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a. A forecast is based on best estimates on what is expected to occur while a projection is

based on hypothetical assumptions which may not necessarily take place.

(2 marks)
b. A practitioner is unable to provide assurance on the ultimate achievability of the results
contained in the prospective financial information (PFI) because:

i. PFI is based on assumptions on future events which may or may not materialize.

ii. The evidence available to support the assumptions also tends to the future

(1 mark each x 2 = 2 marks)

c. Describe the following terms:

i. Audit expectation gap – the difference between the expectations of the users of the
financial statements and the reality that the auditors can provide. For example,
users expect auditors to guarantee the accuracy of financial statements while
auditors can only provide reasonable assurance that financial statements are free
from material misstatements.

ii. Deep pocket theory – the tendency of the injured party to sue the auditors
regardless whether they are at fault or not. This is because auditor is often time
perceived as the only one left with financial resources to compensate the plaintiff in
cases of business failure.

iii. Assurance services – an independent professional service in which a practitioner

expresses a conclusion designed to enhance the degree of confidence of the
intended users other than the responsible party about the outcome of the
evaluation or measurement of a subject matter against criteria.

(2 marks each x 3 = 6 marks)

(Total = 10 marks)


a. As the auditor for both clients, Viva and Savy, such situation will give rise to conflict
of interest. As such, it is not advisable for the auditor to advise Savy on this matter so
as to maintain an unbiased opinion and to be independent.
(3 marks)

b. The audit manager holds 1% of the total shares in the client that he audits. The audit
manager’s shareholding is insignificant, further since the audit partner did not hold
any shares, there is no violation of the by-law. However, in the best interest of the
audit firm, it is best that this audit manager is not involved in the audit of Viva.

(3 marks)

c. The audit fees worked out to be 12.5% of the total income for the audit firm. It
appeared that the audit firm is too reliant on the single client, as such the
independence may be threatened.
(3 marks)


a. The audit risk model:


(1 mark)

Materiality refers to “the magnitude of an omission or misstatement of accounting

information that, in the light of surrounding circumstances, makes it probable that the
judgment of a reasonable person relying on the information would have been
changed or influenced by the omission or misstatement”

(2 marks)

b. risks associated with the audit of ECM Sdn Bhd.

Trade receivables

Most of the company’s sales are on credit. The slow collection from trade receivable in
particular sales to Government hospitals posed a threat to the company’s cash flow in the
long run as such may pose high audit risk in ECM Libra Sdn Bhd.

Overseas expansion

The management’s plan to expand overseas under current condition may also be
contributing to the overall risk in the audit of ECM Libra Sdn Bhd. Uncertainty in the
economic situation in overseas market is one of the risk factors that need to be considered.

Computerized accounting systems

Due consideration needs to be given on the need to be familiarized with the change from
manual to accounting systems.

Reducing staff costs

It is apparent that the company is looking at cutting down cost from the implementation of
computerized system, as such the risk involved may be high in this situation.

(2 marks each x 4 =8 marks)

(Total: 20 marks)


i. A subsequent event is an event or transaction that occurs subsequent to the balance

sheet date prior to the issuance of financial statements and auditor’s report that has a
material effect on the financial statements and, therefore, requires adjustment or disclosure
in the financial statements.

(2 marks)

ii. The objectives are:

(a) To determine whether the financial statements are adjusted (presentation)
where necessary for all (completeness) subsequent events (occurrence) that
provide additional information about accounting estimates (evaluation).
(b) To determine whether adequate disclosure (disclosure) is made where
necessary of all (completeness) subsequent events (occurrence) reflecting
new conditions this may have material future effect on the company.
(2 marks)

iii. Audit procedure to identify subsequent events

- Reading minutes of the BOD meeting

- Review the company’s legal correspondence file
- Discuss with the company’s management regarding the lawsuit.
- Obtain confirmation letter from company’s solicitor.

(any 3 points = 3 marks)


i. There is no adequate supporting documentation to provide the reliable evidence of a

sale being concluded i.e. evidence that risk and rewards of ownership of the goods
has been transferred to the customer. Neither was there confirmation from 3rd party
to provide satisfactory evidence of the transaction. The effect of this is the limitation
of scope on auditors’ ability to express an opinion on the existence of sales and the
corresponding debtor balance. QUALIFIED EXCEPT FOR opinion should be issued.

