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AC/APR 2008/AUD360/390/394

UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION

COURSE COURSE CODE EXAMINATION TIME

: : : :

AUDITING AUD360/390/394 APRIL 2008 3 HOURS

INSTRUCTIONS TO CANDIDATES 1. This question paper consists of three (3) parts : PART A : Section 1(10 Questions) : Section 2 (10 Questions) PART B (4 Questions) PART C (1 Question) Answer ALL three (3) parts : i) ii) iii) iv) Answer all PART A, Section 1 in the Objective Answer Sheet, Answer PART A, Section 2 in the True/False Answer Sheet, Answer THREE (3) questions only from PART B in the Answer Booklet, Answer ALL questions from PART C in the Answer Booklet. Start each answer on a new page.

Do not bring any material into the examination room unless permission is given by the invigilator. Please check to make sure that this examination pack consists of: i) ii) iii) iv) the Question Paper an Answer Booklet - provided by the Faculty a True/False Answer Sheet - provided by the Faculty an Objective Answer Sheet - provided by the Faculty

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO


This examination paper consists of 10 printed pages Hak Cipta Universiti Teknologi MARA CONFIDENTIAL

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AC/APR 2008/AUD360/390/394

PART A SECTION 1 - MULTIPLE CHOICE QUESTIONS This section consists of 10 multiple-choice questions. Choose the most suitable answer and shade the corresponding alphabet representing the answer in the multiple choice answer sheet provided. 1. An auditor may not issue a qualified opinion when a. b. c. d. 2. A scope limitation prevents the auditor from completing an important audit procedure. The auditor's report refers to the work of a specialist. An accounting principle at variance with the generally accepted accounting principles is used. An entity facing going concern problem has disclosed the uncertainty in the financial statements.

Which of the following procedures would an auditor most likely rely on to verify management's assertion of completeness? a. b. c. d. Reviewing standard bank confirmations for indications of kiting. Comparing a sample of shipping documents to related sales invoices. Observing the client's distribution of payroll cheques. Confirming a sample of recorded receivables by direct communication with the debtors.

3.

Which of the following types of audit evidence is the least persuasive? a. b. c. d. Prenumbered purchase order forms. Bank statements obtained from the client. Test counts of inventory performed by the auditor. Correspondence from the client's solicitors about litigation.

4.

Which of the following statements best describes an auditor's responsibility to detect errors and fraud? a. The auditor should study and evaluate the client's internal control system and design the audit to provide reasonable assurance of detecting all errors and fraud. The auditor should assess the risk that errors and fraud may cause the financial statements to contain material misstatements and determine whether the necessary internal controls are prescribed and are being followed satisfactorily. The auditor should consider the types of errors and fraud that could occur and determine whether the necessary internal controls are prescribed and are being followed. The auditor should assess the risk that errors and fraud may cause the financial statements to contain material misstatements and design the audit to provide reasonable assurance of detecting material errors and fraud.
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b.

c.

d.

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AC/APR 2008/AUD360/390/394

The primary objective of using analytical procedures in the final review stage of an audit is to . a. b. c. d. obtain evidence from details tested to corroborate particular assertions. identify areas that represent specific risks relevant to the audit. assist the auditor in assessing the validity of the conclusions reached. satisfy doubts when questions arise about a client's ability to continue as going concern.

6.

In comparison with the external auditor, an internal auditor is more likely to be concerned with . a. b. c. d. Compliance audit Financial Statement audit Internal control structure Operational audit .

7.

Internal controls are not designed to provide reasonable assurance that a. b. c. d.

transactions are executed as authorized by management access to assets is permitted only in accordance with management's authorization recorded accountability for assets is compared with the existing assets at reasonable intervals irregularities will be eliminated .

8.

An auditor would obtain most assurance of the existence of inventories a. b. c. d. by confirming inventories in a public warehouse by recomputing inventory extensions by observing physical inventory counts by requesting written inventory representations from management

9.

Before accepting an audit engagement, the successor auditor should enquire the predecessor auditor regarding all of the following except a. b. c. d. The integrity of management. Any disagreements with management about accounting or auditing matters. The reason for the change of auditor. The reliability of the entities internal control structure.

10.

A test designed to prove that internal controls are operating according to laid down procedures is known as a. b. c. d. walk through test. substantive test. test of control (compliance test). depth testing. (Total: 10 marks)

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CONFIDENTIAL SECTION 2 - True and False questions.

AC/APR 2008/AUD360/390/394

This section consists of 10 TRUE/FALSE questions. Shade T for TRUE and 'F' for FALSE in the answer sheet provided.

