosperity and corporate accountability
with theultimate objective of realizing long-termshareholder value,
whilst taking into accountthe interests of other stakeholders.
Key Ingredients in the Definition

Business Prosperity
Corporate Accountability TheProcessandStructure
The Objectives:
Shareholder Value Used to Direct and Manage
Interests of Other Stakeholders

The process and structure address issues associated with the division of power and
accountability among the board of directors and managers, and shareholders.

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The Objectives The Process and Structure

Business prosperity Process


People, teamwork, leadership, enterprise, The system for decision making by boards of
experience, and skill produce prosperity. directors and managers and for making them
accountable.
Corporate Accountability
The key to the legitimacy of the entire Structure
corporate system. Accountability requires The legal and administrative framework,
appropriate rules and regulations. including:
o companies legislation, securities
Ultimate Objective legislation, law of general application.
The interest of shareholders are served with o memorandum and articles of association.
an appropriate return on investment. The o resolutions of the board and
longer term interest of shareholders will be shareholders.
well served, if the interests of other o listing rules.
stakeholders are addressed. o community standards.
Holding the balance Management is about running business,
between economic and social goals and governance is about seeing that it runs properly.
between individual and communal goals. (Prof Bob Tricker)
(Sir Adrian Cadbury, 1999 Corporate Governance: A Framework for Implementation)

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Malaysian Code of Corporate Governance (MCCG)


CG
o Principally an initiative of the private sector.
o Belief that self-regulation is preferable and the standards developed by those involved
may be more acceptable and thus more enduring.
o Understand that certain aspects are better served by statutory regulation, but others where
self-regulation, complemented by market regulation is more appropriate.

The MCCG 2012 (download at http://www.sc.com.my/eng/html/cg/cg2012.pdf)


o Focuses on clarifying the role of the board in providing leadership, enhancing board
effectiveness through strengthening its composition and reinforcing its independence.
o Encourages companies to put in place corporate disclosure policies that embody principles
of good disclosure.
o Encourages making public their commitment to respect shareholder rights.

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Audit Committee

MCCG 2012, Principle 5 Uphold Integrity in Financial Reporting


o Recommendation 5.1
The Audit Committee should ensure financial statements comply with applicable
financial reporting standards.
Commentary
The board must recognize the value of an effective Audit Committee in ensuring the
companys financial statement is a reliable source of financial information.
The Audit Committee must, amongst others, ensure that the companys financial
statements comply with applicable financial reporting standards as this is integral to
the reliability of financial statements.

MCCG 2012, Principle 6 Recognize and Manage Risk


o Recommendation 6.2
The board should establish an internal audit function which reports directly to the Audit
Committee.
Commentary
The board should establish an internal audit function and identify a head of internal
audit who reports directly to the Audit Committee.

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The head of internal audit should have the relevant qualifications and be responsible
for providing assurance to the board that the internal controls are operating effectively.
Internal auditors should carry out their functions according to the standards set by
recognized professional bodies.
Internal auditors should also conduct regular reviews and appraisals of the
effectiveness of the governance, risk management and internal controls processes
within the company.

The audit committee refers to the governance body that is charged with oversight of the
organizations audit and control functions.
o To ensure independence, auditors both external and internal report to the audit committee.
o Audit committee should ensure that the audit function is adequately resources.

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Board of Directors
MCCG 2012, Principle 1 Establish Clear Roles and Responsibilities
o Recommendation 1.1
The board should establish clear functions reserved for the board and those delegated to
management.
o Recommendation 1.2
The board should establish clear roles and responsibilities in discharging its fiduciary and
leadership functions.
o Recommendation 1.3
The board should formalize ethical standards through a code of conduct and ensure its
compliance.
o Recommendation 1.4
The board should ensure that the companys strategies promote sustainability.
o Recommendation 1.5
The board should have procedures to allow its members access to information and
advice.
o Recommendation 1.6
The board should ensure it is supported by a suitably qualified and competent company
secretary.
o Recommendation 1.7
The board should formalize, periodically review and make public its board charter.

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MCCG 2012, Principle 6 Recognize and Manage Risks


o Recommendation 6.1
The board should establish a sound framework to manage risks.

MCCG 2012, Principle 7 Ensure Timely and High Quality Disclosure


o Recommendation 7.1
The board should ensure the company has appropriate corporate disclosure policies and
procedures.
o Recommendation 7.2
The board should encourage the company to leverage on information technology for
effective dissemination of information.

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Benefits/ Roles and Drawbacks of Audit Committee

The roles of audit committee:


Assist directors in discharging their statutory duties and responsibilities: The directors liable on
preparing companys financial statements and audit committee minimize the involvement of BOD.
Monitor company activities: Ability to access the accounting records and indirectly monitor the
company activities
Increase public confidence in the credibility and objectivity of financial reporting. The financial
statement is free from bias.
Support the audit function: Audit committee becomes closely with the whole audit process and it
will strengthens the auditors independence.
Monitor disclosure requirements
Satisfy the board that adequate attention is being given to risk management. Organization should
have prevention and response mechanisms in place to help them keep risk at acceptable level.
Audit committee should determine the systematic methods employed to evaluated business risks.
Satisfy the Board that internal control exist and are effective. An internal control system is an
integral part of the management process and the committee should ensure that the control
framework in place is adequate to provide assurance on:
o Accomplishment of establish objectives o The reliability and integrity of information
o The economical and efficient use of resources o Compliance with policies, plans,
o Safeguarding of resources procedures, laws

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The drawbacks of having an audit committee in an organization:


Interference in executive decision on operational matters which will tend to undermine the
authority of the board. There may be conflict of mistrust and misunderstanding among the
committee, management, internal auditors and the external auditors. How to overcome/prevent:
Audit committee should have clear terms and responsibilities and communication between all
parties should be made on timely basis on professional manner.
Audit committees have no teeth: Audit committee are just window dressing to comply Bursa
Malaysia Listing Requirement. How to overcome/prevent: Audit committee must be and be seen
to be independent, with authority given to back up their responsibilities. BOD must give their full
support to the committee including financial and administrative resources to carry out their duties.
The full board is distanced from financial matters and the external auditor. This happen when BOD
has discharged his duty to audit committee BUT they still has full responsibilities on the financial
matters of the company. How to overcome/prevent: the BOD must require oral and written report
on all activities of the committee and may even call the auditors to attend the meetings.
Legal Liability of Audit Committee members: Audit committee does not relieve the BOD of its
responsibility for the financial reporting process. However, audit committee members may
increase their exposure to possible additional liability because the extra responsibilities entrusted
to them.

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SHAREHOLDERS REGULATORS
STAKEHOLDERS (Laws,regulations,standards)

BOARDOFDIRECTORS
(AUDITCOMMITTEE)

MANAGEMENT
(Executivesoperationalise policies,
strategiesandcorefunctions)
Directionandcontrol Accountability

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BOD
Providesleadership
Board anddirectionto
Accountabletoregulatorsfor management
conformancewithlawsand Management
toshareholders/stakeholders AccountabletotheBoD
forprofitandcorporate
results
FUNCTION
OFEACH
PLAYERS

Shareholders Internalandexternalauditors
Haveresponsibilitytomakeuse Monitorperformanceand
oftheirvotes outcomes

Ultimately,theplayersshouldensurethecompanyisableto
havetherightbalancebetweenconformanceand
performance

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Transparency:Financial
andnonfinancial
informationshouldbe
easilyavailable

Socialresponsibility:Awell Independence:Proceduresand
managedcompany shouldbe structuresofcompany shouldbe
awareofandrespondtoissues putinplace tominimizeconflict
ofsocial concern. ofinterest.

Fairness:Allshareholders Accountability:Decision
shouldreceivedequal makersshouldbe
considerationregardlessof accountableforwhatthey
thesizeoftheirholdings. do.

Responsibility:Directors
shouldbeliablefortheir
performanceto
stakeholder.

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Enhancing
Shareholdervalue:
Theultimate
objective,the
shareholderan Structure:
Accountability: appropriatereturnon
investment. Directionand
Appropriaterulesand
managementofthe
regulationsneedtobe
businessandaffairs
inplacetoensure
areaffectedthrougha
accountability.
setofrules.

Process:
BusinessProsperity:
Directedatpersons
Ultimategoalsof
whohasthepowerto
Corporate
Governancetoensure
KEY directandmanagethe
ELEMENTSOF businessandrefersto
businessis
CORPORATE thesystemfordecision
maintainedwithhigh
makingbytheparties
accountability, GOVERNANCE responsiblefor
businessprosperand
directingandmanaging
enhance
thebusinessofa
shareholdersvalue.
company.

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Strengtheninglaws
governingshareholder
rights,directorsdutiesand
dutiesofothercorporate
participants

Identificationof
trainingandeducation
Enhancingdisclosure
needsofdirectors,
andtransparency
otherkeycorporate
participants Corporate
Governance
focuson:

Developmentofa
MalaysianCodeofBest
PracticesinCorporate Promotingeffective
Governance,whichseeksto environment
restructureboard
compositionandthereby
createeffectiveboards

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Stewardship

Leadership Control

EFFECTIVE
GOVERNANCE:
PRINCIPLESAND
BESTPRACTICES
FORBOD

Goodgovernancedependsoneffectiveinterrelationship
betweenBoardandmanagement.EffectiveBoardisa
boardwhichabletoestablishgoodleadership,stewardship
andcontrol.

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EffectiveBoardwillenhancethe
competitivenessofthecompanyand
shareholdersconfident.Effectiveboard
alsowillassurethattheorganizationis
trustworthy,honestandincorruptible.
LEADERSHIP Boardalsoshoulddemonstratetheir
concernonsocialresponsible,notjust
focusingonprofits.Transparent,loyal,
careanddiligenceareamongimportant
attitudesandprinciplesrecognised
globallyforgoodcorporategovernance.

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STEWARDSHIP
Boardsasstewards(personofresponsible/care off)ofthecompanys assets
haveamoralandstatutoryobligation toworkwithmanagementtoaddvalue
tothoseassetsbycontributing invarious ways:
Strategicplanning:
Strategicplanning developsbymanagementandmonitorsbyboard onthe
achievement.
Riskmanagement:
Boardmustensurethatkeyriskareaofthebusinessareidentified,analysed
andmanaged.
Humanresourcesmanagement:
Anorganization musthaveahigheststandard ofselecting, compensating
andmonitoring performance ofkeypersonnelandseniormanagement as
theyarethekeypersons,theBoD trustand assistsBODindischarging their
duties.

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STEWARDSHIP(CONT)

Boardsasstewards(personofresponsible/care off)ofthecompany assets


haveamoralandstatutoryobligation toworkwithmanagementtoaddvalue
tothoseassetsbycontributing invarious ways:

Communication policy:
Communication linebeitinternalandexternalmustbeclearsoasto
effectivelyconveyinformation and accommodatefeedback.
Internalcontrol assurance:
Theboardshouldreviewtheadequacy andintegrityofthecompanys
accountingand financial reportingsystemandinternalcontrolsystemsand
othersystemsofthecompany andtoensurethesystemsareincompliance
withcurrentlawsandregulations.

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Thethirdcomponentofprinciplesandbestpracticefor
BODis monitoring.Thecompanycanhavethebest
systems,proceduresandtechnologyinplacebutifthey
CONTROL donotwellmonitorandcontrol,thebusinessisbound
tofail.Continuousmonitoringwillalsoprovide
assuranceofthingsthataregoingrightandidentify
matterswhichneedtobeputright.

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

TheDIRECTORSmustactinthebestinterestofthecompany,careanddiligenceintheir
functionandindealingwithstatutoryduties.Mustacthonestlyandavoidconflictof
interest.HemustactaccordingtoM&A,CompaniesAct,SecuritiesIndustriesActand
complytotheListingRequirement.
Setcorporateobjectives,reviewandapproveandguide
corporatestrategiesandbusinessplan,budgetsandtomonitor
theimplementation;
Tooverseethemanagementofcompanybusinessandto
ensurecorporateperformance;
Tooverseehumanresourcesmanagement,staffselectionand
Specifically,the compensation,etc;
directors
Todevelopandimplementinvestorrelationsprogramsto
responsibilities
effectivelycommunicatewiththeshareholders,other
are:
stakeholdersandthepublic;
Toreviewtheadequacyandintegrityofthesystemsemployed
bythecompany.i.e.accountingsystem,financialreporting
systems,internalcontroletc;
ToselectCEO;and
Toprescribethetransactionsthatrequireboardapproval.

Faculty of Accountancy, UiTMKampusPuncakAlam 144 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Whyanaudit
AuditCommittee committeeisneeded:
Audit istoassistBODin Majorfrauds,strong
Committeesis dischargingtheir criticismofthequality
requiredon: dutiesrelatingto ofexecutive
Alllisted company/entity managementandthe
companiesand managementand effectivenessofboard
thoseseeking internalcontrol, supervision,and
listingonBursa accounting financialinstitutions
Malaysia policiesand causeitnecessaryfor
AllFederal financial actionthatstrengthen
reportinganda accountabilityand
Statutory
lineof corporategovernanceso
Bodies
communication astoprovidegreater
Banksand protectionfor
betweenthe
Financial shareholdersandthe
boardandthe
Institutions investinganddepositing
auditors.
public.

Faculty of Accountancy, UiTMKampusPuncakAlam 145 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Board of Directors

Company Audit Committee


Secretary

Internal Audit External Risk


Auditors management
Committee
Control assessment
Review process
Risk identification
Reporting
and assessment
Risk mitigation

Faculty of Accountancy, UiTMKampusPuncakAlam 146 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Assistdirectorsindischarging
theirstatutorydutiesand
responsibilities:Thedirectors
liableonpreparingcompanys
financialstatementsandaudit
committeeminimizethe
involvementofBOD.
Monitorcompany
activities:Abilityto
Monitordisclosure ROLEOFANAUDIT accesstheaccounting
requirements COMMITTEE recordsandindirectly
Tooverseethe monitorthecompany
activities
financialreporting
andgovernance
processessoasto:

Supporttheauditfunction: Increasepublicconfidence
Auditcommitteebecomes inthecredibilityand
closelywiththewhole objectivityoffinancial
auditprocessanditwill reporting.Thefinancial
strengthenstheauditors statementisfreefrom
independence. bias.

Faculty of Accountancy, UiTMKampusPuncakAlam 147 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

ROLEOFANAUDIT
COMMITTEE
Tooverseethefinancial (CONT)
reportingandgovernance
processessoasto:

SatisfytheBoardthatinternalcontrol
existandareeffective.Aninternal
controlsystemisanintegralpartofthe
managementprocessandthecommittee Satisfytheboardthatadequate
shouldensurethatthecontrol attentionisbeinggiventorisk
frameworkinplaceisadequateto management.Organizationshould
provideassuranceon: havepreventionandresponse
Accomplishmentofestablishobjectives mechanismsinplacetohelpthem
Theeconomicalandefficientuseof keepriskatacceptablelevel.Audit
resources committeeshoulddeterminethe
Safeguardingofresources systematicmethodsemployedto
Thereliabilityandintegrityof evaluatedbusinessrisks.
information
Compliancewithpolicies,plans,
procedures,laws

Faculty of Accountancy, UiTMKampusPuncakAlam 148 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Drawbacksofanauditcommittee
Auditcommitteeshavenoteeth:Audit
Interferenceinexecutivedecisiononoperational
committeearejustwindowdressingto
matterswhichwill tendtounderminethe
complyBursaMalaysiaListingRequirement.
authorityoftheboard.Theremaybeconflictof
mistrustandmisunderstandingamongthe
Howtoovercome/prevent:Auditcommittee
committee,management,internalauditorsand
mustbeandbeseentobeindependent,with
theexternalauditors.Howtoovercome/prevent:authoritygiventobackuptheir
Auditcommitteeshouldhavecleartermsand responsibilities.BODmustgivetheirfull
responsibilitiesandcommunicationbetweenall supporttothecommitteeincludingfinancial
partiesshouldbemadeonatimelybasison andadministrativeresourcestocarryouttheir
professionalmanner. duties.
Someoftheproblemsare:
Thefullboardisdistancedfromfinancial
mattersandtheexternalauditor.Thishappen LegalLiabilityofAuditCommitteemembers:
whenBODhasdischargedhisdutytoaudit AuditcommitteedoesnotrelievetheBODof
committeeBUTtheystillhasfull itsresponsibilityforthefinancialreporting
responsibilitiesonthefinancialmattersofthe process.However,auditcommitteemembers
company.Howtoovercome/prevent:TheBOD mayincreasetheirexposuretopossible
mustrequireoralandwrittenreportonall additionalliabilitybecausetheextra
activitiesofthecommitteeandmayevencall responsibilitiesentrustedtothem.
theauditorstoattendthemeetings.

Faculty of Accountancy, UiTMKampusPuncakAlam 149 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Assistinestablishgood
internalcontrolandrisk Measuretodetect
managementpolicies misstatement
Ensure
Provideassuranceof Ensureawarenesson independentin
integrityandreliability andusesrelevant performingthe
oftheinternalcontrol measurestodetect audit
andriskmanagement misstatementin
systemofclients financialstatement

Reduce
expectationgap
Ensureperformaudit Adhereto through
quality auditing communication,
standards educationand
professional
development

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

TOPIC 6 AUDIT RISK, MATERIALITY AND SAMPLING

Business Failure Audit Risk


Audit Failure
A business unable to repay its A risk that an auditor will
Auditor failed to exercise
lenders or meet the conclude that a financial
due care.
expectation of its investors statements are fairly stated
because of economic or Auditor issues an erroneous and unmodified report is
business conditions, such as a audit opinion as the result of issued when, in fact, they
recession, poor management an underlying failure to are materially misstated.
comply with the
decisions, or unexpected E.g. risk that the auditor will
competition in the industry. requirements of Approved
not uncover a material
Standards on Auditing.
E.g. of an extreme case is misstatement due to well-
E.g. assign unqualified audit concealed frauds, even
bankruptcy.
assistants to perform audit though an auditor complied
tasks who then fail to find with approved standards on
material misstatements that
auditing.
qualified auditors would
discover.

Faculty of Accountancy, UiTMKampusPuncakAlam 153 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Auditing = a process ofObtaining and EvaluatingEvidence

Evidence = Persuasive Evidence = Appropriateness x Sufficiency


(Relevant & (Sample Size =
Reliable) Material Items)

Material = An item is considered to be materially misstated, if the misstatement can influence or affect
the decision made by the users of financial statements.

Risk of Material Misstatement = Inherent Risk x Control Risk


Inherent risk = Susceptibility of an assertion to misstatement
Control risk = Internal control failed to prevent, detect, correct misstatement on timely basis;
Why? Limitation of I/C.

Risk is a fundamental concept that underlies the Audit Process.

Audit Process = A Systematic process of ObjectivelyObtaining and EvaluatingEvidence


(Figure 1-3,p.17) = (Planning x Fieldwork x Completing) x Reporting
Evaluating the Audit Test Going Concern True & Fair
client acceptance & (i.e. Nature, Confirm the
continuance Timing, Extent) knowledge
Understand the client &
itsenvironment RISK
Establish materiality

Faculty of Accountancy, UiTMKampusPuncakAlam 154 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

OVERVIEW RISK OF MATERIAL MISSTATEMENT & MATERIALITY


Audit Risk Model AR = IR x CR x DR
Will not detect
misstatement
Risk of Material Misstatement that exist in an
assertion.