(3 marks)

ii. The company has used a replacement cost inventory rather than the lower market
cost or market. The auditor was not able to verify the valuation. An ADVERSE
OPINION should be issued as the amount is material and pervasive.
(3 marks)

iii. The auditor was not able to examine all records as the company has lost some of
the records and also was engaged after the balance sheet date. Due to the
limitation of scope and because the amount is material and pervasive, a
DISCLAIMER REPORT should be issued.
(3 marks)


Auditor’s need to consider:

i. The appropriateness of the management’s use of the going concern assumption in
the preparation of the FS
ii. Whether there are any material uncertainties about the entity’s going concern that
should be disclosed.
(3 marks)
(Total: 20 marks)


i) Three purposes of data capture control

 All transactions are recorded in the application system
 Transactions are recorded only once
 Rejected transactions are identified, controlled, corrected and reentered
into the system.
(3 points x 1 mark = 3 marks)

ii) Under the test data approach, the auditor creates a set of simulated transaction data
for testing. The test data should include both correct and incorrect data. The
auditor manual calculated the processing result and run the test data through the
client’s application program. The application program tested by the auditor must
be the same as the client used for processing transactions and general control
relating to program changes, access and library functions are in place and
reliable. The results are compared to the predetermined result. The correct data
should be properly processed and incorrect data should be rejected as errors.
(3 marks)


i. The three primary objectives are:

 The internal controls over share capital and related dividends are adequate.
 Owners’ equity transactions are recorded properly.
 Owners’ equity balances are properly presented and disclosed.

(3 points x 1 mark = 3 marks)

ii. Internal controls of concern to the auditors are :

 Proper authorization of transactions. Material transactions should be approved
by the board of directors, including issuance of share capital, repurchase of
share capital, and declaration of dividends.
 Proper recordkeeping and segregation of duties. This should include well-
defined policies for preparing share certificates and recording share capital
transactions, and independent internal verification of information in the records.
Many companies use a share capital certificate book and a shareholders’ share
capital master file to improve control over share capital transactions.
 Independent registrar and agent. An independent registrar acts as a control to
prevent the improper issuance of stock certificates.

(3 points x 1 mark = 3 marks)



Companies Act 1965 requires the principal auditor to express an opinion on all the group
financial statements as a whole but does not require all subsidiaries to be audited by the
principal auditor. As such, when the principal auditor did not audit all the subsidiaries in the
group, he has to comply with additional reporting requirements (S174 (2)(c) (i) and (ii):

(i) The name of the subsidiaries of which he has not acted as auditor; and

(ii) Whether he has considered the financial statements and auditors’ reports of
all the subsidiaries which he has not acted as auditor.

(2 points x 2 marks = 4 marks)


Forensic accounting is where an assurance provider investigates a specific issue, often with
a legal consequence, such as a suspected fraud. Specifically it is the process of gathering,
analysing and reporting on data for the purpose of finding facts and/or evidence in the
context of financial/legal disputes and/or irregularities.

(2 marks)

The relevance here is that the external auditor is likely to be asked to provide a forensic
accounting service to Acepack Sdn Bhd. The investigation will consider two issues – firstly
whether the fraud actually happened, and secondly, if a fraud has taken place, the financial
value of the fraud. The investigation should determine who has perpetrated the fraud, and
collect evidence to help prosecute those involved in the deception. In this case the suspicion
that inventory is being stolen should be investigated, as there could be other reasons for the
discrepancy found in the inventory records.

(any 2 points = 2 marks)

(Total: 20 marks)

Section B – Case Study

(a) The provisions of MIA By-laws in avoiding conflicts of interest in the provision of
non-audit services to an audit client including the following principal areas:
i. Objectivity might be threatened by the provision of services other than audit. One
significant danger of providing non-audit services is that the product of those
services may be judged as part of the audit, example Aziah and Co advised on
the designed of the system and then tested the system as part of the audit.
Because of the involvement in the system implementation, Aziah and Co may be
less willing to comment adversely on the system.
ii. One way the regulations diminish this threat is to warn against any staff of the
audit firm becoming involved in executive management roles at the client, so that
audit staff are not given responsibilities which then have to be reported on by the
firm. In addition, objectivity may be improved by having different partners and
staff involved on the audit and non-audit work.

iii. Independence concepts. Objectivity might be threatened or appeared to be

threatened by undue dependence on any client. The statement recommends that
the work paid by one client should not in general exceed 15%. Non-audit work is
included within this and whilst the guidance principally relates to recurring work,
non recurring fees such as consultancy may affect independence if they are large
enough. However the above case does not indicate whether the fees have
breached 15%.

