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JUN 2014

Question 1
A. i.

Preparing accounting records and financial statements.


Valuation services.
Taxation services.
Internal audit services.
IT systems services.
Litigation support services.
Legal services.
Recruiting services.
Corporate finance services.
Any two = 2 marks

ii. Self-review threat the threat that a professional accountant will not appropriately
evaluate the results of a previous judgment made or service performed by the
professional accountant, or by another individual within the professional accountants
firm or employing organization, on which the accountant will rely when forming a
judgment as part of providing a current service;
Example:
- A firm issuing an assurance report on the effectiveness of the operation of financial
systems after designing or implementing the systems.
- A firm having prepared the original data used to generate records that arethe subject
matter of the assurance engagement.
- A member of the assurance team being, or having recently been, a director or officer of
the client.
- A member of the assurance team being, or having recently been, employed by the client
in a position to exert significant influence over the subject matter of the engagement.
- The firm performing a service for an assurance client that directly affects the subject
matter information of the assurance engagement
Advocacy threat the threat that a professional accountant will promote a clients or
employers position to the point that the professional accountants objectivity is
compromised;
Example:
- The firm promoting shares in an audit client.
- A professional accountant acting as an advocate on behalf of an audit client in litigation
or disputes with third parties.
Explanation =1 marks x 2 = 2 marks
Example = 1 marks x 2= 2 marks
Total = 4 marks

Question 2
A.
(i)
Ethical threat
1. A familiarity threat arises where an
engagement partner is associated with a
client for a long period of time. Azam &
Cos partner has been involved in the
audit of Jasa Baik Bhd for six years and
hence may not maintain her professional
scepticism and objectivity

2. The engagement partners son has


accepted a job as a sales manager at
Azam & Co. This could represent a selfinterest/familiarity threat if the son was
involved in the financial statement
process.
3. A self-interest threat can arise when an
audit firm has a financial interest in the
company. In this case the partners son
will receive shares as part of his
remuneration. As the son is an
immediate family member of the partner
then if he holds the shares it will be as if
the partner holds these shares, and this
is prohibited.
4. Fees based on the outcome or results of
work performed are known as contingent
fees and are prohibited by MIA By-Laws
(on Professional Ethics, Conduct and
Practice) . Hence Azam % Cos request
that 20% of the external audit fee is
based on profit after tax would represent
a contingent fee.

(ii)
Safeguards to reduce threats to an acceptable
level
Azam & Cos should monitor the relationship
between engagement and client staff, and should
consider rotating engagement partners when a
long association has occurred. In addition, MIA
By-Laws (on Professional Ethics, Conduct and
Practice) recommends that engagement partners
rotate off an audit after five years for listed and
public interest entities.
Therefore consideration should be given to
appointing an alternative audit partner.
It is unlikely that as a sales manager the son
would be in a position to influence the financial
statements and hence additional safeguards
would not be necessary.

In this case as holding shares is prohibited by


MIA By-Laws (on Professional Ethics, Conduct
and Practice) then either the son should refuse
the shares or more likely the engagement partner
will need to be removed from the audit.

NAB & Co will not be able to accept contingent


fees and should communicate to Goofy Co that
the external audit fee needs to be based on the
time and level of work performed.