Risk of Material Misstatements


Fieldwork
Low High
Nature
Both Substantive Tests c/w
o Tests of Controls
(Tests of Controls x Substantive Tests) Tests of Controls
o Substantive Tests
Timing
Both Only
o Interim Audit
(Interim Audit x Final Audit) Final Audit
o Final Audit
Extent
SmallSample Size LargeSample Size
o Small Sample Size
for Substantive Test for Substantive Test
o Large Sample Size

Faculty of Accountancy, UiTMKampusPuncakAlam 155 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Risk of Material Misstatements


Low High
Testsof Controls & Substantive Tests c/w
Audit Tests : Nature
Substantive Tests Tests of Controls
: Timing Interim Audit& Final Audit Final Audit
: Extent Small Sample Size Large Sample Size

Detection Risk
High Low
Chances of detecting High chance to detect Low chance to detect
a material misstatement, a material misstatement, a material misstatement,
if present if present if present

Materiality
Rule of Thumb = > 5% is Material
(e.g. 50 Samples)
High %age Low %age
e.g. of %age 7-10% 2-3%
Small Sample Size Large Sample Size
Extent (i.e. Sample Size) for Substantive Test for Substantive Test
e.g. 40 Samples (< 50 Samples) e.g. 60 Samples (> 50 Samples)

Faculty of Accountancy, UiTMKampusPuncakAlam 156 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

ANOTHER ROUND OF EXPLANATION ON THE FUNDAMENTAL CONCEPT


IN CONDUCTING A FINANCIAL STATEMENT AUDIT

1. Audit Risk

2. Materiality

3. Evidence
Assertions
Material misstatements
Nature Persuasive Evidence
o Test of control Types of evidence Relevant to assertions
o Substantive test Tangible (Insp, Obsv, Repef)
Substantive test of transactions Testimonial (Inqr, ExCom)
Analytical review Computation (Recom, AProc)
Test of details of balances Reliable
Timing
o Interim
o At/ Near balance sheet date
o Final
Extent
o Risk Materiality Sample Size

Faculty of Accountancy, UiTMKampusPuncakAlam 157 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Materiality

Definition (p.100)
o Influence economic decision
o Reasonable user of financial statements, i.e. they are assumed
to possess reasonable business and accounting knowledge ,and
to be able to make rational economic decisions based on the information in financial
statements.
o Size (RM) and nature (error vs. fraud; Companies Act 1965)

Types of materiality:
o Quantitative Size in term of monetary value; Cumulative effect
o Qualitative Improper description of accounting policy; Misappropriation of assets

Purpose of Audit

To ensure the financial statements are stated in accordance with specified financial reporting criteria in all
material respects.

Financial statements are free from material misstatements.


o Detect error = Primary
o Detect fraud = Incidental

Faculty of Accountancy, UiTMKampusPuncakAlam 158 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Audit Risk
Risk is a fundamental concept that underlies the audit process.

Definition of Audit Risk(p.70)


o Express an inappropriate audit opinion (i.e. unmodified opinion)
o The financial statements contain material misstatement
Eliminate vs. acceptable low level (9) of risk Inherent limitation of audit that affect detection of
material misstatements
o Sampling test basis
o Persuasive evidence relevance vs. reliability
Auditors direct knowledge
Timeliness
Independence of provider
Qualifications of individuals providing the information
Degree of objectivity
Effectiveness of clients internal controls
o Inherent limitation of clients internal control
Collusion/ abuse of authority
Cost vs. benefit
Human error/ inefficiency/ negligence/ lack of training/ lack of motivation
Outdated system
Limited to class of transactions (Sales & Cash Receipts; Purchase & Cash Payments;
Inventory; Payroll)

Faculty of Accountancy, UiTMKampusPuncakAlam 159 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Also expose to public practices business risk:


o litigation financial loss,adverse publicity damage to professional reputation
o quality control,auditing standards
Audit risk at assertion level:AR = IR x CR x DR
o Inherent risk
Assertion easily affected by misstatement
Absence of internal control
o Control risk
Prevention, detection and correctionnot on timely basis
Inherent limitation of internal control
o Detection risk
No detection by the audit procedures
Inherent limitation of audit
Effectiveness of audit procedures - nature, extent and timing
Sampling risk vs. non-sampling risk
o Non sampling risk use an inappropriate audit procedures; misinterpret audit
findings

Faculty of Accountancy, UiTMKampusPuncakAlam 160 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Audit Planning
Risk assessment procedures Understanding the entity and its environment Identifying
(p.76-82) business risk

HIGH RISK OF MATERIAL MISSTATEMENT LOW MATERIALITY

LOW RISK OF MATERIAL MISSTATEMENT HIGH MATERIALITY

COUNTERBALANCE RISK OF MATERIAL MISSTATEMENT MODERATE MATERIALITY

Faculty of Accountancy, UiTMKampusPuncakAlam 161 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Audit Risk Model AR = IR x CR x DR

Risk of Material Misstatement

e.g. AR = e.g. IR x e.g. CR x e.g. DR

First audit engagement S/holders = Directors Segregation of duty Working papers.


New client mgmt team Credit sales Independent check Supervision
Sales on cash basis Documentation Competent and due
No staff training Serial number care
F/S Net liability Timely record Skepticism

To reduce audit risk to acceptable low level


Auditors professional judgment Appropriate to express opinion.
(qualitative)

Faculty of Accountancy, UiTMKampusPuncakAlam 162 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Audit risk model expresses general relationship of


o the audit risk (AR),and
o the components of the model (IR, CR&DR)
The model is useful when planning risk levels (High, Moderate,Low or Very Low)
for audit procedures.

Steps in using the audit risk model as a planning tool at the


o Class of transactions
o Account balances }
Substantive Test

1. Setting a planned level of audit risk (AR)


2. Assessing inherent risk (IR) and control risk (CR) = Risk of Material Misstatement
3. Solving the audit risk equation for the appropriate level of detection risk (DR)

AR = IR x CR x DR

1 2 3

Faculty of Accountancy, UiTMKampusPuncakAlam 163 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

1. Step 1 Auditor needs to achieve acceptable level of AR


(Here the auditor planned to achieve Very Low)
2. Step 2 Auditor assesses the clients business risks and the risk of material misstatement (IR and CR)
3. Step 3 Auditor determines the appropriate level of DR

AR
DR =
IR x CR

4. Step 4 Auditor uses the determined level of DR (in Step 3) to design audit procedures that will
reduce AR to an acceptable level (Very Low).

Faculty of Accountancy, UiTMKampusPuncakAlam 164 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

8
Numerical example for AR ( .05)
Account Balance DR ( .10) =
(Account Receivable) (p.74) IR ( .80) x CR ( .60)

10 % chance that a material misstatement (if present) not detected.

AR ( .05) Recurring audit


IR ( .80) Poor management of debts collection, therefore account receivable
balances are materially misstated
CR ( .60) Poor internal control over the sales and collection cycle in preventing,
detecting and correcting material misstatement
DR ( .10) Scope of the audit (Nature Audit Tests; Extent Sample; Timing
Interim/ Final/ Both) for the account receivable balance, so that there is
only 10% chance that a material misstatement, if present, is not detected

Low ()assessment of DR ( .10) implies that the auditor will conduct a more detailed
examination of substantive test

Faculty of Accountancy, UiTMKampusPuncakAlam 165 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Instead of AR( .05), IR( .80), CR( .60) and DR( .10), it is more appropriate to use
qualitative terms to implement the audit risk model

The qualitative term for AR The qualitative term for IR, CR and DR
Very Low () Best
Low () Good Low () Good IR/ CR
Moderate () Satisfactory Moderate () Satisfactory IR/ CR
High () Poor IR/ CR

Low (DR) Large sample


(Detailed Substantive Test c/w
Tests of Controls)
Moderate (DR) Fair sample
(Test of Control/
Detailed Substantive Test)
High (DR) Small sample
(Test of Control/
LessDetailed Substantive Test)

Faculty of Accountancy, UiTMKampusPuncakAlam 166 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

The auditor planned to Assess business risks and The auditor determined
achieve an acceptable risk of material misstatement the appropriate level for
very low() AR DR is low ()

AR () = IR () x CR () x DR ()
E.g. 1
Very Low ()
Low () The Inverse Relationship Low ()
Moderate () Moderate ()
High ()

The auditor planned to Assess business risks and The auditor determined
achieve an acceptable risk of material misstatement the appropriate level for
very low() AR DR is high ()

AR () = IR () x CR () x DR ()

Very Low ()
Low () The Inverse Relationship Low ()
Moderate () Moderate ()
High ()

Faculty of Accountancy, UiTMKampusPuncakAlam 167 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

The Conclusion of the Inverse Relationship (AR DR Materiality)

1. AR IR CR DR Materiality
High High
Very Low
Low Low Low 2% - 3%
Moderate Moderate Moderate 5%
High High 7% - 10%

2. AR IR CR DR Materiality
High High
Very Low
Low Low Low 2% - 3%
Moderate Moderate Moderate 5%
High High 7% - 10%

Faculty of Accountancy, UiTMKampusPuncakAlam 168 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

3. AR IR CR DR Materiality
Low Low
Very Low
Low Low Low 2% - 3%
Moderate Moderate Moderate 5%
High High 7% - 10%

4. AR IR CR DR Materiality
Low Low
Very Low
Low Low Low 2% - 3%
Moderate Moderate Moderate 5%
High High 7% - 10%

Faculty of Accountancy, UiTMKampusPuncakAlam 169 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Sampling Sufficient Appropriate Audit Evidence


Definition Sampling risk
o Applying audit procedures o < 100%; uncertainty
o < 100% o Sample is not representative of the population
o Test basis o Incorrect conclusion of account balance and class of transactions
Sampling method to determine sample size
o Statistical sampling o Non-statistical sampling (judgmental)
Random; Law of probability No statistical technique
Advantage: Non-random
Design an efficient sample
Measure sufficiency of evidence
Quantify sampling risk
Disadvantage:
Cost training; sampling application
Statistical sampling technique
o Attribute Sampling
Examining documents for particular attributes and providing a given level of confidence on
these attributes
o Monetary-Unit Sampling
To estimate the monetary amount of misstatement
o Classical Variable Sampling
?

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

AUDITEVIDENCE(ISA500)
Theauditorshouldobtainsufficientappropriateaudit
evidencetobeabletodrawreasonableconclusionson
whichtobasetheauditopinion.
Informingtheauditopinion,theauditordoesnotexamine
alltheinformationavailablebecauseconclusionsordinarily
canbereachedbyusingsamplingapproachesandother
meansofselectingitemsfortesting.

Faculty of Accountancy, UiTMKampusPuncakAlam 171 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

DEFINITION

ISA530:Samplinginvolvestheapplicationofauditprocedurestolessthan
100% ofitemswithinanaccountbalancesorclassoftransactionsuchthatall
samplingunitshaveanequalchance ofselection.Thisenabletheauditorto
obtainandevaluateauditevidenceaboutsomecharacteristicoftheitems
selectedinordertoformorassistinformingaconclusionconcerningthe
populationfromwhichthesampleisdrawn

ExpressopinioninAuditorsReport:AnAudit
includesexamining,onatestbasis,referstothe
auditworkcarriedonsamplingbasis

Auditsamplingcanuseeitherastatistical
oranonstatisticalapproach

Faculty of Accountancy, UiTMKampusPuncakAlam 172 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Samplingrisk(DEFINITION) isthattheauditors
conclusionbasedonthesamplemaybe
differentfromconclusionthatwouldbe
reachedifa100%examinationwerecarried
out.
Example:Auditortestingoncontrolprocedures
forpaymentcycle.SupposeAuditorsknow
clienthas1000paymentvoucherduringthe
yearand50ofthosepaymentvouchersarenot
SAMPLING properlyapproved(5%).Therefore,if20
representativesampleselected,shouldcontain
RISK 19samplecorrectlyapprovedand1not
properlyapproved(5%).BUTsometimesfrom
20samplesmaybecontained5sampleswere
notproperlyapproved(25%,considered
material)ORmaybeallthesamplesare
properlyapproved(Consideredimmaterialat
all).
Auditorcanlowerthesamplingriskby
increasingthesamplingsize.

Faculty of Accountancy, UiTMKampusPuncakAlam 173 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Twotypesofsamplingrisk

IntheCompliancetestor
IntheSubstantivetest
testoncontrol

Type1:Riskofassessing Type1:Riskthattheauditor
controlrisktoohigh isthe willconcludethatthereisa
riskthattheauditorwill materialerrorwhen,infact,it
concludethattheriskis doesnotexist
higherthanitisactuallyis

Type2:Riskofassessing Type2:Riskthattheauditor
controlrisktoolow isthe willconcludethatamaterial
riskthattheauditorwill errordoesnotexist,infact,it
concludethattherisklower doesexist
thanitisactuallyis

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

NONSAMPLINGRISK
Nonsamplingriskreferstofactorsthatcauseauditorstoreacha
conclusionotherthanthesamplingsize.Example:Auditorrelyon
anotherrepresentationonerroneousinformation

Otherexamples:Misinterpretationofevidence,humanmistakes
suchasfailingtorecognise errorsindocumentsandapplying
auditingproceduresthatareinappropriatetotheauditobjectives

* Non Sampling risk can never be a mathematical measured. However, to


keep this risk to minimum level, proper planning and supervision and adhere
to the quality control standards is essential.

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

TYPESOFAUDIT
SAMPLING

NONSTATISTICAL
STATISTICALSAMPLING SAMPLING
(PROBABILISTICSAMPLING) (NONPROBABILISTICOR
JUDGMENTALSAMPLING)

Faculty of Accountancy, UiTMKampusPuncakAlam 176 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

STATISTICALSAMPLING(PROBABILISTICSAMPLING)
Statisticalsampling meansanyapproach tosamplingthat
hasthefollowingcharacteristics:

Useofprobability
theorytoevaluate
Random
sampleresults,
selectionofa
sample including
measurementof
samplingrisk

Statisticalsampling
permitthe auditor to
Defendmeasureat
relyonasmaller
thecourt asitis
sampleforanintensive systematicapproach
checkingand make
ofselectingsample
representativetoa
largepopulation

Faculty of Accountancy, UiTMKampusPuncakAlam 177 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

NONSTATISTICALSAMPLING
(NONPROBABILISTICORJUDGMENTALSAMPLING)

Whenauditoruseshis Theauditormustrely
Asamplingapproach
professionaljudgment onhisprofessional
thatdoesnothave
toselectthesample judgmentratherthan
abovecharacteristicis
andevaluatesample thelawsofprobability
considerednon
whenconductingaudit toreachaconclusion
statisticalsampling
test abouttheaudittest

Auditormayusenon
Auditorwillselectthose
randomselectionmethods
samplesitemthathe
&requiresmore
believesabletoprovide
subjectivityinmaking
usefulinformation
samplingdecisions

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Monetary
Unit
Sampling
Classical
Attribute
Variable
Sampling
Sampling

3
CATEGORIES
OF
STATISTICAL
SAMPLING

Faculty of Accountancy, UiTMKampusPuncakAlam 179 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

AttributeSampling
Usedtoestimatetheproportionofapopulationthatpossesaspecified
characteristics(Example:lookingfordeviationrate).Themostcommonuseis
fortestofcontrolsuchasauditorwantstodeterminethedeviationratefor
controlimplementedinaccountingsystemorinternalcontrolstructure.

E.g.Examinationonhowoftenacreditcheckisnotperformed(deviationfrom
normalprocedures,i.e.beforeapprovalsalescredit,weshouldcheckthecredit
availabilityofacertaincustomer)oncustomerordersbeforedeliverthegoodor
beforeapproveanothercreditsales.

Thismeasurementofdeviationratedetermineswhethertheinternalcontrol
canbereliedupontoprocessaccountingtransactionsproperlyandsupport
auditorsassessedlevelofcontrolrisk.

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

MonetaryUnitSampling
Itusesattributesamplingtheoryandtechniquestoestimatetheamountof
misstatementforaclassoftransactionsoranaccountbalance.

Designedprimarilytotestforoverstatementerrorsandmostappropriate
forlowerrorratepopulationofthesampleresults.

Itexpressaconclusioninmonetaryamountsratherthanasarateof
occurrence:
E.g.auditingaccountsreceivable,loans,investmentsecuritiesand
inventory
E.g.Assumethatauditorhasestablishedamaterialitylevelof
RM100,000,anymisstatementmorethanthatconsideredmaterial

Faculty of Accountancy, UiTMKampusPuncakAlam 181 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

ClassicalVariableSampling
Itusesnormaldistributiontheorytoevaluatethecharacteristicsofa
populationbasedonsampledataofwhichdatashouldhaveequalchance
ofselection.
Determinetherangeofthedataandselectingsamplebaseonrandom
tableorcomputerauditsoftwarecurrentlypracticedbymostbig
accountingfirmfortheirbigclients.
Thepurpose:
Toestimatetheamountforaclassoftransactionsoraccountbalance
Todetermineifaclassoftransactionsoraccountbalanceismaterially
misstated
E.g.auditingaccountreceivableinwhichalargeamountofmisstatementis
expected,andinventoryinwhichsignificantauditdifferencesareexpected
fortestcountsandpricingtests.

Faculty of Accountancy, UiTMKampusPuncakAlam 182 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Whentousestatisticalsampling
Thedecisionwhethertouseastatisticalornonstatistical
samplingapproachisamatterfortheauditorsjudgment
regardingthemostefficientmannertoobtainsufficient
appropriateauditevidenceintheparticularcircumstances

Examplesituationswherestatisticalsamplingcanbeused:
Theclientsaccountingandinternalcontrolsystemare
reliableandeffective
Thepopulationareverylarge
Allitemsinthepopulationarehomogeneous
Allitemsinthepopulationareidentifiableandaccessible

Faculty of Accountancy, UiTMKampusPuncakAlam 183 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

ADVANTAGES:Ithelpstheauditorto:
Designanefficientsample
Measurethesufficiencyofevidenceobtained
Quantifysamplingriskbecausesampleisselectbasedonstatisticaltheory
Permittheauditortorelyonasmallersample
Permittheauditoramoreintensiveexaminationofsampleitemssincewith
smallersamplesizes
Plantheauditapproachinsystematicandscientificmanner
Defendmeasureatthecourtasitissystematicapproachofselectingsample

DISADVANTAGESincludeadditionalcostsof:
Trainingauditorsintheproperuseofsamplingtechniques(statistic)
Designingandconductingthesamplingapplication(Software)

Faculty of Accountancy, UiTMKampusPuncakAlam 184 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Asdiscussedabove,samplingapproachthatdoesnothave
abovecharacteristicisconsiderednonstatisticalsampling

Whyauditorsusednonstatisticalsampling:
Partofthereasonsisduetotheauditorneedstoconsiderthe
relationshipbetweenthecostofobtainingauditevidenceandthe
usefulnessoftheinformationobtained
Oftenlesscostlyandlesstimeconsumingbutcanbejustas
effectiveinsatisfyingauditobjectives

Faculty of Accountancy, UiTMKampusPuncakAlam 185 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

ADVANTAGESOFNONSTATISTICALSAMPLING

Theeaseof
Thelowertraining Proposedadjustment
implementationof
costofnonstatistical basedonquantitative
nonstatistical
sampling analysis
sampling

DISADVANTAGESOFNONSTATISTICALSAMPLING

Training Theabsenceof Potential Maycauseincorrect


difficulties no consistency litigation evaluationof
systematicways anduniformity problems samplingrisk

Faculty of Accountancy, UiTMKampusPuncakAlam 186 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

STATISTICALSAMPLING NONSTATISTICALSAMPLING
Needtohaveknowledgeonstatistical Baseonexperienceandcommonsense
formula
Objectiveresults samplesare Subjectiveresults thesamplemay
mathematicallyproventorepresent notrepresentthepopulation
population
Differentauditorwiththesame Differentauditorwillhavedifferent
approachwillgivesameanswer approachandasaresultwillgive
differentanswer
Itisanefficientmethodandcan Itisnotanefficientmethodandneed
delegatetheresponsibilitytoselect moreseniorauditstafftodevisethe
auditsampletolowerrankauditstaff sampleandselectthesample
Defensibleinthecourtoflaw Notdefensibleinthecourtoflaw

Faculty of Accountancy, UiTMKampusPuncakAlam 187 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Auditsamplingamongfirms
Varybetweeneachauditfirmspractices.