On the provision of Companies Act 1965 are stated in Section 9(1) b, c and d.

9(1)b- if he is indebted to the company or to a corporation that is deemed to be

related to the company or to a corporation that is deemed to be related to that
company by virtue of Section 6 in an amount exceeding RM2500

9(1)c – if he is-(i) an officer of the company, (ii) a partner or employee of an officer of

the company, (iii) a partner or employee of an employee of an officer of the company,
(iv) a shareholder or his spouse is a shareholder of a corporation whose employee is
an officer of the company

9(1)d – if he is responsible for or if he is the partner, employer or employee of a

person responsible for the keeping of the register of the member or the register of
holder of debentures of the company.

(Any 5 points x 2 marks = 10 marks)

* (Students must provide at least 2 points from CA 1965 and 2 points on MIA By-Laws)


There are several applicable requirements in ISA240 for the auditor’s responsibility
for fraud and errors:

i. Auditors should communicate the discovered or suspected fraud to management

as soon as is practicable
ii. If a discovered fraud involves management, employees with a significant role in
internal control or the fraud has a material impact on the financial statements, the
auditors must communicate these matters to those charged with governance
without delay
iii. If the auditor have a statutory duty or report a fraud or suspected fraud to external
regulators, they should do so, having taken legal advice
iv. If a fraud has a material impact on the financial statements, the auditors may
have to quantify their audit opinion

(Any 2 points x2 = 4 marks)

Fraud is an intentional act by one or more individuals among management, those charged
with governance (management fraud), employees (employee fraud), or third parties
involving the use of deception to obtain an unjust or illegal advantage.

Error is unintentional mistake.

(1 mark for fraud, 1 mark for error = 2marks)



Audit procedures Why failed

Evaluation of controls Evaluation of controls would be

performed by walkthrough tests i.e.
obtaining confirmation or evidence.
This evaluation should indicate any
faults in the design of the system.
However, the faults indicated do not
appear to be faults in the system
design, but in other elements, which
a limited review of the system may
have problems identifying. The
system review would show that
authorisation by senior management
does take place, and only a more
detailed review might indicate it is not

(3 marks)

Tests of controls The effectiveness of this test is likely

to be limited for the following

i. Only a sample of suppliers would

be selected
ii. It would be difficult for the auditor
to gauge whether authorisation
was being taken seriously. If
defined procedures have been
followed, the auditors might be
best only be able to speculate
that the managing director had
not taken authorisation seriously,
based on their knowledge of the
managing director’s personality.

(3 marks)

Analytical procedures Analytical procedures might not have

been precisely identify the following

i. Gross profit percentage may not

have followed a predictable
pattern in previous years
ii. The analytical information
required may not have been

available in sufficient detail

iii. Frauds such as this one tend to
be spotted by reviewing changes
in figures over a number of years.
Two years is probably insufficient
time to identify what appears to
be an immaterial fraud.

(3 marks)


The likelihood of success is due to the principal for duty of care of auditors. The Caparo
case indicates that the auditors have a duty of care to the company. However, whether this
duty of care means that the auditors will be liable is doubtful for the following reasons:

i. The auditor’s terms of engagement should have stated that the auditor carry out
procedures so as to have a reasonable expectation of detecting fraud that
materially impacts upon the accounts. It is questionable whether this fraud would
have had a material impact.
ii. Although the auditors did not comment on weaknesses in their management
letter, they may nonetheless be able to prove that they conducted an audit that
was in accordance with auditing standards.
iii. The letter of engagement should also state that the directors are responsible for
safeguarding the assets of the company, and for the prevention and detection of
the fraud. The directors do not seem to have taken their duties seriously enough
if approval of suppliers was just a formality.
(Any 3 points x 2 marks = 6 marks)

(Total: 30 marks)