1.

The audit report should be signed and dated before the directors' approval of the financial statements. Independence in appearance exists when the auditor is actually able to maintain an unbiased attitude throughout the audit. In collecting audit evidence, debtors' confirmations are more reliable as compared to debtors' balance verification. An audit report communicates the auditor's findings to top level management of the company (auditee). Current audit working paper files contain documents, schedules and other data that will be of continuing significance to audit. Limited evidence gathered within an effective internal control structure is more competent or reliable than extensive evidence gathered within an ineffective internal control structure. In an audit report, the introductory paragraph indicates the responsibility of the management and the auditor. Physical inspection procedures are common audit steps when examining property, plant and equipment accounts. Companies listed on Bursa Malaysia are required to engage a share registrar to prevent improper issue of shares certificates. Tests of controls for inventory focus on material movement authorization and the control of inventory against records. (Total: 10 marks)

2.

3.

4.

5.

6.

7.

8.

9.

10.

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AC/APR 2008/AUD360/390/394

Answer three (3) questions only from this part. QUESTION 1 A. The Companies Act 1965 requires financial statements to be audited by an approved company auditor. Required: i) State the Companies Act 1965 requirements on the disqualification of auditor. (3 marks) Explain the auditor's responsibilities under section 174 (2) of the Companies Act 1965, in relation to the reporting of financial statements. (2 marks)

ii)

B.

Juwita & Co, a public accountant firm, was formed a few months ago. One of the audit partners, Juwita is an accounting graduate from UiTM and has been working with established accounting firm for the past five years. With her vast experience, Juwita managed to be accepted as a MIA member and awarded the audit licence to practice. In promoting her audit services, Juwita & Co printed name cards for the partner and the audit manager. The business card stated the name of the audit firm, address and contact number. Other than this, there are also personal particulars on the designation and qualification of the partner as well as the audit manager. Recently, Juwita has been approached by Citra Bina Sdn Bhd, a construction company, to become the company's auditor. Without further investigation, Juwita accepted the offer. During the course of the audit, Juwita & Co did not encounter any problem with the assignment. As such, Juwita decided to charge the audit fee at RM300 with the intention to secure more professional engagement in the future. In return for the services provided, the management of Citra Bina Sdn Bhd offered Juwita shares amounting to RM10,000 in a subsidiary company which is not audited by Juwita & Co. Juwita accepted the offer. Required: i) From the above case, (a) explain two (2) situations which comply with the MIA By-Laws or Companies Act 1965 and (b) state the related By-Laws or Companies Act 1965 provisions. Present your answer in the following format: Situations according to the ByLaw/Companies Act 1965 The MIA By-Law/Companies Act 1965 followed. (6 marks)

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AC/APR 2008/AUD360/390/394

ii)

From the above case: (a) explain three (3) situations which violate the MIA By-Laws or Companies Act 1965 and (b) state and explain the By-Laws or Companies Act 1965 provisions that have been violated. Present your answer in the following format: Situations violated the ByLaw/Companies Act 1965 The MIA By-Law/Companies Act 1965 violated. (9 marks) (Total: 20 marks)

QUESTION 2

A.

An internal control system should be designed and operated to provide reasonable assurance that an entity's objectives are being achieved. Required: i) Briefly explain any four (4) limitations of an effective internal control system. (4 marks) Explain the procedures to be performed by the auditor in order to ascertain the client's internal control system. (6 marks)

ii)

B.

Audit firms are required to establish policies and procedures for the acceptance and continuance of client relationship and specific engagement. The policies and procedures have to be designed to provide the firms with reasonable assurance that the likelihood of association with a client whose management lacks integrity is minimised. Required: i) Explain any four (4) factors that an auditor should consider before accepting appointment of a new client? (4 marks) If a new client has previously been audited, explain the responsibilities of the successor auditor to the predecessor auditor. (6 marks) (Total: 20 marks)

ii)

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AC/APR 2008/AUD360/390/394

QUESTION 3

A.

Cash and investment in the form of marketable securities often represent the most liquid assets of an entity. For every entity, proper management of cash and investment is essential and the principal objective of cash management is to ensure that sufficient cash is available to meet the entity's needs. Required: i) Briefly explain four (4) audit objectives for the audit of investments. (4 marks) ii) Describe four (4) substantive procedures that should be performed to verify the movement of investments during the year. (4 marks) List four (4) items for investments that may require disclosure in accordance with FRS 125 "Accounting For Investments". (2 marks)

iii)

B.