Commonapproachisrandomsampling.

Othertypesoftesting:
Highvalueditems.100%testonindividualitemsselected
becausetheyarehighvalueorsuspectedtobeerror
suchasoverdueaccountreceivables.Otheritems,if
immaterialtestingbasedonsampling.
Otheritems.Basedsamplingonacertainamount.E.g.
testing80%onallbalancesheetitems.

Faculty of Accountancy, UiTMKampusPuncakAlam 188 [March 2016]


FINAL EXAMINATION Topic 4 & 6

June 2013 (Question 3)

B. The concept of materiality recognizes that some matters will be taken either
individually or in the aggregate for the fair presentation of the financial statements
taken as a whole. The concept of materiality is crucial to the process of recognition,
aggregation, classification and presentation of financial information.

Required:

i. Briefly describe what is meant by the auditors concept of materiality.


(2 marks)

ii. What are the common approaches used by auditors in establishing materiality?
(4 marks)

December 2013 (Question 3)

B. According to ISA 240, an auditor conducting an audit is responsible for obtaining


reasonable assurance that the financial statements taken as a whole are free from
material misstatement, whether caused by fraud or error.

Required:

Explain the auditors responsibilities in relation to the prevention and detection of fraud
and error.
(4 marks)

June 2014 (Question 3)

B. Fraud is defined as an intentional act by one or more individuals. Thus, there are
various fraud risk assessment processes where auditor might be able to detect the
risks of misstatement due to fraud.

Required:

Discuss four (4) methods that an auditor should perform in identifying the risks of
misstatement due fraud.
(8 marks)

1
December 2014 (Question 3)

A. Audit risk and materiality significantly impact the auditors evidence decisions. The
auditors consider both concepts in the nature, timing and extent of audit procedures.
According to the standards, the auditor shall perform risk assessment procedures to
provide a basis for the identification and assessment of risks of material misstatement
at the financial statement and assertion levels.

Required:

i. Explain the relationship between the components of audit risk.


(4 marks)

ii. Explain the risk assessment procedures in identifying the risks of material
misstatements.
(6 marks)

iii. Describe the relationship between materiality and audit risk.


(2 marks)

June 2015 (Question 3)

C. Masis Communications Bhd (Masis) is a large mobile phone company established


fifteen (15) years ago. Masis operates a network of stores in countries across Europe.
The companys financial year end is 30 April 2015. You are the audit senior of Fahim &
Co. Masis a new client and you are currently planning the audit with the audit
manager. You have been provided with the following planning notes from the audit
partner following his meeting with the finance director.

Masis purchases goods from a supplier in Vietnam and China. These goods are
shipped to the companys central warehouse in Kuala Lumpur. The goods are usually
in transit for ten (10) days and the company correctly records the goods when
received. Masis does not undertake a year-end inventory count, but carries out
monthly continuous (perpetual) inventory counts and any errors identified are adjusted
in the inventory system for that month.

During the year the company introduced a bonus based on sales for its sales persons.
The bonus target was based on increasing the number of customers signing up for 24-
month phone line contracts. This has been successful and revenue has increased by
20 per cent, especially in the last few months of the year. The increase in sales is due
to the credit term given by Masis to their dealers. Thus, this lead to an increase in
account receivable and this receivables is considerably higher than last year and there
are concerns about the creditworthiness of some customers.

During the year the directors have each been paid a significant bonus, and they have
included this within wages and salaries. Separate disclosure of the bonus is required
by local legislation.

Required:

Explain four (4) audit risks, and the auditors response to each risk.
(8 marks)

2
December 2015 (Question 3)

A. Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the
financial statements are materially misstated.

Required:

i. Explain your understanding of acceptable audit risk.


(3 marks)

ii. Explain the limitations of the audit risk model.


(4 marks)

B. The auditors consideration of materiality on an audit is matter of professional


judgement. Materiality is established and implemented using quantitative and
qualitative approach.

Required:

Explain three (3) qualitative factors that may affect materiality.


(3 marks)

3
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4
AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

TOPIC 7 COMPUTERIZED INFORMATION SYSTEM (CIS)

IT encompasses automated means of


o originating, o computer systems (including hardware and
o processing, software components and data),
information, and
o storing, and o communication systems,
includes
o communicating o recording devices, and
o other electronic devices (fax, iPad, smart phone).

The auditor must understand the effects of IT on Unique feature of IT


o the clients internal control, and o Lack/ loss of audit trail
o the auditors risk assessment approach. o Data is centralized DBMS
Therefore, IT affects the audit process (i.e. nature, (Database Management System)
timing and extent of audit procedures). o Different form ofsegregation of duties

Internal Control Risk Assessment


IT Controls Audit Procedures:
o General Control o Nature
o Application Control o Extent (AR = IR x CR x DR Material)
o Timing

Faculty of Accountancy, UiTMKampusPuncakAlam 189 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Control Environment
o Assignment of Authority and Responsibilities
Manual system department is responsible for its own data/ information
DBMS access by multiple user; database administrator is the key responsible person
o Human Resources Policies and Practices
Skills and expertise to operate and oversee IT

Control Procedures
o Information Processing
Authorization (Application)
Documentation and Records (Soft copy)
Maintenance screen vs. View screen
o Adequate Separation of Duties
Authorization + Recording + Safeguard = One Person
General Controls = Data Centre
Access = Segregation of Duties
OS(Acq Chg Maint), and
AS (Acq Dev Maint)
o Physical Control Over Assets and Records
Maintenance screen vs. View screen
Backup off-premise

Faculty of Accountancy, UiTMKampusPuncakAlam 190 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Benefits of IT (p.237) Risk of IT (p.237)


o Consistent application of rules o Programmes errors/ outdated
o Complex calculation and analysis o Loss/ corrupt of data
o Timeliness, availability, accuracy o Unauthorized access
o Security control o Unauthorized change master files/
o Reduce circumvention programmes
o Performance monitoring o Manual intervention

CIS Environment (pp.245-246)


o Low complexity systems o Advanced systems
Standalone PC Online, real-time processing
A network of a small number of Extensive database systems
PCs Distributed data processing
Off-the-shelf software no/ systems
little modification Network
Limited IT expertise E-Commerce
Audit trail Lack/ loss of audit trail
Physical control over computer Controls are automated or
Audit approach = manual programmed
systems Audit approach = CAAT

Faculty of Accountancy, UiTMKampusPuncakAlam 191 [March 2016]

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Types of Controls

General Controls Application Controls

Data Centre + Network Data Capture Controls

Access Security Data Validation Controls

System: Processing Controls


Acquisition
Change/ Development
Output Controls
Maintenance

Operating System Application System Error Controls

Faculty of Accountancy, UiTMKampusPuncakAlam 192 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Data Centre and Network Operations Controls Access Security


Data preparation Physical protection
o Error correction o Computer
Work flow control o Software
o Scheduling of application o Data
o Setup of programmes Theft & unauthorized use
o Correct files o Loss of assets
Computer operations and Network operations o Loss of information
o Prevent unauthorized access Door security
o Rotation of operators Fire protection
o Mandatory vacations Power supply
Library functions Off-premise backup
o Maintenance of files Firewalls
o Backup Encryption
o Data recovery Password

Faculty of Accountancy, UiTMKampusPuncakAlam 193 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

System Acquisition, Development, Maintenance


Policies and procedures Documentation User + Operator + Programmer
Involvement of IA and EA Authorized Tested Implemented
Data Capture Controls 1. Source documentation
All transactions are recorded Batch processing
Recorded only once 2. Direct data entry
Identified , controlled, corrected rejected Transaction log
transactions and re-entered o Reference
o Date
o Time
o Terminal
o User ID
3. Both
Data Validation/ Processing Controls
Programmed edit checks (p.242) Limit Reasonable Hash Mathematical Check
Turnaround documents checks; check; total; accuracy; digit
Output Controls Error Controls
Distributed or displayed to authorized user Error identified by data processing, output,
Transmittal sheet i.e. omitted/ invalid data

Faculty of Accountancy, UiTMKampusPuncakAlam 194 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Computer-Assisted Audit Techniques

For substantive tests & tests of controls

To test application controls Completeness

Accuracy Process Record

Validity
To test general control = IT environment

Types of CAATs

Generalized Audit Integrated Concurrent


Custom Audit Parallel
Software Test Data Test Auditing
Software Simulation
e.g. IDEA, ACL Facility Techniques

Faculty of Accountancy, UiTMKampusPuncakAlam 195 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Generalized Audit Software (GAS)


Test on database mathematical accuracy; select confirmation; select unusual items;
analytical review; report generation.

Custom Audit Software (CAS)


o Written by auditor.
o Why? Client system non compatible with GAS.

Test Data (TD) Integrated Test Facility (ITF)


o To test application control. o = Test data (TD)
o To check data validation control. o Normal application run (during
o Create a simulated transaction data regular processing)
(create both valid data & invalid data).
o Auditors already have the predetermined result.

Parallel Simulation (PS)


o Simulation programs with controls
o Use client data Run data with auditors program + Run data with clients program

Concurrent Auditing Techniques (CAT)


o Continuous monitoring.
o Use by internal auditors.

Faculty of Accountancy, UiTMKampusPuncakAlam 196 [March 2016]


FINAL EXAMINATION Topic 7

June 2013 (Question 4)

A. CAATs are computer programs and data that the auditor uses as part of the audit
procedures to process data of audit significance contained in a clients computer
information system (CIS). The types of CAATs include generalized software, custom
audit software and test data.

i. Differentiate between generalized software and custom audit software.


(4 marks)

ii. Describe two (2) functions of test data.


(3 marks)

iii. Briefly describe how the auditor uses the test data to test the application controls
in the clients computer programs.
(3 marks)

June 2014 (Question 4)

C. You are an audit partner in a medium audit practice. Recently, your firm has been
appointed as the auditor to Dynamic Bhd. Dynamic Bhd intends to develop and install
a new on-line computer based accounting system. As you are the partner in charge for
the audit of Dynamic Bhd, the directors are seeking your guidance on the controls to
be included in the new system.

Required:

i. Identify four (4) characteristics of a computerized accounting system which


distinguishes it from the conventional systems.
(4 marks)

ii. Explain the purpose of general control and application control and provide two
(2) examples of each type of control.
(6 marks)

December 2014 (Question 3)

B. The auditors need to consider how Computerised Information System (CIS)


environment affects the audit. The overall audit objectives and scope do not change
but the use of CIS have changed the processing, storage and communication of
financial information and may also affect internal control of an entity.

Required:

i. Explain the challenges faced by auditors in CIS environment.


(4 marks)

ii. Explain the extent to which the audit software can assist auditors in performing
their audit work.
(4 marks)

1
June 2015 (Question 4)

A. Azim the senior auditor for Dahlan and Associate are responsible for the audit of
inventory for Maju Jaya Bhd. Azim will be attending the year-end inventory count on 30
June 2015. The manager for Dahlan and Associate wishes to utilise the computer-
assisted audit techniques (CAAT) for the first time for controls and substantive testing
in auditing the Maju Jaya Bhds inventory.

Required:

i. Describe four (4) audit procedures that could be carried out using computer-
assisted audit techniques (CAATs).
(6 marks)

ii. Explain two (2) advantages and two (2) disadvantages of using computer-
assisted audit techniques (CAATS).
(4 marks)

December 2015 (Question 4)

B. The use of information technology (IT) for financial reporting and operational purposes
is common in every sector of the business and industry today. Auditor must be familiar
with effects of IT on the entitys internal control and the auditors risk assessment
approach.

Required:

i. Explain four (4) potential benefits of IT on internal control.


(4 marks)

ii. Discuss two (2) factors that affect the control environment with the
implementation of an IT in an entity.
(4 marks)

iii. Describe two (2) areas in which control procedures can be affected by the use of IT.
(4 marks)

2
AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

T O P I C 8 B A L A N C E S H E E T A U D I T (VERIFY ASSETS & LIABILITIES)

Managements Management 1 FINANCIAL


Responsibility Assertions STATEMENTS

2 3

Auditors Management Audit Tests/ Audit AUDIT


Responsibility Assertions Procedures Evidence REPORT

The financial statements reflect managements assertions about the various classes of transactions and
1
account balances.

The auditor accumulates and evaluates audit evidences to determine whether each relevant management
2 assertion is being supported.
The audit procedures are guided by the management objectives.

3 The audit evidences support the audit report.

Faculty of Accountancy, UiTMKampusPuncakAlam 197 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Management Transaction-Related Balance-Related


Assertions Assertions Assertions

Occurrence 1. Occurrence(Transaction Cycle) 1. Occurrence(Special Transaction)

Existence 2. Existence

Rights and Obligations 3. Rights and Obligations

Completeness 2. Completeness 4. Completeness

3. Accuracy

4. Cutoff
Allocation/ Measurement
5. Classification

5. Allocation

Valuation 6. Valuation

Presentation and Disclosure Transaction-Related Assertions x Balance-Related Assertions x Understandability

Faculty of Accountancy, UiTMKampusPuncakAlam 198 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Audit proceduresare the detailed instructions for the collection of [type of] audit evidence.

The detailed instructions are spelt out in sufficiently specific terms in the audit programmes.

Therefore, an audit procedurespelt out (1st) the types of instructions;


(2nd) the types of evidences, and
(3rd) the types of audit objectives/ management assertions.

Audit programme is the list of audit procedures for an audit area or an entire audit.

Audit programme = f (nature, timing, and extent of audit procedures)

Faculty of Accountancy, UiTMKampusPuncakAlam 199 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

E.g. of instructions given to the staffs during the fieldwork.

(i) Assertion Ownership of motor vehicle.


Examine (the types of instruction) the registration card issued by the authority (the types of evidence
documentation) and noted the beneficial owner (the types of audit objectives rights/ ownership).

(ii) Assertion Sales invoiced to the customers were for the shipments that have occurred.
Trace (the types of instruction) a sample of sales invoice to match to duplicate shipping document
(the types of evidence documentation) to determine that each sales had been shipped/ occurred (the
types of audit objectives occurrence).

(iii) Assertion Accuracy of the year-end balance of Accounts Payable.


Send (the types of instruction) confirmation to the selected accounts payable (the types of evidence
documentation inquiry from third party) and noted any discrepancies in the amount confirmed (the
types of audit objectives accuracy/ measurement).

(iv) Assertion Accounts Receivable represent amounts that are realizable.


Examine (the types of instruction) aging report of accounts receivable (the types of evidence
documentation) and noted balances that long outstanding and uncollectable (the types of audit
objectives realizable value/valuation).

Faculty of Accountancy, UiTMKampusPuncakAlam 200 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Motor Vehicles Management Assertions


Additions and disposals are authorized and supported. Occurrence (Special)
You see the motor vehicles at the companys porch. Existence
JPJs registration cardsstated the motor vehicles are under the companys name. Rights
All motor vehicles that are existed and owned are included in the financial statements.
Completeness
Register of noncurrent assets agreed with the general ledger
Acquisition cost is as per the invoice (excluding the road tax and insurance). Accuracy
The recording entry for acquisition is as per the account code. Classification
Acquisition is recorded in the correct accounting year. Cut-Off
Motor vehicles are charged with depreciation. Valuation and Allocation
Motor vehicles are written-off for impairment. (Realizable Value)
The presentation and disclosures of non-current assets complied with the Presentation and
approved accounting standards (AAS). Disclosure

Faculty of Accountancy, UiTMKampusPuncakAlam 201 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Sales Management Assertions


Sales invoices are authorized; supported with shipping documents, credit approval
Occurrence (Cycle)
and sales orders.
Sales invoices are recorded in the order of prenumbered/ serial number. Completeness
Selling prices are charged according to approved price list. Accuracy
Cash sales and credit sales are written in different journals. Classification
Sales are recorded on the dates the transactions occurred.
Cutoff
Total sales are posted periodically to the general ledger.

Accounts Receivable Management Assertions


Existence
You received the reply that confirm/ dispute the balance for accounts receivable.
Rights
All accounts receivable are included in the financial statements. Completeness
Sales as per invoice; return as per credit note; collection as per official receipt. Accuracy
The recording entry for sales, return and collection are as per the account code. Classification
Sales, return and collection are recorded in the correct accounting year.
Cut-Off
Accounts receivable ledger agreed with the general ledger.
Accounts receivable are charged with allowance for doubtful debts. Valuation and Allocation
Accounts receivable are written-off for bad debts. (Realizable Value)
Presentation and
The presentation and disclosures of accounts receivable complied with the AAS.
Disclosure

Faculty of Accountancy, UiTMKampusPuncakAlam 202 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Balance Sheet Audit


Share Capital ordinary shares and preference shares
Reserves and Retained Profits
o Ordinary shares issued at premium share premium
o Revaluation of properties revaluation reserves
o Foreign exchange adjustment foreign exchange reserves
o Income Statement retained profit; reserves that is distributable as dividends
Intangibles economic benefit for longer than a year.
o Copyrights
o Trademarks and trade names
o Licenses and franchises
o Patents
o Goodwill
Investments
o Equity securities ordinary and preference shares
o Debt securities loan stocks, bond, notes
o Hybrid securities convertible loan stocks/ bonds, transferable subscription rights, warrants

To Start the Balance Sheet Audit


Obtain the schedules that support the items in the balance sheet.
Agree the opening balance to the previous year working paper.
Agree closing balance to general ledger.

