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SUGGESTED SOLUTIONS
DECEMBER 2019
QUESTION 1
A. Audit planning:
i. List three (3) principal contents of an engagement letter:
The objective of financial statement audit
Management’s responsibility for the financial statements
The scope of audit, including reference to applicable standards
The form of opinion – inability to form opinion if audit is not completed
The inherent limitations of an audit (fraud/error) and there are risk that material
misstatement may be uncovered
Deadlines
Schedules to be prepared for auditor
Audit fees
C1 (Any 3 X 1 mark each = 3 marks)
QUESTION 2
ii. Identify the type of audit evidence for each of the given audit procedure:
Testing:
- analytical procedures can be used as substantive procedures in collecting
appropriate audit evidence. They can be performed together with other
substantive procedures (substantive tests of transactions and tests of details
of balances) and they help to:
o Indicate possible misstatements
o Reduce detailed tests.
Completion of audit:
- analytical procedures can be used as part of an overall review of the financial
statements for the auditors to reach conclusions about the fair presentation of
the financial statements. The auditor shall design and perform analytical
procedures near the end of the audit that assist the auditor when forming an
overall conclusion as to whether the financial statements are consistent with
the auditor’s understanding of the entity. The analytical procedures help the
auditors to take a final review of the audited financial statements objectively
and help to:
o Assess going concern
o Indicate possible misstatements.
C3 (2 marks each with explanation = 6 marks)
B. Audit documentation:
i. Explain two (2) purposes for the auditor to maintain audit documentation:
It provides evidence of the auditor’s basis for a conclusion about the achievement of
the overall objective.
It provides evidence that the audit was planned and performed in accordance with
ISAs and other legal and regulatory requirements.
It assists the engagement team to plan and perform the audit.
It assists team members responsible for supervision to direct, supervise and review
audit work.
It enables the conduct of quality control reviews and inspections (both internal and
external).
C3 (1.5 marks each with brief explanation = 3 marks)
No A. Weaknesses B. Impact
.
1. Dayang is authorized to open the mails Dayang could have taken the cheques
containing cheques and to complete the (especially cash cheques) for her
recording of cheques without personal use and manipulate the
supervision. recording of cheques.
2. Deposits of cheques into the bank are Possibility for the cheques to be
made on a weekly basis. mishandled/misplaced due to gaps of
time as well as voluminous of
cheques at the end of the week.
3. No segregation of duties as Dayang is Dayang could have committed fraud
responsible from end-to-end in handling and manipulate the recording of
the cheques including the the updating cheques.
of the cash receipt journal.
4. Ernie alone is authorized to sign Unauthorised issuance of cheques by
cheques below RM100,000 Ernie might not be detected.
5. Payment instruction forms were Ferhad could have provided incorrect
presigned by the signatories and payment instruction for salary
information on the form were not payments to the bank.
verified by an officer before they are
submitted to the bank.
6. Bank reconciliation statements were Bank reconciliation statements should
prepared on a bi-monthly basis. have been prepared on a monthly
basis as the two-month gap would
make it difficult to reconcile the figure
between the bank account and bank
statement.
C4 & C5 (1 mark each for weaknesses + 1 mark each for impact X 6 answers = 12
marks)
C. Assess two (2) strengths of internal control system implemented in the Finance and
Accounts Department of Dinamik Utara Sdn Bhd:
Cheques issuance exceeding RM100,000 requires two signatories
Salaries are paid through the bank account of the employees
Bank reconciliation statements are prepared and verified by different person
C6 (Any 2 with explanation X 2 marks each = 4 marks)
D. Describe two (2) internal control objectives relevant to the activities carried out in the
Finance and Accounts Department of Dinamik Utara Sdn Bhd:
To ensure that the company receives all cash that it is entitled from the customers
To ensure that payments are made to genuine suppliers
To ensure payments are made only for the goods that have been received
To ensure employees’ salaries are paid on a timely basis
To ensure employees’ salaries and deductions are correctly computed
C6 (Any 2 with explanation X 2 marks each = 4 marks)
(Total: 20 marks)
QUESTION 4
ii. Illustrate four (4) substantive audit procedures that an auditor would perform to obtain
sufficient and appropriate audit evidence in auditing cash and bank balances in Bistari
Endah Bhd:
Obtain Bistari Endah Bhd bank account reconciliation and cast to check the
additions to ensure arithmetical accuracy.
Agree the balance per the bank reconciliation to an original year-end bank
statement and to the bank confirmation letter.
Agree the reconciliation’s balance per the cash book to the year-end cash book.
Trace all the outstanding lodgements to the pre year-end cash book, post year-
end bank statement and also to paying-in-book pre year end.
Trace all unpresented cheques through to a pre year-end cash book and post
year-end statement. For any unusual amounts or significant delays, obtain
explanations from management.
Any other relevant answers.
C3 (Any 4 with explanation X 2 mark each = 8 marks)
B. Audit of inventory:
i. Explain the function of each of the following documents used for inventory
management:
a. Receiving report:
- records the receipts of goods from suppliers. A copy of this document usually
accompanies the goods to warehousing department and is used to update
the perpetual inventory records.
C5 (2 marks)
ii. Explain three (3) factors that may cause complexity for the auditors in auditing
inventory:
inventories are usually major items in the balance sheet/SOFP and it is often the
largest item making up the account included in the working capital.
Inventories are sometimes placed in different locations which make the physical
control and counting difficult and time-consuming.
Diversity of items (from raw materials, WIP and finished goods) creates difficulty
in valuing the closing stock, and that expose to the risk of occurring errors.
Obsolences of inventory make it challenging for valuation.
The risk of pilferage/inventory misappropriation is high especially if the control is
lacking.
C5 (Any 3 with explanation X 2 marks each = 6 marks)
(Total: 20 marks)
QUESTION 5
A. Explain three (3) contents of an auditor’s report:
Title
Adressee
Auditor’s opinion
Basis for opinion
Management’s responsibilities for the financial statements
Auditor’s responsibilities for the financial statements
Key audit matters
Name of the engagement partner
Signature of the auditor
Auditor’s address
Date of the auditor’s report
C3 (Any 3 with explanation X 2 marks each = 6 marks)
B. Determine the type of audit opinion that you would issue and the reason for such opinion
for the following independent situation:
Modified opinion The auditor is unable to audit all the documents because it
(qualified/except for) is not allowed by the client. This has caused lack of
evidence but only with this respect. For all other items the
auditor has been able to obtain sufficient and adequate
evidence. Therefore, this situation is material and but not
pervasive to the financial statements.
iv Modified opinion The financial statements present a true and fair view except
. (qualified/except for) with respect to inventory, where its valuation method does
not comply with the MFRS. Non-compliance with the
MFRS is a mistatement and is deemed as material but not
pervasive to the financial statements.
C. Justify three (3) conditions that should be met for the issuance of an unmodified opinion
(standard unqualified) expressed in the auditor’s report:
All statements - statements of financial position, income statement/Statement of
comprehensive income, statements of changes in equity, statement of cash flows
and notes to the accounts - are included in the financial statements.
The ISAs have been followed in all respects on the engagement.
Sufficient appropriate audit evidence has been accumulated.
The financial statements are presented in accordance with approved accounting
standards.
There are no circumstances requiring the addition of an explanatory
paragraph or modification of the wording of the report.
C6 (Any 3 with explanation X 2 marks each = 6 marks)
(Total: 20 marks)