1 mark each for ethical threat x4 = 4 marks


1 mark each for managing the threat x 4 = 4 marks
Total marks = 8 marks

B. Parveen & Co:


i. Advertising is allowed as long as the advertising does not go against any of the fundamental
principles contained in MIA By-Laws.
Advertisements should be truthful and not make false claims. For example, it would be
inappropriate to claim that Parveen & Co could promise to offer a cheaper audit service
than the competitor firm. Equally, it would be inappropriate to make exaggerated claims
regarding the experience or the qualifications possessed by the firms partners and
employees.
In addition, any advertisement should not make disparaging remarks about any other audit
or accountancy firm, for example, it would be inappropriate to state that Peaches & Co
offered a higher quality service than any other provider.
Any advertisements should also be in compliance with any local rules and regulations. For
example, in some jurisdictions it is prohibited for professionals such as auditors to advertise
on television, and most jurisdictions will have some kind of regulatory authority, such as the
Advertising Standards Authority in Malaysia, which imposes rules on advertising to ensure it
is not misleading and is in good taste.
ii. Lowballing
a. Lowballing is a term used to describe a situation where an audit firm submits a
tender to provide an audit service at a very low fee, with the objective of undercutting competitors prices in order to win the tender.
b. The By-laws on Professional Ethics, Conduct and Practice do not encourage
professional accountants to charge low fee in order to obtain new client. Since, the
objective of charging low fees is to win the tender; the audit firm will hope to recover
the low fees quoted in the tender either by increasing the audit fee in the future, or
by providing some lucrative non-audit services.
The problem is that when low fees are charged for the audit, the quality of the audit
work performed may suffer, as the temptation will be to cut back on audit work in
order to reduce costs. It could be perceived that the auditor is not acting with due
care and competence if not enough time is spent on audit work due to the low fee
attached to the audit work.
This perception is damaging to the firm concerned, and to the profession as a
whole.
IFACs Code does not prohibit this practice, but it does state that when a firm
obtains an audit appointment at a significantly lower fee than that quoted by
competitors or the predecessor audit firm, the firm should be able to demonstrate
that appropriate time and qualified staff are assigned to the audit, and that all
applicable standards are being adhered to.

C.
i.

Privity of contract
Refers to a contractual or fiduciary relationship of auditor and the party of the contract.
(2 marks)

ii.

Ordinary negligence an absence of reasonable or due care in the conduct of an


assignment
(2 marks)

iii.

Professional indemnity insurance (PII) is an insurance policies that provide cover for
practitioners against claims for professional negligence. The purpose of PII is to ensure
that practitioners have the means to meet any claims of this nature
(2 marks)

Question 3b
1. discuss among the audit team members the risks of material misstatement due to
fraud such as share insights about the entity and its environment and the entitys
business risks
2. inquire management and others about their views on the risks of fraud and how it is
addressed i.e auditor should inquire managements knowledge of fraud in the entity.
3. Consider any unusual or unexpected relationships that have been identified in
performing analytical procedures in planning the audit.
4. Understand the clients period-end closing process and investigate unexpected
period-end adjustment
(2 marks each with explanation x 4 = 8 marks)
Question 5d
The elements that AEM Bank must proved that defendant is liable to third party due to
negligence and fraud. (Indicate a law case if necessary)
1.

Duty of care: The auditor owed a duty of due care to the plaintiff .(cited 1
case)
(1.5 marks)

2.

Breach of duty of care: The auditor has failure to act in accordance with
due care. The standard of care is that of the reasonable skill and care of another
person carry in the same assignment. .(cited 1 case)
(1.5 marks)

3.

4.

Casual relationship: There is casual relationship or connection between


the auditors negligence and the plaintiff damage. .(cited 1 case)
(1.5 marks)
Damage: The plaintiff suffered actual loss or damage
(1.5

marks)

(Each 4 points with explanation x 1.5marks = 6 marks)


JUNE 2013
Question 1
A.
A professional accountant shall comply with the following fundamental principles:
(a) Integrity - to be straightforward and honest in all professional and business relationships.
(b) Objectivity - to not allow bias, conflict of interest or undue influence of others to override
professional or business judgments.
(c) 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.
(d) 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.
(e) Professional Behaviour to comply with relevant laws and regulations and should avoid
any action that discredits the profession.
(Any 2 x 1.5 marks = 3 marks)
B.
Definition of auditing and assurance engagement
Auditing (broadly defined) is a systematic process of (1) objectively obtaining and
evaluating evidence regarding assertions about economic actions and events to ascertain
the degree of correspondence between those assertions and established criteria and (2)
communicating the results to interested users.
An assurance engagement is an engagement 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.
(1.5 marks for each explanation = 3 marks)
C.
Practice Review is the process whereby the standard and procedures of an audit firm is being
assessed by an independent body of auditors appointed by MIA together with representatives of