Faculty of Accountancy, UiTMKampusPuncakAlam 203 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Share Capital (pp.513-514) Management Assertions


Issued and fully paid are approved.
Occurrence
o Verify the minutes of board of directors/ shareholders meetings and document of
Existence
approval from regulatory bodies (Securities Commission and Bursa Malaysia)
Rights
o Examine cancelled share certificates.
Registers of shareholders are properly maintained and updated.
o Cast the shares outstanding in the share register and/ or share certificate book and agree
them to total shares outstanding in the share capital account in the general ledger.
o Reconcile issued and fully paid share capital as per shareholders register to the
Completeness
share capital account in the general ledger.
o Account for and inspect any unissued share certificates in the share certificate book.
o Trace the transfers of shares between shareholders to the shares register and/ or
shares certificate book.
Not an issue Allocation
Trace the transfers of shares between shareholders to the shares register and/ or
shares certificate book.
Cash Valuation is straightforward. Proceed from new issue are traced to the
cash receipts journal. Valuation
(Par value toOrdinary Share Capital Account&Premium toShare Premium Account)
Bonus Issue Recompute the value of bonus shares and trace to the general ledger.
(Charged to reserves (share premium)&Credited to Ordinary Share Capital Account)
Presentation and
Table 15.2, p.514
Disclosure

Faculty of Accountancy, UiTMKampusPuncakAlam 204 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Investments (pp.537-543) Management Assertions


Physical examination of the share certificates.
Confirmation with the issuer.
Confirmation with custodian.
Confirmation of unsettled transactions with the broker-dealer. Occurrence
Reading executed joint venture or similar agreements. Existence
Additional procedures for marketable securities: Rights
o Examine brokers contract notes.
o Inspect monthly statements from MCD.
o Confirm with stock-broking firms of ADA.
All investments are included in the financial statements Completeness
Purchased value acquisition cost = fair value; examine brokers contract notes.
Market value official quotations of BursaMalaysia. Measurement
Non-current assets (long term investments) cost less impairment losses (p.540). Valuation
Current assets (investments) lower of cost and market value.
Presentation and
Table 16.6, pp.542
Disclosure

Faculty of Accountancy, UiTMKampusPuncakAlam 205 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Journal

Sales Journal
Date Details Invoice Account Amount
No. Code (RM)
2010
Jan 3 Sejahtera Enterprise 1001 AR021 10,600
7 Sentosa Trading 1002 AR034 11,350
14 AmanSdnBhd 1003 AR002 80,000
19 Syarikat Damai 1004 AR040 9,300
21 Nyaman Trading 1005 AR008 15,400
24 RestoranBayu 1006 AR015 21,210
27 Makmur Plantation 1007 AR005 14,570

31 Total for January 2010 162,430

Faculty of Accountancy, UiTMKampusPuncakAlam 206 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

General Ledger
Sales Account
Date Particular Amount Date Particular Amount
(RM) (RM)
2010 2010
Jan 31 Balance c/d 162,430 Jan 31 A/Receivable 162,430

162,430 162,430
Feb 1 Balance b/d 162,430

General Ledger Control Account


Accounts Receivable
Date Particular Amount Date Particular Amount
(RM) (RM)
2010 2010
Jan 1 Balance b/d 33,260 Cash Receipts
Jan 31 Sales 162,430 Discount Allowed
Jan 31 Balance c/d 195,690
195,690 195,690
Feb 1 Balance b/d 195,690

Faculty of Accountancy, UiTMKampusPuncakAlam 207 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Subsidiary Ledger Accounts Receivable Ledger

AmanSdnBhd (AR002)
Date Particular Amount Date Particular Amount
(RM) (RM)
2010 2010
Jan 1 Balance b/d 6,696 Cash Receipts
Jan 14 Sales 80,000 Discount Allowed
Jan 31 Balance c/d 86,696
86,696 86,696
Feb 1 Balance b/d 86,696

Makmur Plantation (AR005)


Date Particular Amount Date Particular Amount
(RM) (RM)
2010 2010
Jan 1 Balance b/d 5,355 Cash Receipts
Jan 27 Sales 14,570 Discount Allowed
Jan 31 Balance c/d 19,925
19,925 19,925
Feb 1 Balance b/d 19,925

Faculty of Accountancy, UiTMKampusPuncakAlam 208 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Nyaman Trading (AR008)


Date Particular Amount Date Particular Amount
(RM) (RM)
2010 2010
Jan 1 Balance b/d 6,598 Cash Receipts
Jan21 Sales 15,400 Discount Allowed
Jan31 Balance c/d 21,998
21,998 21,998
Feb 1 Balance b/d 21,998

RestoranBayu (AR015)
Date Particular Amount Date Particular Amount
(RM) (RM)
2010 2010
Jan 1 Balance b/d 4,474 Cash Receipts
Jan24 Sales 21,210 Discount Allowed
Jan31 Balance c/d 25,684
25,684 25,684
Feb 1 Balance b/d 25,684

Faculty of Accountancy, UiTMKampusPuncakAlam 209 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Sejahtera Enterprise (AR021)


Date Particular Amount Date Particular Amount
(RM) (RM)
2010 2010
Jan 1 Balance b/d 4,661 Cash Receipts
Jan 3 Sales 10,600 Discount Allowed
Jan31 Balance c/d 15,261
15,261 15,261
Feb 1 Balance b/d 15,261

Sentosa Trading (AR034)


Date Particular Amount Date Particular Amount
(RM) (RM)
2010 2010
Jan 1 Balance b/d 2,260 Cash Receipts
Jan 7 Sales 11,350 Discount Allowed
Jan31 Balance c/d 13,610
13,610 13,610
Feb 1 Balance b/d 13,610

Faculty of Accountancy, UiTMKampusPuncakAlam 210 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Syarikat Damai (AR040)


Date Particular Amount Date Particular Amount
(RM) (RM)
2010 2010
Jan 1 Balance b/d 3,216 Cash Receipts
Jan19 Sales 9,300 Discount Allowed
Jan31 Balance c/d 12,516
12,516 12,516
Feb 1 Balance b/d 12,516

Faculty of Accountancy, UiTMKampusPuncakAlam 211 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Supporting Schedule Aging Report

Accounts Receivables Current 15 30 days 31 60 days 61 90 days > 90days


(RM) (RM) (RM) (RM) (RM) (RM)
AR002 Aman S/B 86,696 80,000 3,216 3,480
AR005 MakmurPlantn 19,925 14,570 3,238 2,117
AR008 NyamanTrd. 21,998 15,400 6,598
AR015 RestoranBayu 25,684 21,210 2,778 1,696
AR021 Sejahtera Ent. 15,261 10,600 4,661
AR034 SentosaTrd. 13,610 11,350 2,260
AR040 Sykt. Damai 12,516 9,300 3,216

195,690 162,430 19,973 8,375 1,696 3,216

Faculty of Accountancy, UiTMKampusPuncakAlam 212 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

SUBSTANTIVE TESTS (done during the FINAL AUDIT):


SUBSTANTIVE TESTS OF TRANSACTIONS VS. TESTS OF DETAILS OF BALANCES
Substantive Tests of Transactions
Class of Transaction: Sales
Transaction-Related
Audit Procedures Work Done
Audit Objectives
Review sales journal and accounts Jan 14, AmanSdnBhd, RM80,000
receivable ledger for unusual transactions.
Occurrence Trace entries in sales journal to sales Sales journal sales invoice
invoices and supporting documents. Accuracy; shipping document sales order *
Timing

Account for a sequence of sales invoice. 1001 1007


Completeness Trace shipping documents to sales journal. Shipping document (Shipping
Departments copy) sales journal
Trace entries in sales journal to sales *
invoices and supporting documents.
Occurrence, Timing

Accuracy Recompute prices and extensions on sales Multiplication and addition


invoices.
Trace details on sales invoice to supporting Sales invoice shipping document
document. Timing sales order (a new set of sample)

Faculty of Accountancy, UiTMKampusPuncakAlam 213 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Examine sales invoice for account Account Code/ Folio


Classification
classification.
Compare date of recording in sales journal *
with sales invoice and shipping document.
Occurrence; Accuracy

Cutoff Trace entries in sales journal to the Account Code/ Folio


accounts receivable ledger.
Foot the sales journal and trace to the RM162,430
general ledger. Dr Accounts Receivable
Cr Sales Account

Faculty of Accountancy, UiTMKampusPuncakAlam 214 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Tests of Details of Balances


Account Balance: Accounts Receivable
Balance-Related
Audit Procedures Work Done
Audit Objectives
Confirm accounts receivable, using Prepare and mail the confirmation
positive confirmation. Accuracy
Perform alternative procedures for all E.g. check for subsequent cash
Existence
confirmations not returned. Accuracy receipts. Realizable Value
Review accounts receivable ledger for SyktDamai, RM9,300 with long
unusual transactions. Accuracy outstanding amount > 3 months, RM3,216
Review the minutes of the board of
directors meetings for any indication of
Rights pledged or factored accounts receivable.
Inquire of management whether any
accounts receivable are pledged or factored.
Trace accounts receivable from accounts Account receivable ledger aging
Completeness
receivable ledger to the aging report. report
Confirm accounts receivable, using
positive confirmation. Existence
Perform alternative procedures for all
Accuracy
confirmations not returned. Existence
Review accounts receivable ledger for
unusual transactions. Existence

Faculty of Accountancy, UiTMKampusPuncakAlam 215 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Review accounts receivable for notes


receivable and related party receivables.
Classification Inquire management whether there are any
notes receivable and related party
receivables.
Examine recording in the correct year by Sales journal sales invoice
selecting the last sales transactions from the shipping document
current years sales journal and the first
from the subsequent years, and trace each
to the related shipping documents.
Review large sales returns and allowances Sales return, discount allowed,
before and after the balance sheet date to allowance for doubtful debts.
Cutoff
determine recording in the correct year.
Trace accounts receivable from the aging Aging report account receivable
report to accounts receivable ledger. Realizable ledger
Value

Foot and cross-foot the aging report and Foot add from top to bottom =
trace totals to the general ledger. Realizable RM195,690; Cross-foot add from
Value
left to right = RM195,690

Faculty of Accountancy, UiTMKampusPuncakAlam 216 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Trace accounts receivable from the aging


report to accounts receivable ledger. Cutoff
Foot and cross-foot the aging report and
trace totals to the general ledger. Cutoff
Valuation
Examine subsequent cash receipts. Existence
(Realizable Value)
Inquire of management on the likelihood of
collecting older accounts.
Examine whether allowance for doubtful Check aging report.
debts is adequate.

Faculty of Accountancy, UiTMKampusPuncakAlam 217 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

TESTS OF CONTROLS (done during the INTERIM AUDIT):


TESTS OF CONTROLS VS. RISK ASSESSMENT PROCEDURES

Risk Assessment Procedures


Class of Transaction: Sales
Assess Control Risk:
Control Risk Matrix
Yes = No=
Transaction-Related Assess Control Risk:
Control Significant
Audit Objectives Key Control Activities
Deficiency/
Material
Weakness
Credit is approved by comparison to authorized credit
limit.
Sales are supported with supporting documents.
Goods shipped (as per shipping documents) are billed
Occurrence daily/ subsequent day.
Batch totals are compared with total billed.
Monthly statements are sent.
Separation of duties between billing, recording of
sales, and handling of cash receipts.

Faculty of Accountancy, UiTMKampusPuncakAlam 218 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Shipping documents are prenumbered and accounted for.


Batch totals are compared with total billed.
Completeness Monthly statements are sent.
Separation of duties between billing, recording of
sales, and handling of cash receipts.
Sales are supported with supporting documents.
Batch totals are compared with total billed.
Accuracy Unit selling price are charged according to approved
price list.
Monthly statements are sent.
Sales transactions are recorded according to account
Classification code (as per chart of accounts).
Sales transactions are internally verified.
Shipping documents are prenumbered and accounted for.
Goods shipped (as per shipping documents) are billed
daily/ subsequent day.
Sales are posted to the accounts receivable ledger and
general ledger.
Cutoff
Accounts receivable ledger is reconciled to the
general ledger.
Monthly statements are sent.
Separation of duties between billing, recording of
sales, and handling of cash receipts.

Faculty of Accountancy, UiTMKampusPuncakAlam 219 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Tests of Controls
Class of Transaction: Sales
Transaction-Related
Audit Procedures Work Done
Audit Objectives
Examine customer order for approval. Specimen signature
Examine sales invoice for supporting Sales invoice shipping document
Occurrence documents. sales order
Examine file of batch totals. Input form
Observe mailing of monthly statements.
Account for sequence of shipping 0001 000x
Completeness documents.
Examine file of batch control. Input form
Examine sales invoice for supporting Sales invoice shipping document
documents. sales order
Accuracy Examine file of batch control. Input form
Examine approved price list. Approved price list
Observe mailing of monthly statements.
Examine sales invoices for account code. Chart of accounts
Classification Examine sales invoices and supporting
documents for internal verification.

Faculty of Accountancy, UiTMKampusPuncakAlam 220 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Account for sequence of shipping 0001 000x


documents.
Examine file of batch control. Input form
Cutoff
Examine evidence of posting.
Examine evidence of reconciliation.
Observe mailing of monthly statements.

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

TOPIC 9 COMPLETING/ CONCLUDING THE AUDIT

Audit Process: How Audit Objectives are Met

Audit Process = Planning x Fieldwork x Conclusion


(Office) (Client Premises) (Office/ Client Premises)
Audit Risk Audit Procedures Auditor Knowledge
= Inherent = Nature Letter of Representation
x Control x Timing Going Concern
x Detection x Extent Post Balance Sheet Event
Materiality Mgmt Assertions Contingencies
Sampling Audit Evidence Commitments
Comparatives Figures

Audit Report True and Fair View

Faculty of Accountancy, UiTMKampusPuncakAlam 225 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Financial Statements Financial Statement Audit


Sufficient Appropriate Evidence

Statement of Plan and Design Perform Perform Complete Issue


Comprehensive Income an Audit Approach Interim Audit Final Audit The Audit an Audit Report
Statement of
Financial Position Analytical Test of Analytical Analytical Unmodified
Statement of Procedures Controls Procedures Procedures Audit Report
Cash Flows
Notes to theAccounts
Knowledge of
Clients Business Substantive Tests of Review for Unmodified
Transactions Subsequent Events Audit Report with
Management Assertions Business Risk Emphasis of Matters
Tests of Details of Going
Inherent Risk Balances Concern Modified
Companies Act 1965 Audit Report
Internal Control Contingent
Conceptual Framework Liability
Financial Reporting Control Risk
Standards(FRS) Capital
Fraud Risk Commitment
Statutory
Registers/ Records Letter of
Bookkeeping: Audit Risk and Representation
Source Documents; Materiality
Authorization/ Approval,
Chart of Accounts,
Journals; Ledgers, Registers
Audit Planning and
Programmes

Faculty of Accountancy, UiTMKampusPuncakAlam 226 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

[LOW] AR = [HIGH] IR x [HIGH] CR x [LOW] DR5%Materiality

Analytical Procedures

Planning Fieldwork Conclusion

Analytical Review Substantive Test Analytical Review

Audit Risk Review Aging Report Acceptable Low Audit Risk


Review debts follow-up
Accounts Receivable procedures Accounts Receivable
Turnover = 72 days Discuss the long Turnover = 18 days
outstanding debts with the (Consistent with the
(Client Policy management auditors knowledge of
= 14 days credit period) 14 days credit period)

Conclusion: Reconfirm the


Accounts Receivable gives Truth and Fairness of
True and Fair View Accounts Receivable
(after provide adequate
allowance for doubtful debts)

Faculty of Accountancy, UiTMKampusPuncakAlam 227 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

SUBSEQUENT EVENTS

S.169(6)

Financial Year Subsequent Events


20X0 20X1

1 31 15
January December May

Year-End BODs
Meeting
approved
the audited
FS

Adjusting Events

Non-Adjusting Events

Faculty of Accountancy, UiTMKampusPuncakAlam 228 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Adjusting Events

The subsequent eventsprovide additional evidence.


Financial Year Subsequent Events
20X0 20X1

1 31 15
January December May

5 October 20X0 Dr Accounts Receivable RM10,000


Cr Sales RM10,000

31 December 20X0 The RM10,000 is still not paid at the year-end (> 60 days outstanding).
The customer is in financial difficulty due to competition.
DR Bad Debts
Total of Accounts Receivable, RM200,000.
CR A/c Receivable
22 April 20X1 The customer is declared bankrupt, an additional evidence to the financial difficulty
(the conditions [i.e. the condition of outstanding debts that affects the debt realization
into cash] that existed at the date of the balance sheet, i.e. 31 December 20X0)

Faculty of Accountancy, UiTMKampusPuncakAlam 229 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Non-Adjusting Events

The subsequent eventsprovide additional evidence.


Financial Year Subsequent Events
20X0 20X1

1 31 15
January December May

31 December 20X0 Companys Warehouse in Puchong Jaya, RM1,800,000


Inventories RM300,000

22 April 20X1 The company's warehouse in Puchong Jaya was destroyed by fire
Inventories RM150,000 were also destroyed, including inventories RM40,000 b/f
from 31 December 20X0
[DISCLOSE in the Notes to the Account]
[AUDIT OPINION Emphasis of Matter]

Faculty of Accountancy, UiTMKampusPuncakAlam 230 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Subsequent Events Time Dimension

Financial Year Subsequent Events


20X0 20X1

1 31 15 12 30
January December May June June

Date of The last


AGM date for
AGM for a
company
with
year end 31
31 December 20X0 to 15 May 20X1 Already discussed December

15 May 20X1 to 12 June 20X1 pp.567-568 (Eilifsen et al., 3rd ed.,2014)

12 June onwards pp.567-568 (Eilifsen et al., 3rd ed.,2014)

Faculty of Accountancy, UiTMKampusPuncakAlam 231 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Auditors Duties for Subsequent Events

Determine whether it is material.

Determine whether it is an adjusting events or non-adjusting events.

Perform audit procedures Inquiry and inspection of documents.

Management agree to the amendment = adjust and/or disclose True and Fair View.

Management disagree to the amendment Modified Report.