ISA 500 "Audit Evidence" requires the auditors to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion. Required: i) Explain why in most instances audit evidence is persuasive rather that conclusive. (2 marks) Explain why external evidence is more reliable than internal evidence. (2 marks) For each of the following, indicate the type of audit procedure that will be undertaken: a. b. c. d. e. f. The existence of a new factory equipment. Comparison of the current year gross profit percentage with the gross profit percentage of the last four years. A letter from the client's solicitor indicating that there were no lawsuits in progress against the client. Test counts of the raw materials in the warehouse. Letter to representative sample of debtors to ascertain the debtors' amount Subsequent clearance test on the bank reconciliation statement of the client (6 marks) (Total: 20 marks)
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ii)

iii)

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AC/APR 2008/AUD360/390/394

QUESTION 4

A.

Audit report is the final stage in the entire audit process. It is a written communication of audit findings to the shareholders. Required: For each of the following independent situations, assume that you are the audit partner for the engagement. State with reasons the appropriate type of audit report and opinion to be issued. i) The controller of Hayatti Hotel Bhd will not allow you to confirm the receivable balance from three of its major customers. The amount of the receivable is material in relation to Hayatti Hotel's financial statements. You are unable to satisfy yourself as to the receivable balance by alternative procedures. In the last three months of the current year, Palma Oil Refining Bhd decided to change direction and go significantly into the oil drilling business. Management recognizes that the business is exceptionally risky and could jeopardize the success of its existing refining business, but there are potential rewards. During the short period of operation in drilling, the company has had three dry wells and no success. The facts are adequately disclosed in the notes to accounts. The audit work on Sri Kompang Resources Sdn Bhd, revealed that an investment in quoted shares stated in the balance sheet at RM500,000 has suffered a material permanent fall in value of RM300,000. However, the company refused to make an allowance for diminution in value in the accounts on the ground that the impact is temporary even though they admitted that loss has occurred. (9 marks)

ii)

iii)

B.

Analytical procedure is an important procedure in an audit. It consists of evaluation of financial information made by a study of comparisons and relationships among both financial and non-financial data. Required: i) Briefly describe three (3) main purposes of analytical procedures during the different stages of audit. (6 marks) State and explain two (2) types of analytical procedures commonly used during an audit. (5 marks) (Total: 20 marks)

ii)

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AC/APR 2008/AUD360/390/394

PART C - COMPULSORY QUESTION QUESTION 1

Syarikat Pusaka Amin Press is a medium size entity involve in the printing business. The company consists of five different departments. You have been assigned to review the operation manual in purchasing and payment system implemented by the company. Brief descriptions of the operating procedures are as follows: Samad is the clerk in the Purchasing Department. Upon receiving the purchase requisition, (from any department) he will select an appropriate vendor by searching through the vendor catalogues registered with the company. He will call the selected vendor and request a price quotation from the vendor. After negotiating the price and getting a verbal confirmation from the vendor, he will issue four copies of pre-numbered purchasing order and sends them to following departments; a copy each to the requisition department head, receiving department, accounts department and one copy will be kept in his own file. Taufiq, is the receiving department officer. Upon receiving the pre-numbered purchase order, he will keep the document in an open file. When the particular goods have been received, he will take out the pre-numbered purchase order and matched it with the delivery note which is attached with the goods delivered by the supplier. He will stamps the prenumbered purchase order with the date received, and if applicable, using marker, he will note down any differences between the quantity stated in the purchase order and the quantity stated in the delivery notes from the supplier. He will issue a good received note and forward it to the accounts department for payment processing and verbally notify the requesting department to collect the goods. Samira, the accounts clerk will file the purchase orders and goods receive notes from the receiving department. When the vendor's invoice has been received, she will match it with the related purchase order and goods received note and prepare the payment voucher. The voucher is then forwarded to En Mazlan, the Assistant Accountant, for his approval. Samira will prepare the cheque which will be signed by the Accountant, En Azhar, who is the head of Accounts Department. When signing the cheque, En Azhar will counter sign the payment voucher as an authorization and approval for the payment made to the supplier. Samira will send the cheque to the respective supplier and record the transaction in the accounts. Lastly, she will file the payment voucher and its supporting documents in the paid invoice file.

Required: a) Identify ten (10) weaknesses in the system and give five (5) recommendations to improve the system. (15 marks) Segregation of duties is an important element in internal control. Briefly explain why it is important to maintain proper segregation of duties. (3 marks)

b)

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AC/APR 2008/AUD360/390/394

c)

What are the problems that may exist in implementing a formal system of internal control in small companies? (2 marks) (Total: 20 marks)

END OF QUESTION PAPER

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