MIA itself (/). It helps to instill confidence of the public and investors by ensuring all members in
public practice maintain and observe the relevant professional standards (/)

Peer review means that an action of an individual person may be looked at again by someone
of similar competence in that activity (/). More formally it is a process of self-regulation by a
profession or a process of evaluation involving qualified individuals within the relevant field (/).
Peer review methods are employed to maintain standards, improve performance and provide
credibility
(2 marks each = 4 marks)
Question 2
A.
Issue

Threat to independence

Recommendation

Rotation of audit
partner

Mr Sam has been the audit


partner for the past five
years

Should rotate audit partner


especially if U-Dee is to be
listed in Bursa

This may give


familiarity threat

rise

to

Provision of nonaudit service

Sam & Co is providng both


audit and non-audit services,
ie preparation of financial
statements for U-Dee. This
may give rise to self-review
threat.

Sam & Co should not


continue in providing such
services.

Unpaid
taxation
fees due to Sam &
Co

Fees
outstanding
on
provision of taxation services
may be construed as a loan
to the audit client. Such
outstanding loan may affect
independence

Sam & Co should suggest


full
payment
of
the
oustanding taxation fees.

(3 marks each for issue identified and explained; and recommendation provided)
(3 x 3 marks = 9 marks)
B.
Auditors owe a duty of care to clients because they hold themselves out to have special skills.
When performing the duties of an auditor, all reasonable care and skill that could be expected of
a professional should be used. For example, refer to Kingston Cotton Mills, London General

Bank and Pacific Acceptance. Moffitt J gave the following comments with respect to the duty
of care in the Pacific Acceptance case:
It is beyond question that when an auditor, professing as he does to possess the requisite skills,
enters into such a contract to perform certain tasks as auditor, he promises to perform such
tasks using that degree of skill and care as is reasonable in the circumstances as they then
exist. That is the limit of his promise. That is the bare legal obligation and in the end the court
must come back in any case to the legal proposition and apply it to the courts view on the facts
found.
(Explanation = 3 marks)
The idea of reasonable care should then be applied to the case of Teduhan Ilmu in the following
way.
1

Do the auditors have the necessary skills to audit the company?


The fact that Teduhan Ilmu is both the largest and most complex client of the auditing firm
does not necessarily imply that the firm was not sufficiently skilled to perform the audit.
Every auditing firm will have a client that is the largest or most complex. The courts would
need to look at the specific performance of the audit, such as the skills and experience of
individuals assigned to the audit team as well as those involved in the review of the new
system and its implementation (including such factors as their relevant experience and
qualifications, especially given the IT environment), the skills and experience of the audit
partner, the use of experts, quality control of the audit such as staff supervision, review
procedures and so on.

Engagement of expert
The firm considered it necessary to engage an expert in the first year of the computer
system being operational. This might have been appropriate, but raises questions about
the firms ability to perform the IT section of the audit in subsequent years. The audit
software has been developed for them by the expert, but what about the impact on the
effectiveness of that audit software if the client has changed parts of the system since that
first year? Does the firm have the necessary skills to change the audit software to
incorporate those client-system changes?

Responsibility on audit opinion


Further, even where an expert is used, the auditor still need to have sufficient knowledge
of the area being reviewed by the expert to form the overall auditors opinion, which
remains the sole responsibility of the auditor (ASA 620.3/ISA 620.3).

Reliance on internal audit


Can the auditor rely on the tests of the program performed by the internal audit? The
auditor needs to perform their own tests to establish how long the programming problem
has existed and whether the financial effect is material.
5

Was the audit evidence obtained by the auditor sufficient and appropriate?
Did the auditor document all relevant procedures, including following up any errors noted?
Were the audit procedures appropriate, given the nature of the system, the experts
findings and increased risk occasioned by the introduction of a new and complex system?
Has the specialised audit software been updated for any changes to the software
program?