Faculty of Accountancy, UiTMKampusPuncakAlam 232 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Audit Procedures for Subsequent Events (p.555-556)

Formal subsequent-event period (year-end to date of audit report)


(Events Occurring between the Date of the Financial Statements and the Date of the Auditors Report)

o Consider the materiality of the events

o Consider whether adjusting or non adjusting events

o Carry out audit procedures to obtain sufficient appropriate audit evidence

Types of Evidence Inquiry from the Management


Ask contingent liabilities/ capital commitments
Ask changes in share capital/ loans/ working capital
Ask current status of account balances (e.g. accounts receivable)
Ask unusual transactions/ adjustments
Obtain letter of representation
-Types of Evidence Documentation
Read interim financial statements subsequent to year-end
Read minutes directors/ committees meetings/ general meetings
Review records for unusual transactions/ adjustments
Types of Evidence Confirmation
Ask legal counsel litigation/ claims

o Audit report Client agree (True and Fair, Emphasis of Matter) Client disagree (Except For; Adverse)

Faculty of Accountancy, UiTMKampusPuncakAlam 233 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

2nd Subsequent-event period (date of audit report to date of AGM)


(Facts Which Become Known to the Auditor after the Date of the Auditors Report but before the Date the
Financial Statements Are Issued)

o Types of Evidence Documentation


The auditor is not responsible to conduct audit procedures

o Types of Evidence Inquiry from the Management


If, a fact becomes known to the auditor that, had it been known to the auditor at the date of the
auditors report, may have caused the auditor to amend the auditors report, the auditor shall
Discuss the matter with management and, where appropriate, those charged with
governance.
Determine whether the financial statements need amendment and, if so,
Inquire how management intends to address the matter in the financial statements.

o Subsequent eventscomes to the auditors attention = Material


Adjusting event Adjusted and disclosed
Non-Adjusting event Disclosed

o Audit report (True and Fair, Emphasis of Matter)

Faculty of Accountancy, UiTMKampusPuncakAlam 234 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

CONTINGENT LIABILITIES (p.557)

Liability of uncertain The possible outflow of resources (the cash an uncertain amount) from the
o timing , and/ or client will ultimately be resolved when some future event occur of fail to occur
o amount (the decision an uncertain time).
e.g.
o Corporate guarantee
o Litigation/ court case (Table 17-1, p. 559)
Disclosure items = Notes to the financial statements

Types of contingent liability


o Possible obligation that arises from past event
The existence will be confirmed by the occurrence/ non-occurrence of uncertain future events not
within the control of the client
o Present obligation that arises from past event, but is not recognized (as liability)
the present obligation is not probable
the present obligation cannot be reliably measured

Probable Neither ProbableNor Remote Remote


(> 50%) (< 50%)
More likely will occur; Less likely to occur; More likely will not occur
Can be measured reliably But still uncertain
Disclose Disclose Do not disclose

Faculty of Accountancy, UiTMKampusPuncakAlam 235 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Audit Procedures for Contingent Liabilities (p.557-558)

Types of Evidence Inquiry from the Management


o Ask contingent liabilities
o Obtain letter of representation

Types of Evidence Documentation


o Read minutes directors/ committees meetings/ general meetings
o Review contracts, loan agreements, correspondences, noted any violation
o Review income tax liability, tax returns, correspondences with LHDNM
o Examine invoices, correspondences from legal counsel, noted pending/ threatened lawsuits

Types of Evidence Confirmation


o Ask bank guarantee, letter of credit
o Ask legal counsel litigation/ claims

Material subsequent events


o Properly accounted for and disclosed

Legal Confirmation Letter (p.558-561)


Solicitor confirmation

Faculty of Accountancy, UiTMKampusPuncakAlam 236 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

COMMITMENTS (p.561)

Long-term contractual commitments to acquire property, plant and equipment


to purchase raw materials at fixed price
to sell products at fixed price
Disclosure items = Notes to the financial statements

Audit Procedures for Commitments

Types of Evidence Inquiry from the Management


o Ask commitments
o Obtain letter of representation

Types of Evidence Documentation


o Read minutes directors/ committees meetings/ general meetings

Faculty of Accountancy, UiTMKampusPuncakAlam 237 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

GOING CONCERN (p.563-567)

An assumption underlying the preparation of financial statements


Continue as a going concern for a future period = reasonable future period is 12 months after year end

Going Concern Assessment


o An indication of going concern problem
o Management plan to mitigate going concern problem
o Substantial doubt about management plan
Disclose = Notes to the financial statements
Audit report Unmodified with emphasis of matter paragraph

Audit Procedures for Going Concern

Types of Evidence Inquiry from the Management


o Ask events or conditions which may cast doubt on the company going concern ability
o Ask contingent liabilities
o Obtain letter of representation
Types of Evidence Documentation
o Read minutes directors/ committees meetings/ general meetings
o Review contracts, loan agreements, correspondences, noted any violation
Types of Evidence Confirmation
o Ask legal counsel litigation/ claims
Types of Evidence Analytical Procedures
o Compute analytical procedures, noted adverse financial ratios

Faculty of Accountancy, UiTMKampusPuncakAlam 238 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Management Mitigation Plan

Dispose/ sale and leaseback of assets


Loan/ restructure debts
Reduce/ delay expenditure
Increase capital

Audit Procedures for Management Mitigation Plan

Types of Evidence Inquiry from the Management and obtain letter of representation.

Types of Evidence Documentation


o Read minutes directors/ committees meetings/ general meetings
o Review contracts, loan agreements, correspondences, noted any violation
o Analyze cash flows
o Analyze latest interim financial statements

Types of Evidence Confirmation


o Loan Ask arrangement for financial support from bank/ third party
o Litigation Ask legal counsel for assessment of outcome and financial implication
o Amount due from holding company Obtain letter of comfort from holding company

Faculty of Accountancy, UiTMKampusPuncakAlam 239 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

AUDIT OF ACCOUNTING ESTIMATES


AI 540 auditor should obtain audit evidence regarding accounting estimates.
Accounting estimates means
o Allowance to reduce inventory and receivable to their estimated realizable value
o Depreciation/amortization
o Accrued revenue
o Deferred tax
o Provision for loss from lawsuit
o Provision to meet warranty claim
It is a management responsibility. Sometimes simple and sometimes complex. For example: accruing
rental expenses is simple compared estimating a provision for slow moving inventories.
Audit Procedures
o Review and testing the process used by management
o Evaluate the data and consider of assumptions used. For example: Estimating Account receivable.
Review ageing and consider the accounting policies for doubtful debt. Specific provision or general.
o Testing the calculation.
o Compare the estimate of current period to last period.
Review Subsequent Event
o Subsequent event may provide audit evidence regarding the accounting estimate made by
management
o For example: Bankrupt of a customer. Inventory damages caused by fire

Faculty of Accountancy, UiTMKampusPuncakAlam 240 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

COMPARATIVE FIGURES (The OPENING BALANCES)

Opening balance
o Obtain sufficient evidence to ensure the opening balances do not contain misstatement that
materially affect the current periods financial statement.
o Ensure the opening balances correctly brought forward from previous period (closing balances)
o Appropriate accounting policies are consistently applied or changes in accounting policies have been
properly accounted for and adequately disclosed.

Comparative figures
o AI 710 Auditor should determine whether the comparatives comply in all material respects with
the financial reporting framework relevant to the financial statement being audited.
o FRS 101 Comparative information shall be disclosed in respect of the previous period for all
amounts.
o When the presentation or classification of items in the financial statements is amended, comparative
amount shall also be reclassified unless is impracticable.
o When it is impracticable to reclassify comparative figure, entity should disclose the reason for not
reclassify and the nature of the adjustment that would have been made if the amount had been
reclassified.

Faculty of Accountancy, UiTMKampusPuncakAlam 241 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

MANAGEMENT REPRESENTATION LETTER

AI 580 requires the auditor to obtain appropriate representations from management, which may be
oral,but later in written.

Management Representation Letter is a letter from the management to confirm to the auditor that all
information (in all material respect) has been properly disclosed in the financial statement and to be dated
on the same day the financial statements are approved.

Important purpose of management letter:


o Acknowledgement by the management of its responsibility for the financial statements
o Representation by management as audit evidence
o To conform the oral representation (documented the oral representation)
o
If management refuse to sign the letter The auditor should constitute a scope limitation, issue a modified
report or disclaim (if material and pervasive)

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

TOPIC 10 AUDITORS REPORT

Types of Auditors Report

Auditors Report

Types of
Unmodified Modified
Audit
Auditors Report Auditors Report
Report

For matters that For matters that


do not affect the do affect the
auditors opinion auditors opinion

Explanatory Paragraph Explanatory Paragraph and


Modified Wording

Types of
Standard Emphasis of a Matter Except for Disclaimer Adverse Audit
Opinion

Faculty of Accountancy, UiTMKampusPuncakAlam 245 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Elements ofStandard Unmodified Audit Report


Report title INDEPENDENT AUDITORS REPORT
Addressee TO THE MEMBERS OF XYZ BERHAD
Introductory We have audited the financial statements of XYZ Berhad, which comprise statement
paragraph of financial position as at 31 December 20XX, and statement of comprehensive
income, statement of changes in equity and statement of cash flows for the year
then ended, and a summary of significant accounting policies and other
explanatory information, as set out on pages AA to ZZ.
Directors The directors of the Company are responsible for the preparation of financial
responsibility statements so as to give a true and fair view in accordance with Malaysian
paragraph Financial Reporting Standards, International Financial Reporting Standards
and the requirements of the Companies Act 1965 in Malaysia. The directors are
also responsible for such internal control as the directors determine is necessary to
enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
Auditors Our responsibility is to express an opinion on these financial statements based on
responsibility our audit. We conducted our audit in accordance with approved standards on
paragraph auditing in Malaysia. Those standards require that we comply with ethical
(Scope requirements and plan and perform the audit to obtain reasonable assurance
paragraph) about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

amounts and disclosures in the financial statements. The procedures selected depend
on our judgment, including the assessment of risks of material misstatement of the
financial statements, whether due to fraud or error. In making those risk assessments,
we consider internal control relevant to the entitys preparation of financial
statements that give a true and fair view in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entitys internal control. An audit also includes evaluating
the appropriateness of accounting policies used and the reasonableness of
accounting estimates made by the directors, as well as evaluating the overall
presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our audit opinion.
Opinion In our opinion, the financial statements give a true and fair view of the financial
paragraph position of the Company as of 31 December 20XX and of its financial performance
and cash flows for the year then ended in accordance with Malaysian Financial
Reporting Standards, International Financial Reporting Standards and the
requirements of the Companies Act 1965 in Malaysia.

In accordance with the requirements of the Companies Act 1965 in Malaysia, we also
report that in our opinion the accounting and other records and the registers
required by the Act to be kept by the Company have been properly kept in
accordance with the provisions of the Act.

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Other matters This report is made solely to the members of the Company, as a body, in
(Re: Royal Bank accordance with Section 174 of the Companies Act 1965 in Malaysia and for no
of Scotland Plc) other purpose. We do not assume responsibility to any other person for the
content of this report.
Name and (Audit Firm)
signature of [AF: 8888]
o chartered Chartered Accountants
accounting
firm, and (Partner)
o auditor [9999/9/99 (J/PH)]
Chartered Accountant
Date Date
Address [Location in the country]

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Elements of Conditions for


Standard Unmodified Audit Report Unmodified Audit Report
Report title
Addressee
Introductory paragraph All Statement
Directors responsibility paragraph International Standards on Auditing
Auditors responsibility paragraph (Scope Standards of Fieldwork havebeen Met
paragraph)
o Understand the entity and its environment.
Opinion paragraph
o Sufficient appropriate audit evidence.
Other matters (Re: Royal Bank of Scotland Plc)
Financial Reporting Standards True and Fair View
Name and signature of
o chartered accounting firm, and No Circumstances for Explanatory Paragraph or
o auditor Modified Wording
Date
Address

Faculty of Accountancy, UiTMKampusPuncakAlam 249 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Standard Unqualified Auditors Report = Clean report


The auditor concludes that the financial statements give a true and fair view in accordance with
the approved accounting standards.
The audit has been performed in accordance with the approved standards on auditing.
Basic elements of an auditors report:
o Report title
o Addressee
o Introductory paragraph
o Responsibility paragraph
Managements responsibility
Auditors responsibility (Scope paragraph)
o Opinion paragraph
o Other matters (Re: Royal Bank of Scotland Plc)
o [No explanatory paragraph]
o Name and signature
Chartered Accounting Firm
Auditor
o Date
o Address

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Nature of Matter Giving Rise to the Modification

Inability to obtain sufficient appropriate audit evidence (Scope limitation)


Financial statements are materially misstated (Disagreement)

Modified Auditors Report

Circumstances:
Inability to Obtain Sufficient Appropriate Audit Evidence (Limitation on Scope)
o Lack of audit evidence
o Auditors inability to obtain the information or explanations that are considered necessary
for the purpose of audit may be imposed
by the company, or
by circumstances
Financial Statements are Materially Misstated (Disagreement with Management)
o Non-compliance with approved accounting standards
o Auditor disagrees with management about the
Selection of accounting policies
Method of applying the accounting policies
Adequacy of disclosures

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

cont'd

Material Material and Pervasive

Qualified, Except for Disclaimer Adverse

Either due to limitation on Due to limitation on Due to disagreement


scope or disagreement scope Auditor is of the opinion
Auditor is of the opinion Auditor has not been able that the financial
that the overall financial to obtain sufficient statements as a whole is
statements give a true and appropriate evidence to misleading, hence do not
fair view form an opinion on the give a true and fair view
overall financial in accordance with
statements approved accounting
standards

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Unmodified Auditors Reportwith Emphasis of a Matter

An explanatory paragraph is added to highlight a matter which is included in the note to the
financial statements.
The note to the financial statements which the auditor makes reference to in his report has
been properly presented or disclosed in accordance to approved accounting standards.
If not properly presented or disclosed, a disagreement exists:
o Qualified opinion, or
o Adverse opinion
Circumstances:
o Going concern uncertainty
o Non-compliance with an approved accounting standard but the auditor concurs

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Types of Modified Auditors Report

Circumstances Material Material & Pervasive


Inability to Obtain Sufficient Appropriate Except for Disclaimer
Audit Evidence
Financial Statements are Materially Misstated Except for Adverse
(Has obtained sufficient appropriate audit
evidence)

* Pervasive:
Misstatements that are not confined to specific accounts
o Sales x Accounts Receivable x Cash Receipts x Inventory x Net Profit
Misstatements that are confined to specific accounts, and the accounts represent a substantial
proportion of the financial statements
o Inventory x (Net Profit Net Loss)

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FINAL EXAMINATION Topic 9 & 10

January 2013 (Question 3)

B. The International Standard on Auditing (ISA) 570 deals with the auditors
responsibilities in relation to management use of the going concern assumption in the
preparation of the financial statements.

Required:

Explain four (4) procedures that an auditor should carry out to ascertain whether an
entity is a going concern.
(6 marks)

January 2013 (Question 2)

A. You are the senior-in-charge for the audit of Aropluz Travel Sdn Bhd, a travel agent
that provides domestic and international travel arrangements for its customers. You
have completed the field work and now in the midst of finalizing the audit. The
financial year end is 31 October 2012. The following information are to be taken into
consideration:

1. The management has not paid the staff salary for the month of October 2012
amounted to RM35,000. The information was made known to you by the
accounts clerk during the interview session with her on 18 November 2012.
According to the clerk, the salaries are to be paid together with the bonus at the
end of the month.

2. The Board resolution dated 29 October 2012 stated that the company has
agreed to acquire one (1) luxury bus for the purpose of travelling in Malaysia and
neighbouring countries. The cost of acquiring the bus as stated in the resolution
was approximately RM450,000. It was also agreed in the meeting that the bus
will be purchased from Mercedez-Benz Malaysia Sdn Bhd.

Required:

i. Explain four (4) audit procedures on each situation that will enable the auditor to
understand of the above situations.
(6 marks)

ii. Describe the accounting treatment for each of the event.


(4 marks)

iii. Indicate and explain the type of audit report that you would issue for Aropluz
Travel Sdn Bhd.
(4 marks)

1
June 2013 (Question 4)

A. In completing the audit, the auditor considers a number of additional audit issues such
as opening balances, comparative figures, accounting estimates and related party
transactions that do not normally pertain to specific business process or financial
statement items.

Required:

i. Explain what is accounting estimates (with examples) and how it affects the
financial statements.
(4 marks)

ii. Briefly describe the audit objective and audit procedures for the audit of related
parties transactions.
(6 marks)

December 2013 (Question 4)

B. Arisa & Co. is the auditor for Warisan Sdn Bhd, a large construction company. During
the audit for the year ended 31 December 2012, you were informed by the managing
director that the company has recently lost a major government contract. You know
that Warisans projections include a fifty percent of cash inflows from this contract. The
company has been experiencing some cash flow difficulties, although this is not
unusual in the industry. Management has recently fully extended their bank credit
facility in order to pay day-to-day expenses. The audit partner is concerned that the
company may be facing going concern problems, but the managing director maintains
that they intend to cut back future capital expenditure to alleviate the going concern
issue.

Required:

i. State SIX (6) indicators of a financial nature that may raise doubt on an entitys
ability to continue as a going concern.
(3 marks)

ii. In addition to the plan of action mentioned by the managing director, identify
THREE (3) possible mitigating factors that may help the company to alleviate its
going concern problem.
(3 marks)

C. The objective of an audit of financial statements is to enable the auditor to express an


opinion on the financial statements. The auditor expresses his opinion in the form of a
report which is referred to as the auditors report.

Required:

Consider the following unrelated situations. Explain and justify the types of audit
opinion that should be issued for each of the following situations:

i. Warna Sdn Bhd a subsidiary of Pelangi Bhd. For the year ended 31 December
2012, Warna has incurred a net loss of RM5 million. The only liability is the
amount due to Pelangi of which the holding company gave assurance that it will
not demand payment within the next 12 months. This matter was adequately
disclosed in the notes to the accounts.

2
ii. Ceria Berhad used first-in-first-out method to value its inventory. However, from
financial year 2011 onwards, the company decided to change the valuation of its
inventory to weighted average method. The auditor requested for the
comparative figure for 2010 but management refused to give their cooperation.

iii. Recently, one of the audit clients, Afizie Sdn Bhd moved to a new office. In the
process, some of the boxes containing the sales journal and customers invoices
were lost. No further supporting documents were kept by the client.
(6 marks)

June 2014 (Question 3)

A. AZ & Co. is the auditor of Bumi Jaya Sdn Bhd (BJSB) for the year ended 31 October
2013. At the end of the audit, a management representation letter is obtained from
client. The partner plans to sign the audit report on 2 January 2014. Sunrise Bhd, one
of BJSB significant customers is found to have huge debt which is partly collectible as
at 31 October 2013. Subsequently on 20 December 2013, Sunrise Bhd is found
liquidated.

Required:

i. Explain two (2) purposes of obtaining the management representation letter.


(3 marks)

ii. Explain the objectives of identifying subsequent events.


(3 marks)

iii. Describe the required accounting treatment and the auditors responsibility for
the subsequent event mentioned in the above case.
(3 marks)

iv. Explain three (3) audit procedures the auditor should perform to identify the
subsequent events stated above.
(3 marks)

December 2014 (Question4)

B. Audit report is the end product of audit, where it communicates the auditors opinion
about the fairness of the financial statements. Audit opinion may be an unmodified
audit opinion and modified audit opinion. Also there are several types of modified audit
opinion.

Required:

Explain under what circumstances the auditor issue an unmodified audit opinion and
modified audit opinion.
(4 marks)

3
C. i. ISA 560 Para 2 stated that the financial statements may be affected by certain
events that occur after the date of the financial statements. The events occur
after the date of financial statement referred to as subsequent events.

Required:

Describe the four (4) audit procedures that the auditor should perform in
identifying these subsequent events.
(6 marks)

ii. The auditor, Ammar, is about to complete the audit work of a client company,
Ridda Bhd (Ridda) for the year ended 30 November 2014. Before finalizing the
audit opinion, Ammar discovered the following:

a. On 4 December 2014, the company had entered into a purchase


agreement to buy inventories from Vietnam. The total amount involved was
RM500,000. On 2 January, the carrier that shipped the inventories had
collided with another ship. Most of the inventories were damaged and sunk
into the sea. The goods were insured and the insurance company agreed
to provide compensation. However, the amount is still undecided.

b. One of Ridda customers, ABAC Sdn Bhd (ABAC) was charged by the court
for failing to provide quality products and was facing serious a warranty
claim. On 10 December 2014, ABAC was declared bankrupt and the
amount owing by ABAC RM350,000 would be irrecoverable.

Required:

For each of the independent situations given, identify the type of the subsequent
event and provides reasons for your answer.
(4 marks)

June 2015 (Question 3)

A. ISA 510 Initial Audit Engagements Opening Balances requires auditor to undertake
additional audit procedures for confirming opening balances for new audit
engagements. In addition, the ISA gives guidance on audit report implications if
auditors are unable to confirm opening balances or if they contain misstatements.

Required:

i. Describe the procedures that the auditor should undertake to confirm opening
balances for a new audit engagement.
(4 marks)

ii. Explain the impact on the audit report if the auditor is unable to confirm the
opening balances, or if the opening balances contain misstatements.
(2 marks)

4
B. Required:

Describe the auditors responsibility for subsequent events occurring between:

i. The year-end date and the date the auditors report is signed; and

ii. The date the auditors report is signed and the date the financial statements are
issued.
(6 marks)

December 2015 (Question 3)

A. ISA 560 Subsequent Events emphasizes that auditor should consider the effect of
subsequent events on the financial statement.

Required:

i. Distinguish between the two types of subsequent events and provide two (2)
examples for each type of event.
(6 marks)

ii. Discuss the circumstances that allow auditor to issue an unmodified report.
(4 marks)

5
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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

TOPIC 11 GROUP AUDIT

RELATED PARTY TRANSACTIONS(pp.173-174; pp.562-563)


Auditors have to be alert for related party transactions.
o How?
Identify related party.
o When?
During the planning phase.
o Why?
Transactions, transfer of resources, services or obligations between related parties
may not be at fair values, either higher or lower than market value, or at no price.
Disclose related party transactions.

Types of related party, e.g.


o Party that controls or are controlled by the reporting entity holding and subsidiary.
o Party that exercises significant influence, or are subject to significant influence by
reporting entity holding and associate.
o Substantial shareholders of the reporting entity, and close members of the family of
such individuals.
o Key management personnel and their close family members.

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Related Parties

Holding
Company

Subsidiary Subsidiary Associate


Company Company Company

Substantial Key
Shareholders and Management and
Close Family Close Family
Member Member

Reporting
Company

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Audit Procedures

Evaluate the clients accounting system and internal control for identifying related parties.
Obtain a list of related parties.
Review filings with the Securities Commission.
Review minutes
Review conflict-of-interest statements from management.
Review the extent and nature of business transacted with major customers, suppliers etc.
Review accounting records for large, unusual, or nonrecurring transactions.
Review confirmations of loans receivable and payable for indications of guarantees.

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Group

Structure of a Related Company

Holding Hs Financial Statements


Company (H) Consolidated Financial
Statements

Subsidiary SC1s Subsidiary SC2s


Company (SC1) Financial Company (SC2) Financial
Statements Statements

Sub-Subsidiary SSC1s Sub-Subsidiary SSC2s


Company (SSC2) Financial Company (SSC2) Financial
Statements Statements

Faculty of Accountancy, UiTMKampusPuncakAlam 260 [March 2016]


AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Types of Auditors for Group Audit

Appointment as principal auditor.


Planning and controlling group audit.
Audit procedures:
o Investment acquisition and disposal.
o Related party transactions.
o Inter-company balances.
o Goodwill on consolidation impairment.
Responsibilities of primary and other auditors.
Procedures to be considered when using the work of other auditors.
Implications on group audit report when the opinion on a subsidiary is modified.

Faculty of Accountancy, UiTMKampusPuncakAlam 261 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Holding company auditor (principal auditor) Subsidiary company auditor (other auditor)
Responsible to audit both the Only responsible to audit the respective
o Holding companys financial o Subsidiary companys financial
statements, and statements, or
o Consolidated financial statements. o Sub-Subsidiary companys financial
Rights statements.
o Access to the accounting and other
records of subsidiary company.
o Obtain information and explanations Who is the other auditor?
from the officers or auditors of o Affiliated firm (a firm being in close
subsidiary company. formal association with principal
o Obtain information and explanations auditor)
from the officers or auditors of o Unrelated firm
related company.

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Reporting on Consolidated Financial Statements


Hs Auditors
o Fully responsible for the audit report on consolidated financial statements.
o Determine the subsidiarys auditors report, either unmodified or modified.
If modified, determine the nature and significance of the circumstances that lead to a
departure from unmodified report in relation to the overall consolidated financial statements:
Immaterial no reference is made in the auditors report.
Material reference is made in the auditors report.

All Subsidiaries Audited by Hs Auditors Not All Subsidiaries Audited by Hs Auditors


Hs Auditors express an opinion on the Hs Auditors express an opinion the group
group financial statements as a whole. financial statements as a whole.
Satisfied that Ss financial statements are in Satisfied that Ss financial statements are in
form and content appropriate and proper for form and content appropriate and proper for
consolidation. consolidation.
Received satisfactory information and Received satisfactory information and
explanations as required for consolidation. explanations as required for consolidation.
Subsidiaries not acted as auditor:
o State the name of subsidiaries.
o Has considered the financial statements
and auditors reports of the subsidiaries.

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Rely on the Work of Other Auditor

The independence of other auditor


The competency of other auditor
o Professional membership
o Ethics
o Training
o Audit methodologies
Communicate at the planning stage
o Accounting, auditing, and legal requirements
o Areas of significant risks
o Areas of special consideration intercompany transactions
The work of other auditor
o Sufficient appropriate evidence for group audit
o If evidence is sufficient appropriate for group audit no additional procedures
Risk of material misstatements at group audit

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

TOPIC 12 USING THE WORK OF OTHERS

Others
o Other auditors in group audit
o Internal auditor
o Expert

Expert

Engaged/ employed by Engaged/ employed by


o Auditor o Client

Expert a person possess special skill, knowledge and experience in a particular field other
than accounting and auditing.

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AU
UD610 AUDIT AND
A ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Plannin
ng to use thhe work off expert
o Thhe materiaality of the items in financial
fi statements, e.g. inventtory, valuaation of pro
operty
Inventoory
Coonstructionn aggregatte sand, gravel,
g cruushed stonee
Prrecious meetal
Mineral
M
Tiimber
o Thhe risk of m
material misstatemen
m nt naturee and compplexity
o Reliability
R oof clients evidence

Some assertions
a require exp
perts evid
dences
o Allocation/
A Measurem ment Cut--off of a prroject, Perccentage off completio
on
o Valuation
V Quantity of
o inventorry

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mpusPuncakAlam
m 266 [M
March 2016]
AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Considering the Work of Expert


Expert is professional competent to take up the engagement
o License
o Professional membership
o Experience and reputation
Objectivity of the expert
o Impaired when employed by the client or related to the client
Term of reference, i.e. scope definition quantity/ quantity x value (cost/ NRV)
Willingness of the expert to discuss on the work
o The auditor does not have the same expertise and knowledge with the expert
o Discuss on the assumption and method used by the expert to determine the
reasonableness of the value

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

TOPIC 13 INTERNAL AUDITING

Internal Auditor

As organizations grew in size and complexity and developed geographically dispersed


operations, internal auditing developed to help organizations, as managers in upper level of
authority in the organizational structure, could no longer personally observe all operations.

Traditional Modern
Assurance financial statements Effectiveness:
Risk management
Control
Governance process
Junior sibling of accounting profession Distinctive discipline/ profession
Adversary to auditee Ally

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Types of Internal Auditing

Operational audit/ performance audit/ Examine control procedures for deficiencies/


value for money audit improvement.
Programme audit/ performance audit/ Evaluate the attainment of a projects objective
management audit
Fraud Audit Proactive approach for evidence of fraud
Ethical business practices audit Compliance to codes of ethics and conduct
Compliance audit Compliance to internal rules and procedures/ external
laws and regulations
Information technology audit Appraisal and testing of IT system through SDLC
Control self-assessment audit Control risk exposure
Financial audit Reliability of financial records and reporting

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Definition of Internal Auditing

Internal auditing is an independent, objectiveassurance and consulting activity designed to


add value and improve an organization's operations. It helps an organization accomplish its
objectives by bringing a systematic, disciplined approach to evaluate and improve the
effectiveness of risk management, control, and governance processes.

independence, objective

o Independent autonomous, not influenced by others or outside forces;


freedom audit and assurance scope and to perform the
appropriate scope of work.

Non-involvement in the day-to-day operation


Direct access, report directly to the audit committee
Appointment and termination are approved by the audit committee
Periodic rotation of staff assignment

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

o Objective = f (unbiased, no conflict of interest, no undue influence)


Unlike the restrictive concept of independent, objective holds
connotation in that the concept allows auditors to be more
responsive to their customers

o The internal auditor adds value through the objective analyses and recommendation for
improvement

assurance and consulting activity

o Activity a specified pursuit;


Function = f (specific occupation, assigned duty)
The term activity allows for internal audit services to be provided by individuals not
employed by the organization. In doing so, the term activity acknowledges that
outsourcing has become a viable alternative for organizations seeking quality internal audit
services.

o The goal of assurance service is to improve information so that decision makers can make
more informed, and presumably better decisions. Assurance services provide opinions that
reduce the information risk (risk that comes from incorrect information).

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

o Explicit recognition of the consulting role of internal auditing means that the full range of
services being provided by the majority of internal audit function is acknowledged.
add value and improve
o Adding value and improving emphasizes the profession commitment to serving the needs
of the organization.
o Assurance and consulting services provide value by improving opportunities to achieve
organizational objectives, identifying operational improvement, and/or reducing risk
exposure
systematic, disciplined approach
o Systematic carried on using step-by-step procedures
o Discipline knowledgeable; well-trained
effectiveness of risk management, control, and governance process
o Risk The possibility of suffering harm or loss
o Risk management the identification, assessment, and prioritization of risks (the effect of
uncertainty on objectives)
o Control Prevent and detect misstatements (resulting from fraud and error)
o Governance Law and regulation

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Internal Auditing vs. External Auditing


Internal Auditors External Auditors
Reporting To Board of Directors/ Audit To the company (shareholders,
responsibilities Committee collectively)
Objectives Managements terms of CA 1965, Opinion True and fair view
Rights and duties reference CA 1965, S. 174
Status Staff/ Outsource Independent
Risk management,
Responsibility Control, and Financial statements
Governance process
Fraud Important Incidental
Qualification ? Accountancy
Considering the Work of Internal Auditor
Technical competence The skill and expertise of the internal auditor.
Professional due care The process of internal audit with due care, i.e. proper planned,
supervision, review and documentations
Scope of work Audit evidence obtained is sufficient and appropriate for
external auditor to form an opinion
The documentation on planning of internal auditor
Sample size selected by internal auditor

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

The Governance Partners of Internal Auditors

Audit Committee Board of Directors


Oversight of A body of elected or appointed
financial reporting and disclosure members who jointly oversee the
activities of a company

Internal Auditors
Assurance and Consulting

Senior Management/
Executive Management/
External Auditors Management Team
Independent Directly responsible for managing
of mind and in appearance a company on a day-to-day basis

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Boards of Directors Audit Committee Shareholders Regulators

Management Internal Audit External Auditor

The duties of the Audit Committee are:

To recommend the appointment of external auditors, the audit fee, and any other terms of
engagement.
To discuss with the external auditors on the audit plan and scope of audit.
Ensure co-ordination of audit where more than one audit firm is involved.
Review the half year and annual financial statement and focus on:
o going concern assumption
o compliance with accounting standards and regulatory requirements
o changes in accounting policies and practices
o significant issues arising from audit
Discuss with the external auditors on the problems and reservations arising from the annual audits.
To review the external auditors management letter and managements response thereto.
To review any related party transaction and conflict of interest situation that may arise within
the Company and the Group.

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

To consider the appointment of independent advisers for corporate proposals involving related
parties.
Review the internal audit program.
To establish the following with the internal audit function:
o review the adequacy of the scope, functions and resources of the internal audit function
and that it has the necessary authority to carry out its work
o ensure co-ordination of external audit with internal audit
o consider the major findings of internal audit reviews/investigations and managements
response, and
o ensure that appropriate actions are taken on the recommendations of the internal audit
function
To assess the quality and effectiveness of the system of internal control and efficiency of
operations, and to review the risk policy and implementation of the risk management
framework.
To review any appraisal or assessment of the performance of the members of the internal audit
function, approve any appointment or termination of senior staff members of the internal audit
function and be informed of any resignation of internal audit staff members and reasons thereof.
To perform any other such function as may be agreed to by the Audit Committee and the Board.

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

TOPIC 14 AUDIT RELATED SERVICES

Assurance Non-Assurance
Services Services

Attestation Accounting and


Services Bookkeeping

Management Tax
Audits Consulting Services
(high assurance) the primary goal,
to improve the Management Consulting
Reviews quality of to generate recommendations
(limited assurance) information for
decision makers.
Forensic Accounting/
Fraud Examination

Financial ISO
Forecasts Certification

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Assurance Services
Independent Add Credibility Quality Information Confident Decision Making

Types of Assurance Services


Reasonable Assurance Limited Assurance
e.g. Audit of Financial Statements(AUD610) e.g. Review of Financial Statements
Reduce Risk to an acceptable level Reduce risk to an acceptable level
VL, L, M VL, L, M. BUT, the risk surrounding the
financial statement is HIGHER.
Audit Evidence: WHY? Reduced and limited evidence:
o Inspection o Inspection
o Documentation o Documentation
o Inquiry o Inquiry Client
o Computation o Computation Analytical Review

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Elements of an Assurance Services


Three party relationship Preparers Users, Professional
Subject matter Financial Statements
Established criteria Standards
Evidence Inspection, Documentation, Inquiry, Computation
Report True and Fair View

Review of Financial Statements


ISRE 2400 the principles and essential procedures
Assurance service, but not an auditor
Knowledge of Business + Risk Assessment Materiality Limited Evidence Report
Review Report
o Unqualified Review Report True and Fair View, in accordance with FRS
o Attestation Conclusion in negative form (p.724);
{Audit Report conclusion in a form of opinion}
Modified Review Report (p.725)

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Financial Forecasts and Projections


ISRE 3400 the principles and essential procedures
To enhance the credibility of assumptions.
Financial forecasts prospective financial information that presents an entitys expected
results of operations or financial performance.
o Assumption best estimate (real, judge to be probable), need to be reasonable
Financial projections prospective financial information that presents an entitys expected
results of operations or financial position.
o Assumption hypothetical (what if)
Procedures to determine the basis of assumption:
o Knowledge of business
o Sufficient appropriate evidence budget, forecasts, management accounts, latest interim
reports, audited historical financial statements
Reporting on the assumption Conclusion in a negative form
Reporting on the prospective financial information Conclusion in a positive form
General distribution Prospectus (prepare in accordance to requirement of SC,
BursaMalaysia, CA 1965)
Limited distribution negotiating for bank loan, capital investment, acquisition of business

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

(p.734)

No Limited Reasonable Absolute


Assurance Assurance Assurance Assurance

Compilation & Review Audit Impossible


Agreed Upon Procedures

Non-Assurance Engagement
No assurance is expressed
Users draw their own conclusion and derive their own level of assurance from the report of
factual findings

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Agreed-Upon Procedures
ISRS 4400 the principles and essential procedures
Report of actual findings based on specific procedures performed on financial or other
information
Financial information = An item in financial statements; A component of financial
statements; A complete set of financial statements
Specific procedures
o Evidence are basically of an audit nature
Inspection
Documentation
Inquiry
Computation
o The accountant and the client understood and agreed to the procedures
o Wide ranging and no standards procedures
o Client has a say in the scope of work and nature of procedures
o AUP engagement letter (p.735, Table 21.3)
Report
o No opinion, No assurance
o Describes the findings
o Contents (p.736)

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Compilation
ISRS 4410 the principles and essential procedures
Nature of client partnership, sole proprietorship; not mandatory for annual audit
E.g. preparation of
o Accounts and financial statements
o Tax returns
o Other financial documents
Do not give technical advice
Do not assess or verify the reliability and completeness of the information
Inquire and request for additional information, if aware that information supplied by
management is incorrect or incomplete.
Procedures = Collecting Classifying Summarizing
Accounting policies need to be applied accordingly and ensure free from obvious error, e.g.
mathematical or clerical mistakes

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FINAL EXAMINATION Topic 11, 12, 13 & 14

January 2013 (Question 3)

C. The purpose of International Standard on Review Engagements (ISRE) is to establish


standards and provide guidance on the practitioners professional responsibilities when
a practitioner, who is not the auditor of an entity, undertakes an engagement to review
the financial statements. The standard also includes the form and content of report that
the practitioner issues in connection with such a review.

Required:

Briefly discuss four (4) examples of inquiries made during a review engagement.
(6 marks)

January 2013 (Question 4)

B. The International Standards on Auditing (ISA) 600 applies to group audits and deals
with special considerations that apply to group audits, in particular those that involve
component auditors. The group engagement partner (principal auditor) decides
whether the group engagement team or a component auditor performs the work on the
financial information of a component.

Required:

i. Describe any four (4) factors to be considered by the group engagement partner
(principal auditor) when planning to rely on the work of component auditor.
(6 marks)

ii. In evaluating the work of the component auditors, the group engagement partner
(principal auditor) would advise the component auditors on certain issues.

Required:

Briefly describe three (3) of the issues addressed by the group engagement
partner (principal auditor) to the components auditors.
(6 marks)

June 2013 (Question 3)

C. Providing assurance services other than statutory audit is no longer new to most audit
firms. These services are intended to enhance the degree of confidence of the
intended users about certain subject matter.

Required:

Discuss the differences between review of financial information and agreed-upon


procedures. (Your discussion should cover the definition, comparative level of
assurance and the report to be provided by each of the services).
(6 marks)

1
December 2013 (Question 3)

A. Internal auditors' roles include monitoring, assessing, and analyzing organizational risk
and controls; and reviewing and confirming information and compliance with policies,
procedures, and laws. Thus, the work of internal auditor complements the work of the
external auditor.

Required:
Explain any FOUR (4) factors that might be considered by the external auditor in
accepting the work of the internal auditor.
(6 marks)

June 2014 (Question 4)

A. Internal audit is an appraisal activity established or provided as a service to the entity.

Required:
Briefly discuss the importance of effective internal audit function in order to achieve
good corporate governance.
(4 marks)

B. You are the manager responsible for the audit of Perusahaan Bersatu Bhd, a
manufacturing company with a year ended 31 December 2013. In the previous years,
several investment properties have been purchased to provide rental income. The
properties have been revalued at the year-end in accordance with FRS 140
Investment Property. The properties have been recognised on the balance sheet at a
fair value of RM8 million, and the total assets of Perusahaan Bersatu Bhd are RM160
million at 31 December 2013. An external valuer has been appointed to determine the
fair value for each property.