(Any 4 issues x 2 marks = 8 marks)


Total = 11 marks
Question 3
A.
i. The objective of a quality assurance review:
a. to determine whether the member is subject to an adequate system of quality control, is in
compliance with such system
b. adherence to professional standards and applicable legal and regulatory requirements in
performing engagements.
(1 mark each x 2 =2 marks)
ii. The objectives of the auditor to communicate with those with governance are:
(a) To communicate clearly with those charged with governance the responsibilities of the
auditor in relation to the financial statement audit, and an overview of the planned scope
and timing of the audit;
(b) To obtain from those charged with governance information relevant to the audit;
(c) To provide those charged with governance with timely observations arising from the audit
that are significant and relevant to their responsibility to oversee the financial reporting
process; and
(d) To promote effective two-way communication between the auditor and those charged
with governance
(Any 3 x 2 marks = 6 marks)

Question 5
a. Fraudulent financial reporting involves intentional misstatements including omission of
amounts or disclosures in FS to deceive financial users.
It can be caused by the efforts of management to manage earnings in order to deceive FS
users by influencing their perception as to the entitys performance and profitability.
(2 marks)
b. Fraud
Fraud Diamond

Examples

Opportunity

Companys directors arranged meetings with the senior


officers of the company without the knowledge of the
CEO
Shaniza the project controller is Dato Malik niece.
- Lack of communication among the board with the external

Pressure/Incentive

auditor lead to the Board fail to identify the problem in GCB.


- CEO threatened to replace the existing auditor it the issue
is highlighted in the auditors report
Rationalization

Capability

There are overdue amount receivable from few


companies but no further action has been taken by
management since these companies has been sponsoring
many events organized by the company
External auditor agreed to the management request since
GCB is one of the external auditor main client.
Dato Malik is the company director cum project manager
It has been the companys policy that any withdrawal
regardless of amount to be signed by the finance manager
(1.5 marks x 4 = 6 marks)

c. Indicators of fraudulent reporting


Red flags/indication of fraud in the
case
(1 mark each)

Implication if red flags are not


addressed
(1 mark each)

1
.

The existence of close family relationship


between the director in charge for a
project (Dato Malik) and the project
controller, Miss Shaniza.

Close relationship between the director in


charge and the project controller may
cause conflict of interest where the
personal
interest
supersedes
the
stakeholders interest in general.

2
.

Expenses incurred by the BOD and their


family members have been charged as
part of the companys expenses.

BOD will continuously take advantage of


their position to use the companys
money to pay for his expenses.

3
.

The CEO and BOD reluctant to increase


the provision for doubtful debt (PFDD) as
not to decrease the companys profit.

There is a possibility that receivables of


the company will not be able to pay the
debt in future. The attitude of CEO and
BOD which colluded with the external
auditor to hide the actual PFDD may also
lead to other fraud in the company
undetected.

4
.

Withdrawals of the company controlled by


only by the finance manager who rarely
takes his annual leave.

There is a possibility that he manipulates


his position to withdraw the companys
money for his own purpose.

5
.

Junior staffs in accounting department are


mostly lack of experience and not aware
of the accounting procedures and
principles.

There could be many irregularities


conducted by the senior accounting staffs
not tackled by the junior staffs or they are

not dare to voice out to the management.


6
.

Some of the directors are


companys projects to handle.

given

The situation may create conflict of


interest as the directors tend to increase
the cost for a project and act in their
interest rather than the interest of the
shareholders.

7
.

Directors of the company are paid three


times greater than other directors in the
same industry.

The situation can lead to manipulation of


power where the BOD has taken
advantage to obtain more payment for
their role in the company at the expense
of the shareholders interest.

8
.

The project controller, Miss Shaniza


realized that the project handled by his
uncle, Dato Malik does not meet the
companys and authorities standards.