Required:
Explain the factors need to be considered before placing any reliance on the work of
the external valuer.
(6 marks)

December 2014 (Question 4)

A. ISA 600 deals with Audit of Group Financial Statements. A component auditor may be
required by statute, regulation or for another reason, to express an audit opinion on the
financial statements of a component. The group engagement team may decide to use
the audit evidence on which the audit opinion on the financial statements of the
component is based to provide audit evidence for the group audit. The group
engagement partner is not only responsible for the direction, supervision and
performance of the group audit engagement but may also consider whether the group
engagement team may be required to be involved in the work of the component
auditor

Required:
Explain the three (3) factors that may affect the group engagement teams involvement
in the work of the component auditor.
(6 marks)

2
June 2015 (Question 4)

B. High Lo Industries Bhd is considering establishing an internal audit (IA) department


next year. The finance director has asked whether the work performed by the IA
department can be relied upon by Bakar & Partners.

Required:

Explain the factors that should be considered by an external auditor before reliance
can be placed on the work performed by a companys internal audit department.
(6 marks)

C. The International Standard on Assurance Engagements 3000 (ISAE 3000) deals with
assurance engagements other than audits or reviews of historical financial information.

Required:

Explain the objectives of Assurance Engagement as stated in ISAE 3000.


(4 marks)

December 2015 (Question 4)

A. ISA 600 deals with group audit highlighting duties of group engagement partner and
their coordination with the component auditors. This ISA requires the group
engagement partner to obtain satisfaction on the work performed by the component
auditor.

Required:

i. Explain your understanding of Group Audit.


(2 marks)

ii. Discuss the challenges for the group engagement partner in planning and
performing the group audit.
(6 marks)

3
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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

TOPIC 15 OTHER SERVICES

DISCUSSIONTOPICS

Secretarial
Consultation
services

Due Taxation
diligence

Forensic Other
Auditing Accounting
Services:

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Oftenconductedtoobtainordevelop
informationaslegalevidenceorforuse
Other byexpertwitnessesinthecourtoflaw
Services:
Requirestheuseofcriticalanalysesand
investigativeskills,integratedwithaccounting
knowledgeandbusinessexperience
Requiredtoreporttothecompanythathas
appointedhim/herinthecaseofaregulatory
body(e.g.BursaMalaysiaorMinistry)tothe
Forensic committeesetupforthatpurpose
Auditing
Requiredpersonnelwhoaretrainedin
detecting,investigatinganddeterring
fraudandwhitecollarcrime

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

DEFINITION

An inquiry into the financial affairs of a business including


the examination of its audited accounts for recent years
Other and its current and estimated future position, as it will
Services: enable the investigating accountant to ascertain and
marshal in his report the information relevant to the
purpose of his enquiries and to give recommendations and
conclusions based on this information.

Businessoremployeefraud
Criminalinvestigations
Example:
EXAMPLES
Forensic
Auditing Shareholderandpartnershipdispute
Businesseconomiclosses
Prospectusreports
Purchaseofsharesinaprivatecompanyor
partnership
Requestforloan
Investigationsunderstatutes

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Other Forensic
STAGEOFAUDIT Auditing
Services:

3.Assessingtheaims
1.Instruction 2.Communicate
andprobablescopeof
fromclient withtheauditors
theinvestigations

5.Decidingthe 4.Obtaining
6.Fact
outlineofthe background
gathering
auditreport information

7.Drafting 8.Clearingthedraftreport
theaudit withthecompanybeing
report investigated

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Other Forensic
STAGEOFAUDIT Auditing
Services:

Written and establish the aim and scope of assignment


Who is the beneficiary of the report, confidentiality
1. issues, schedule of investigations and reasons for any
Instruction limitations imposed
fromclient If no or incomplete instructions, the accountant should
sent a letter of engagement to the client confirming any
oral instructions or terms of reference given by the client

If investigating accountant is not the auditor, he


should make arrangements to ensure that the
2. auditors are informed of the impending
Communicate investigation and to communicate with the auditors
withthe as a matter of professional courtesy
auditors This is because the investigating accountant will
require information from the auditors when
conducting the investigation

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Other Forensic
STAGEOFAUDIT Auditing
Services:

3.
Assessingthe Assess whether you can achieve the aim and
aimsand assess whether the scope of investigation can be
probablescope covered
ofthe
investigations

4.
Obtaining Preliminary visits to be made to gain an overall
background appreciation of the situation
information

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Other Forensic
STAGEOFAUDIT Auditing
Services:

5.
Deciding Important to draft the main and subheading of the report
the as this will help him guide the direction of the investigation,
outlineof facilitates the control of the staff and provides a framework
theaudit for the final reporting writing.
report

6. Facts that gathered during the visit are to be compared


Fact and analyzed
gathering Prepare detailed listing of important and critical points

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Other Forensic
STAGEOFAUDIT Auditing
Services:

7.
Drafting
the The work should be completed in parts
audit Once work completed should write report
report

8.
Clearingthe All factual parts of the draft report to be cleared with
draftreport the company to be investigated
withthe This help to eliminate any minor inaccuracies and
company often leads to further points of importance and hence
being avoiding any disputes at a later stage.
investigated
Forensicaudit:Transmile

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Duediligenceauditisaprocessof
enquiryandinvestigationmadeonbehalf
Other ofaprospectivebuyeronapossible
Services: businessmergeroracquisition

ThescopeofduediligencerequirestheChartered
Accountantstoverifythestateofaffairofthe
targetedbusiness.Itrequirescomprehensivereview
andenquiry.Itisconductedinprudenceandin
accordancewithgenerallyacceptedpractices
Due Theauditorisrequiredtounderstandthe
diligence clientsneed,toavoidwrongaudit
proceduresbeingcarriedout.Therefore,
letterofengagementisnecessaryforthe
auditclienttoagreeonthescopeofaudit

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

AUDITPROCEDURES
Inthemostcases,willbesimilartostatutoryauditprocedures:

Reviewtheworkingpapersofpreviousauditors
Evaluatethevaluationoftheassetsofthecompany
ReviewIncomeStatementtodetermineaccuracyofprofits
Carryoutanalyticalreviewanddiscussunusualitems
Reviewinterimfigurestoevaluateaccuracyandpossibleachievementof
theforecastfigures
Useinterimandmanagementaccountingrecordstoassessbusinesstrends
Verifyallmaterialitemsinthebalancesheet
Reviewandreportthemanagementstructureandcorporatestructure
Reviewlitigationissues,contingentliabilities,commitments
Enquireifthecompanyfacinganyproblemrelatingtoitproductetc
Reviewstatutoryrecords DueDAjuma TilesSdn Bhd (Page3)

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Consultancyinpublicofferingofstock
Acquisitionofacompany
Ventureintonewbusiness
Developmentofnewproduct
Management Studyfornewlocationforbusiness
Consultationtoclient (restaurant)
verballyorinwriting: Developingtheinternalcontrol
proceduresfortheclients
Operationalimprovement,cost
reduction,processflowimprovementetc

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

SecretarialServices
Providesecretarialservicestoclients
Incorporationofnewcompany
Deregistrationofcompany
Windingupofcompany
Maintenanceofstatutorybooksandregisters
FillingstatutoryformsandreturntoCCMandother
regulatoryauthorities
Attendingmeetingandpreparationofminutes
Advicetheclientonthematterpertainingtothesecretarial

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

TAXATION

Compilationofreturn(onbehalfofclient):
CP204
FormCandtaxcomputation
FormR(Informationaboutsection108taxbalance)
FormEandEA(foremployerandemployee)

Taxplanning

Adviseclientonnewchanges(rate)andnewincentives

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

Providingaccountingjobtoclienton:
Monthlybasisoryearlybasisor
quarterlybasis

Analyzethefinancialinformationand
comparingtobudget,previousyearand
ACCOUNTING forunfavorabledifferences,provide
explanationformanagementdecision

Assistinpreparingpayrollcalculation
andetc

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TOPIC 16 ISSUES IN AUDIT

Expectation Gap
The expectation gap is the gap between the auditors actual standard of performance and the various
public expectations of auditors performance (as opposed to their required standard of performance).
Many members of the public expect that:
o auditors should accept prime responsibility for the financial statements,
o auditors certify financial statements,
o a clean opinion guarantees the accuracy of financial statements,
o auditors perform a 100% check,
o auditors should give early warning about the possibility of business failure, and
o auditors are supposed to detect fraud (See Wisconsin Law Journal article entitled, Why
Didn't Our Auditors Find the Fraud?).
Such public expectations of auditors, which go beyond the actual standard of performance by
auditors, have led to the term expectation gap.
Peer Review/ Practice Review
Peer review is a periodic outside review, performed by another accounting firm, of a firm's
quality control system in accounting and/or auditing.
Practice review is a periodic review, performed by regulatory body, in Malaysia by MIA.
Both peer and practice reviews are intended to maintain and improve the quality of the accounting
and/or auditing services performed by firms.

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ISSUES IN AUDIT SHARIAH AUDIT


Prepared by: SamsuwatdZuhaMohd Abbas

Audit in Al Quran

Numerous Quranic verses and Hadiths indicating audit process:

Then as for he who is given his record in his right hand, He will be judged with an easy account,
And return to his people in happiness.
(Surah al-Insyiqaq: Verses 6-9)

And indeed, [appointed] over you are keepers, Noble and recording; They know whatever you
do.
(Surah Al-Infithar: Verses 10-12)

And he took attendance of the birds and said, "Why do I not see the hoopoe or is he among
the absent? I will surelypunish him with a severe punishment or slaughter him unless he brings
me clear authorization.
(Surah al-Naml: Verses 20-21)

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Normal Audit Practice (Conventional Audit)

To ensure assertions about economic actions and events comply with relevant standards.

Audit from Islamic Perspective

Matters are audited to ensure compliance with Shariah rules and principles as decided by the
Shariah regulatory councils.

Bank Negara Malaysia (BNM) Shariah Governance Framework

The BNMs Shariah Governance Framework (SGF) was introduced in 2011 and the main content
of the SGF is the Shariah Audit Functions.

SGF defines Shariah Audit as a periodic assessment conducted from time to time, to provide an
independent assessment and objective assurance designed to add value and improve the degree
of compliance in relation to the business operations of Islamic Financial Institutions (IFIs) business
operations, with the main objective of ensuring a sound and effective internal control system for
Shariah compliance.

A shorter definitionThe Shariah Audit function is defined in the framework as an independent


assessment that is conducted on a periodical basis in order to improve the degree of compliance
and to ensure a sound and effective internal control system for Shariah compliance in the
institutions.

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The Shariah Audit approach has three levels.


1. Audit of IFIs financial statements;
2. Compliance audit of organizational structure, people and processes;
3. Review of the adequacy of the Shariah governance process, providing recommendations to
the Audit Committee and the Shariah Committee.
According to SGF, the Shariah Audit function is to be performed by internal auditors who have
adequate Shariah-related knowledge, skills and training. Their ultimate goal is to ensure a sound
and effective internal controls system for Shariah compliance. Internal auditors may also engage the
expertise of IFIs Shariah officers in performing the audit so long as the objectivity of the audit is not
compromised. IFIs may also appoint an external party to conduct a Shariah audit on their banking
operation. Moreover, Hood and Bucheery (1999) mentioned that the external auditors were reluctant
to undertake the responsibility of ensuring Shariah compliance due to lack of expertise.
Why Shariah Audit is needed?
1. To report the findings of Shariah compliance and non-compliance.
2. To assess the degree of non-compliance and its effect on the IFI as a whole.
3. To recommend corrective actions, improvement and rectifications necessary by the identified
persons in-charged with such corrective actions, improvement and rectifications.
The foundation of Shariah Audit is to report to ALLAH Authorities Shareholders Public.
Shariah Audit should not be regarded as one of the corporate governance practices only, but a
religious obligation on the Islamic financial institutions and Shariah auditors (Chik, 2011).

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AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

REFERENCES:

Bank Negara Malaysia (BNM).(2010). Shariah Governance Framework. Malaysia

Chik, Nazri, (2011) Shariah Division BIMB.

N. Kasim, S.H. Ibrahim, and M. Sulaiman, Shariah auditing in IFIs: Exploring the gap between the
desired and the actual, Global Economy & Finance Journal, vol. 2, no. 2, pp. 127-137, 2009

N. Kassim and Z.M Sanusi Emerging Issues for Auditing in Islamic Financial Institutions: Empirical
Evidence from Malaysia, Journal of Business and Management Vol 8, Issue 5, pp10-17, Mar-Apr
2013

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SAMPLE OF AAOIFIs SHARIAH AUDIT REPORT


(extracted from 15th IRTI Program in Islamic Finance by Assoc. Professor DrShahulHameed bin Mohamed Ibrahim)

In the name of Allah, The Beneficent, The Merciful


To the Shareholders of The Example Islamic Financial Institution
AssalamAlaikumWaRahmat Allah WaBarakatuh
In compliance with the letter of appointment, we are required to submit the following report:
We have reviewed the principles and the contracts relating to the transactions and applications introduced by the Example Islamic Financial
Institution during the period ended. We have also conducted our review to form an opinion as to whether the Example Islamic Financial
Institution has complied with Sharia Rules and Principles and also with the specific fatwas, rulings and guidelines issued by us.
The Example Islamic Financial Institutions management is responsible for ensuring that the financial institution conducts its business in
accordance with Islamic Sharia Rules and Principles. It is our responsibility to form an independent opinion, based on our review of the
operations of the Example Islamic Financial Institution, and to report to you.
We conducted our review which included examining, on a test basis of each type of transaction, the relevant documentation and procedures
adopted by the Example Islamic Financial Institution.
We planned and performed our review so as to obtain all the information and explanations which we considered necessary in order to
provide us with sufficient evidence to give reasonable assurance that the Example Islamic Financial Institution has not violated Islamic
Sharia Rules and Principles.
In our opinion:
a) the contracts, transactions and dealings entered into by the Example Islamic Financial Institution during the year ended ... that we have
reviewed are in compliance with the Islamic Sharia Rules and Principles;
b) the allocation of profit and charging of losses relating to investment accounts conform to the basis that had been approved by us in
accordance with Islamic Sharia Rules and Principles;
c) (where appropriate, the opinion paragraph shall also include the following matters:)
d) all earnings that have been realized from sources or by means prohibited by Islamic Sharia Rules and Principles have been disposed of
to charitable causes; and
e) the calculation of Zakah is in compliance with Islamic Sharia Rules and Principles.
We beg Allah the Almighty to grant us all the success and straight-forwardness.
WassalamAlaikumWaRahmat Allah WaBarakatuh
(Names and signature of the members of the Sharia supervisory board)
Place and Date
Faculty of Accountancy, UiTMKampusPuncakAlam 310 [March 2016]
AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

BY-LAWS AREAS OF CONTROVERSY

Multiple Services
Small audit firms providing multiple services to clients may affect independence.
For the firm, the same staff will do the accounting and auditing. Working paper should be
well documented and reviewed by engagement partner.
For the clients, they are comfort to deal with only one person in charge and considered
audit firm as one stop center for them.
Large and medium firms may not have this problem as they would have different departments
for accounting and auditing.

Low Balling
The practice of charging special rate for auditing job, and then obtains other services is known
as low balling.
Low balling involves intentionally underbidding, therefore independence is questionable.
Competition among accounting firms for audit clients may lead to discounted audit fees.

Opinion Shopping
Clients get second opinion from another auditor and sometimes put pressure on current
auditors. To solve, may be through communication between the two auditors.

Faculty of Accountancy, UiTMKampusPuncakAlam 311 [March 2016]

AUD610 AUDIT AND ASSURANCE SERVICES MOHD JOHARI MOHD ALWI & ZAINI AHMAD

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Faculty of Accountancy, UiTMKampusPuncakAlam 312 [March 2016]


FINAL EXAMINATION Short Questions

January 2013 (Question 1)

A. An auditor has statutory responsibilities under Section 174 Companies Act 1965.

Required:

State three (3) duties of the auditor as stated in the Act.


(3 marks)

B. Forensic audit is often conducted to obtain or develop information as legal evidence or


for use by expert witness in the court of law.

Required:

Define forensic audit and provide two (2) examples of forensic audit.
(4 marks)

C. Required:

Explain what is self-interest threat and give two (2) examples of circumstances that
create self-interest threat for a professional accountant in public practice.
(3 marks)

June 2013 (Question 1)

A. Required:

Briefly explain any two (2) Fundamental Principles of the MIA By-Laws (on
Professional Ethics, Conduct and Practice).
(3 marks)

B. There is a common misconception among many financial statements users that


auditing and assurance services are somehow synonymous.

Required:

Distinguish the term auditing from assurance engagement.


(3 marks)

C. Required:

What do you understand by the term Practice Review and Peer Review?
(4 marks)

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December 2013 (Question 1)

A. Required:

Explain any FOUR (4) fundamental principles contained in the MIA By-Laws (On
Professional Ethics, Conduct and Practice).
(4 marks)

B. Required:

Explain the following terms:

i. Due diligence
ii. Expectation Gap
iii. Forensic Audit
(6 marks)

June 2014 (Question 1)

A. i. Required:

List two (2) non-assurance services that may impair independence of an auditor.
(2 marks)

ii. Threats may be created by a broad range of relationships and circumstances.

Required:

Explain the following threats and provide an example of each threat.

a. Advocacy threat
b. Self-review threat
(4 marks)

B. Required:

Differentiate the following terms:

i. Agreed Upon Procedures


ii. Review of historical financial information
(4 marks)

December 2014 (Question 1)

A. As an auditor, there are times for certain assertions require an expert opinion and
involvement.

Required:

i. Define who is an Expert.


(1 mark)

ii. Provide two (2) examples of experts that may assist the auditor.
(2 marks)

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B. Required:
Explain the meaning of Shariah Audit.
(3 marks)
C. Required:
Explain the following fundamental principles:
i. Professional Behavior
ii. Objectivity
(4 marks)

June 2015 (Question 1)


A. Threats may be created by a broad range of relationships and circumstances. These
threats could compromise a professional accountants compliance with the
fundamental principles.
Required:
Explain any four (4) types of threats.
(4 marks)
B. The principle of confidentiality imposes an obligation on all professional accountants to
refrain from disclosing outside the firm and shall maintain confidentiality of information
disclosed by a prospective client or employer.
Required:
State any three (3) circumstances that allow the disclosure of clients confidential
information.
(3 marks)
C. The BNMs Shariah Governance Framework (SGF) introduced Shariah Audit in 2011.
Required:
State three (3) reasons the needs of Shariah Audit.
(3 marks)

December 2015 (Question 1)


A. Prospective financial information can be in the form of a forecast, a projection or a
combination of both. Differentiate between forecast and projection.
(3 marks)
B. A professional accountant shall comply with the following fundamental principles.
Explain the following fundamental principles:
i. Professional Competence and Due Care
ii. Confidentiality
(3 marks)
C. Auditors do provide other services to their client. Among the services include
accounting, taxation, forensic and due diligence. Define and provide two (2) examples
for the followings:
i. Forensic Audit
ii. Due diligence
(4 marks)

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FINAL EXAMINATION Case Study

January 2013 (Question 5)

Sallehuddin Ngah Mokhtar, Chartered Accountant, a partner in Salleh & Co has been in
practice for a number of years and he intends to expand his assurance services.

In order to promote the assurance services that Salleh & Co can provide, he sent circulars to
his existing audit clients and audit clients which were referred to by his associates.

As the business expands, he managed to move to a larger office and has inform his clients,
of the change of address in the newspaper

Sallehuddin managed to secure some of his assignments through referral made by his
associates. Upon receiving fee from the client. He will give certain percentage of the fees
received to his associates, who referred him the job, as a token of appreciation.

The firm recently secured Tawaran Baik Sdn Bhd (TBSB) as its audit client. The company
manages AM2PM Mart in the Centre Region of Perak. The company has been in operation
for almost ten years and has turned to a medium-size company.

With the expansion of the business, there seems to be problems in the operation of the mart.
The goods placed on the shelves are either not properly arranged, placing too many goods
on the shelves, goods are not replenished on time or the canned foods placed on the
shelves exceeded the expiry date.

The company currently did not use any computerized system on the inventory and
accounting system. There are only three (3) workers who arrange the goods on the shelves
and they also maintain the goods in the storeroom. There is only one accounts officer and
two accounts clerks who are responsible to maintain the books of accounts manually. No
one is responsible to maintain the stock card.

The management of TBSB did not have any intention to recruit more permanent staff to
cater for the business expansion but would opt for a systematic and organized computerized
inventory and accounting system. The staff has absolutely no knowledge on computerized
accounting system but will be given full access to the system.

TBSB financial year end is 31 October 2012.

Required:

a. Explain two (2) audit procedures that you would conduct to confirm the problems
mentioned by TBSB management.
(2 marks)

b. From the above case, explain the situations which violated the MIAs By-Laws.
(Indicate the MIAs By-Laws that have been violated)
(6 marks)

c. Describe the risk of material misstatements (RMM) to be addressed by the auditor in


planning the audit of TBSB for the financial year ended 31 October 2012.
(12 marks)

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d. Advice management on the potential benefits and risks of computerized information
system to an entitys internal control system.
(6 marks)

e. The presence of automated processing for significant accounting applications affects


how an entity implements its internal control. There are some factors within the control
environment that are affected by information technology.

Required:

Identify two (2) control environment factors in TBSB and explain how the control
environment should be implemented.
(4 marks)

June 2013 (Question 5)

Zubair has been accepted to join the internal audit department of Global Construction
Berhad (GCB), a medium-size construction company with the head office in Kuala Lumpur
and seven branches throughout the major cities in Malaysia. GCB is listed on Bursa
Malaysia and has reported net earnings of RM100 million and RM130 million for the financial
year 31 March 2012 and 31 March 2013 respectively.

After working with GCB for a few months, Zubair has identified the following unresolved
issues:

Issue 1

The board of directors (BOD) of GCB consists of eight members with experiences of
more than 10 years. Due to their expertise, four directors are paid three times higher
than the industrys average. Occasionally, some of the companys directors arranged
meetings with the senior officers of the company without the knowledge of the Chief
Executive Officer (CEO). Zubair also noticed that there is lack of communication
between the board members and the external auditors. In many cases, the BOD failed
to identify the problems in GCB.

Issue 2

The project controller, Miss Shaniza, discovered some accounting irregularities in the
projects proposed by Dato Malik, the companys director cum Project Manager. The
projects specifications do not meet the companys standards and breach the public
authority legislation. Miss Shaniza personally believes that the projects might have
adverse effects on the public and other stakeholders. She has been persuaded by
Dato Malik to alter and revise some of the accounting figures in order to make the
projects appear viable. Dato Malik is convinced that the projects will eventually
generate profits for the company. The company has a policy of rewarding employees
based on their contributions to the companys revenues. Dato Malik is Miss Shanizas
uncle.

Issue 3

Several accounting issues encountered by Zubair personally are:

1. Expenses for the Board of Directors family such as entertainment, hotel charges
and cleaning services have been charged to the companys expenses account.

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2. There are overdue account receivables from a few companies but no further
actions have been taken by the management. These companies have been
sponsoring many events organized by the company.

3. It has been the companys policy that any withdrawals, regardless of the amount,
to be signed by the Finance Manager, who has been employed since the first
day of the companys establishment. Nobody in the company has ever
questioned his integrity as he is seen to be a workaholic and seldom takes his
annual leave.

4. Most of the junior employees in the accounting department lack experience and
are not aware of GCBs accounting principles and procedures.

Issue 4

The external auditor who performed the audit for the financial year ended 31 March
2013 has raised his concern over the insufficient allowance for doubtful debts.
Discussion with the CEO revealed that he is aware of the issue, but is reluctant to
increase the allowance because of the adverse effect towards the companys profit.
The CEO is willing to take full responsibility of any misstatements and insisted that the
auditor ignore the issue. The external auditor agreed to the management request and
is aware of the risk associated with issuing an unqualified opinion on misstated
financial statements.

The decision was partly influenced by the fact that GCB is one of the auditors main
clients, whose audit fee contributes to more than 20% of the auditors annual earnings.
The CEO had once threatened to replace the existing auditor if the issue is highlighted
in the auditors report.

Required:

a. Define fraudulent financial reporting.


(2 marks)

b. The fraud diamond approach has been used in many fraudulent financial reporting
cases.

Required

Explain, with example, the fraud diamond.


(6 marks)

c. Identify and describe six (6) indicators of fraudulent activities that have been
highlighted in the issues raised by Zubair. Explain the possible implications if the
fraudulent activities are not addressed by the management.
(12 marks)

d. Comment on the ethical issues that concern the external auditors. Support your
answer with the relevant MIA By-Laws (On Professional Ethics, Conduct and Practice).
(4 marks)

e. Discuss the appropriate actions that should be taken by Zubair, as the companys
internal auditor, in dealing with the above issues.
(6 marks)

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December 2013 (Question 5)

Pearl Electrical Bhd (Pearl) is a manufacturer of electrical equipment. It has four factories
across the country and its customer base includes retailers as well as individuals, to whom
direct sales are made through their website. The companys year-end is 30 September 2013.
You are the audit supervisor of Azam & Co and are currently reviewing documentations of
Pearls internal control in preparation for the interim audit. Azam & Co has been the auditor
for Pearl for the last 2 years.

Pearls website allows individuals to order goods directly, and full payment is taken in
advance. Currently the website is not integrated into the inventory system and inventory
levels are not checked at the time when orders are placed.

Goods are despatched via local couriers; however, they do not always record customer
signatures as proof that the customer has received the goods. Over the past 12 months, there
have been customer complaints about the delay between sales orders and receipt of goods.
Pearl has investigated these and found that, in each case, the sales order had been entered
into the sales system correctly but was not forwarded to the despatch department for fulfilling.

Pearls retail customers undergo credit checks prior to being accepted and credit limits are
set accordingly by sales ledger clerks. These customers place their orders through one of
the sales team, who decides on sales discount levels. Raw materials used in the
manufacturing process are purchased from a wide range of suppliers. As a result of staff
changes in the purchase ledger department, supplier statement reconciliations are no longer
performed. Additionally, changes to supplier details in the purchase ledger master file can be
undertaken by purchase ledger clerks as well as supervisors.

In the past 6 months, Pearl has changed part of its manufacturing process and as a result
some new equipment has been purchased, however, there are considerable levels of plant
and equipment which are now surplus to requirement. Purchase requisitions for all new
equipment have been authorized by production supervisors and little has been done to
reduce the surplus of old equipment.

Required:
a. Identify and explain FOUR (4) risks of Pearl Electrical Bhd.
(6 marks)
b. Recommend how to overcome those identified risks.
(6 marks)
c. Describe the test of control Azam & Co would perform to overcome those identified risks.
(8 marks)
d. Pearls CEO has expressed an interest in Azam & Co performing other review
engagements as been advised by his finance manager. The CEO wants the audit
manager of Azam & Co to explain to him what is review engagement and he is also
unsure how much assurance would be gained via these engagements and how this
differs to the assurance provided by an external audit.
Required:
i. Explain review engagement to the CEO.
(4 marks)
ii. Identify and explain the level of assurance provided by an external audit and
other review engagements.
(6 marks)

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June 2014 (Question 5)

Sandy Win is the executive director of Rampai Terus Sdn Bhd (Rampai), a medium-sized
company that deals with the trading of agricultural equipment. The company has been in
operation since 1999. Most of the companys customers include small scale farmers and
some big corporations. The government has provided financial assistance to the small
farmers by awarding subsidy to purchase the equipment. However, most of the small
farmers misuse the financial assistance and did not settle the payment on time. In addition,
the big corporations have been facing challenges in producing good quality crops as the
weather is uncertain, thus significantly reducing the sales of the products.

Since its incorporation, Rampai has been managed by different management teams. As a
small scale company at that time, there are no major problems faced by the company.
Sandy was the finance manager at that time and she has been overseeing the internal
controls and accounting system of the company. As Rampai grows to a medium-sized
company, the management are complacent and did not realize the changes that should take
place in the company. Rampai is still adopting the old system and with Sandy eyeing for
another project, Rampai was neglected.

To survive in the industry, Sandy managed to obtain a loan from AEM Bank amounting to
RM500,000. AEM Bank agreed to disburse the loan after relying on the 30 June 2012 and
30 June 2011 financial statements. The loan would be very helpful to settle the overdue
payment of stock and as the working capital to fund the fixed overheads. After obtaining the
loan, Rampai managed to settle its outstanding debts and overheads. However, the
company may not be able to survive the coming months. Sandy managed to persuade
some potential investors to invest in the company. One serious investor, Irene Storm Sdn
Bhd has agreed to acquire substantial amount of shares in Rampai. The decision has been
done by referring to the latest annual audited report prepared by the auditor, Kamal Hussien
& Co. The auditor rendered the independent auditors report with an unqualified opinion.
Kamal Hussein & Co has been the auditor of Rampai for the last 8 years.

Anticipating the possible collapse of Rampai, Sandy has ventured into a new business.
Together with her good friend, Kirana Ros, they formed a coffee shop which was formed
under the franchise of Coffee & Cakes International. Forging on the market study, Sandy
and Kirana managed to open up the cafe outlet in Shah Alam. An international branded
coffee cafe outlet is located nearby their cafe.

Subsequently, Rampai went into liquidation and AEM Bank filed a petition to prosecute the
auditor for negligently issuing an unqualified opinion on the 2011 and 2012 financial
statements.

Required:

a. Explain the components of audit risk.


(3 marks)

b. Identify and discuss the risk of material misstatement (RMM) that should be addressed
by the Kamal Hussein & Co. in the audit of Rampai Terus Sdn Bhd.
(12 marks)

c. Recommend the procedures that auditor will perform to confirm the going concern
problems faced by Rampai Terus Sdn Bhd.
(6 marks)

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d. AEM Bank has filed a petition to prosecute the auditor for preparing the auditors report
negligently.

Required:

Being a plaintiff, discuss the elements that he must prove to ensure that defendant is
liable to third party due to negligence and fraud. (Indicate a law case if necessary).
(6 marks)

e. From the point of view of the auditor of Rampai Terus Sdn Bhd, describe the suitable
type of independent auditors report that should be issued. (Indicate the reasons for
issuing such report).
(3 marks)

December 2014 (Question 5)

Impian Berjaya Bhd (Impian) was incorporated 15 years ago by Encik Rashid and his family
as a private company. Due to brisk business, Encik Rashid had converted the company to a
public company five years ago. Impian provides information technology (IT) services to
customers. Most of the Impian customers are small and medium size companies which
depend on Impian to provide them with the IT services. The business has been very
successful due to Encik Rashids hard work and dedication. For the last one year, things
have changed since Encik Rashid hand over the family business to his son Johan. Encik
Rashid has been advised by his doctor to rest since he has been diagnosed with cancer.
Encik Rashid believed that his son Johan can handle the business since he has just
graduated with a Bachelor of Accountancy from a local university. Johan has never had any
business experience since his father was too busy to train him. Moreover he was also busy
with his studies.

You are the audit manager in Seedah & Co, responsible for the audit of Impian Berjaya Bhd
(Impian). Seedah & Co has been the auditor for Impian for the last five years. There have
been no significant irregularities in the company for the past five years. The finance director
of Impian Berjaya Bhd, Zikri, contacted you this morning to discuss the audit of the company
for the financial year ending 31 December 2014. The following are the notes that he has
emailed to you earlier to be discussed in the meeting that is scheduled for tomorrow.

I was alerted yesterday to a fraud being conducted by members of our sales team. It
appears that several sales representatives have been claiming reimbursement for fictitious
travel and client entertaining expenses and inflating actual expenses incurred. Specifically, it
has been alleged that the sales representatives have claimed on expenses for items such as
gifts for clients and office supplies which were never actually purchased, claimed for
business-class airline tickets but in reality had purchased economy tickets, claimed for non-
existent business mileage and used the company credit card to purchase items for personal
use. Further, they are using the company cars for family used during week days such as
sending their children to school and many more. They even have the guts to claim the petrol
from the company on their personal used of these companys cars.

I am very worried about the scale of this fraud, as travel and client entertainment is one of
our biggest expenses. All of the alleged fraudsters have been suspended pending an
investigation, which I would like your firm to conduct. We will prosecute these employees to
attempt to recoup our losses if evidence shows that a fraud has indeed occurred, so your
firm would need to provide an expert witness in the event of a court case.

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Impian has a small internal audit department and in previous years the evidence obtained by
Seedah & Co as part of the external audit has indicated that the control environment of the
company is generally good. The audit opinion on the financial statements for the year ended
31 March 2011 was unmodified.

Required:

a. Discuss the ethical and professional issues raised in respect of the request by Impian
for Seedah & Co to investigate the alleged fraudulent activity.
(8 marks)

b. The fraud diamond approach has been used in many fraudulent activities.

Required:

Discuss the elements of fraud diamond.


(6 marks)

c. Explain the matters that should be discussed in the meeting with Zikri in respect of
planning the investigation into the alleged fraudulent activity.
(6 marks)

d. Discuss any four (4) risks faced by Impian.


(6 marks)

e. Explain four (4) audit procedures in identifying the fraudulent activities committed by
the member of sales team.
(4 marks)

June 2015 (Question 5)

Aidid & Associate is appointed as the auditor for Claren Computer Bhd (CCB) for the
financial year end 30 April 2015. The previous auditor has resigned due to some
disagreement with the management of CCB. Aidid & Associates has accepted the
engagement although the firm has yet to get the reply from the previous auditor. Maria, the
new manager for Aidid & Associate is assigned to audit CCB. Maria has never audit a
computer company before. Due to shortage of staff in Aidid, Maria is required to lead the
audit in CCB.

CCB is a computer hardware specialist and has been trading for over five years. The
company is funded partly through overdrafts and loans and also by several large
shareholders. CCB has experienced significant growth in previous years; however, in the
current year a new competitor, Dron Design Bhd (DDB), has entered the market and through
competitive pricing has gained considerable market share from CCB. One of CCBs larger
customers has stopped trading with them and has moved its business to DDB.

In addition, a number of CCBs specialist developers have left the company and joined DDB.
CCB has found it difficult to replace these employees due to the level of their skills and
knowledge. CCB has just received notification that its main supplier who provides the
company with specialist electrical equipment has ceased to trade.

CCB is looking to develop new products to differentiate itself from the rest of its competitors.
It has approached its shareholders to finance this development; however, they declined to
invest further in CCB. CCBs loan is long term and it has met all repayments on time. The
overdraft has increased significantly over the year and the directors have informed you that
the overdraft facility is due for renewal next month, and they are confident it will be renewed.

7
The directors have produced a cash flow forecast which shows a significantly worsening
position over the coming 12 months. They are confident with the new developed products,
and in light of their trading history of significant growth, they believe that there is no need to
make any disclosures in the financial statements regarding going concern.

At the year end, CCB received notification from one of its customers that the hardware
installed by CCB for the customers online ordering system has not been operating correctly.
As a result, the customer has lost significant revenue and has informed CCB that they intend
to take legal action against them for loss of earnings. CCB has investigated the problem post
year end and has discovered that other work-in-progress is similarly affected and inventory
should be written down. The finance director believes that as this misstatement is identified
after the year end, it can be amended in the 2016 financial statements.

Required:

a. Explain six (6) potential indicators that CCB is facing a going concern problem (the
indicators must be in relation to the case above).
(9 marks)

b. Describe four (4) audit procedures which you should perform in assessing whether or
not CCB is a going concern.
(6 marks)

c. Discuss the ethical issues arise in relation to Aidid & Associates.


(5 marks)

d. Describe the procedures that the auditors of CCB should undertake in relation to the
uncorrected inventory misstatement identified in the case above.
(6 marks)

e. The auditors are informed that CCBs bankers will not make a decision on the overdraft
facility until after the audit report is completed. The directors have now agreed to
include some going concern disclosures.

Required:

Describe the impact on the audit report of CCB.


(4 marks)

December 2015 (Question 5)

Zahidi has been a senior manager for Zain & Partners for the past 10 years. He has been a
steady performer during his career and is known for his technical and personal skills.
However, not all of the firms partners are enthusiastic about Zahidi. Zahidis track record for
bringing new clients has been marginal. This weakness has not stopped Zahidi from moving
up the ladder. He has to work harder to bring in new clients because this is critical to his
aspirations to become a partner.

One of the potential clients for Zahidi is Nagasari Bhd a family owned company with its head
office in Klang. Nagasari Bhd is in the construction business since its incorporation. Control
of the company is in the hands of the Nagasari family, who have been majority shareholders
for more than 20 years. The owner, Mr Naga is the Chairman and managing director of the
company. The other three directors one of whom is a member of the Nagasari family, all hold
senior positions within the organization. The other two directors of Nagasari are Bumiputra

8
directors that help the company to secure government contract. Seventy percent of the
companys construction contracts are government contracts, with the remaining contracts
being small shopping centers and business centers.

Mr Naga has informed Zahidi the following facts:

1. During the year the company won a major contract to construct a number of buildings
on a university campus. The project is particularly interesting as all the facilities must
be capable of transmitting and receiving video conference broadcasts. Nagasari Bhd
has not been involved in this type of work before but believes that it will lead to a lot
of similar work in the private sector.

2. Reconciliation of debtors statements to the debtors ledger were performed


incorrectly for a three-months period while a clerk was on leave. These
reconciliations were approved by the accountant. The errors were detected by the
debtors clerk on his return and all errors were corrected.

3. Nagasari Bhd keeps a small store of building materials in its main warehouse. The
warehouse manager is responsible for ordering goods, receipting goods and paying
creditors.

4. A bonus incentive scheme was introduced for the supervisors at the construction
sites to ensure that building would be completed on time.

On behalf of the firm, Zahidi agreed to be appointed as auditor for Nagasari Bhd. He did that
without considering the fact that the firm did not have sufficient staffs and none of the
partners in the firm have experience in dealing with the audit of a construction company.
Meanwhile, Nagasari Bhd engaged an expert in the valuation of the life of assets used for
the purpose of construction. Nagasari Bhd also would like the auditor to check on the new
computerized accounting system for his company.

Required:

a. Discuss the ethical and professional issues raised by referring to the MIA By-Laws on
Professional Ethics.
(7 marks)

b. Discuss the six (6) inherent risks found in the above case.
(12 marks)

c. Discuss four (4) factors the auditor needs to consider before relying on the work of an
expert.
(6 marks)

d. Explain two (2) functions of the board of director.


(2 marks)

e. Explain the approach the auditor will take to check on the new computerized
accounting system for Nagasari Bhd.
(3 marks)

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