Any project which is not following


specification might cause harm to the
public and such situation will be tarnishing
the companys image.
(6 points x 2 marks = 12 marks)

d. Ethical issues raised and leading to threats (violation of the MIA By-Laws)

Agreed to management request of not increasing the allowance for doubtful debt
intimidation threat and hence affects the auditors objectivity.
Significant amount of audit fee self-interest threat due to GCBs audit fee which
constitute 20% of the auditors annual earnings and hence objectivity.
(4 marks)
e. Several measures that can be taken by Zubair:
i)
ii)
iii)
iv)

Discuss the management whom he most trusted and believed not being part of the
management who take advantage of their position and work according to their interest.
Report to the members of BOD who have strong values and oppose to the misconduct
by other directors.
Report to the authorities such as MIA on external auditors action to collude with the
management or SC for the misconduct of the directors (eg: Dato Malik).
Report to the authorities for the fraud perpetrated by the finance manager.
(Any 3 measures with explanation x 2 marks = 6 marks)
(Total: 30 marks)

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APR 2011
Question 1
Part A
a
b
c

Integrity requires members to be sincere, honest and straightforward in his professional and
business relationships.
Members are required to maintain professional knowledge and skill at the level required to
ensure competent services are provided and to act diligently in accordance with technical
and professional standards.
Members should comply with relevant laws and regulations and should avoid any action that
discredits the profession.
(3 x 2 marks = 6 marks)

Part B
a

Circumstances that have potential threats to auditors independence when accepting audit
engagement:

Self - interest threat


The auditor having close business relationship with the audit client, the audit firm has a
financial interest in audit clients affair, receiving gifts and hospitality from audit client

Self- review threat


The audit firm, being the auditor, is also involved in the preparation of accounting records
and financial statements of the audit client

Familiarity threat
The audit firms long association with the audit client may be over influencing the auditors
professional judgement with regards to the audit

Intimidation threat
The audit firm may be intimated by threats that they may be sued by the audit clien or may
be sued by the audit client or loss of audit engagement

Advocacy threat
The audit firm is promoting the shares of a listed audit client
(any 4 x 1 mark = 4 marks)

12

Reasons why the situations could create threats to auditor independence are:
1

Direct financial interests in an audit client by the partner in charge may create selfinterest threat.
Safeguards:
Dispose of the direct financial interest prior to the individual becoming a member of
the assurance team;
Remove the member of the assurance team from the assurance engagement (if
possible).

A close business relationship between the audit firm and the assurance client or its
management which involves a commercial or common financial interest may create selfinterest and intimidation threats.
Safeguards

Terminate the business relationship;


Reduce the magnitude of the relationship so that the financial interest is immaterial
and the relationship is clearly insignificant; or
Refuse to perform the assurance engagement.

Family and personal relationships between a member of the audit / assurance team and
a director, an officer or certain employees, depending on their role in management
decisions, of the audit / assurance client, may create self-interest, familiarity or
intimidation threats.
Safeguards
Removing the individual from the assurance team;
Where possible, structuring the responsibilities of the assurance team so that the
professional does not deal with matters that are within the responsibility of the
immediate family member; or
Policies and procedures to empower staff to communicate to senior levels within the
firm any issue of independence and objectivity that concerns them.

The provision of services by the staff of audit firm to a financial statement audit client
that involves the design and implementation of financial information technology
systems that are used to generate information forming part of a clients financial
statements may create a self-review threat.
Safeguards

The staff providing the assistance should not be given audit responsibility for any
function or activity that they performed or supervised during their temporary staff
assignment; and
The financial statement audit client should acknowledge its responsibility for
directing and supervising the activities of firm, or network firm, personnel.

13

The provision of services by the audit firm to a financial statement audit client that
involves the design and implementation of financial information technology systems
that are used to generate information forming part of a clients financial statements
may create a self-review threat.
Safeguards
The audit client acknowledges its responsibility for establishing and monitoring a
system of internal controls;
The audit client designates a competent employee, preferably within senior
management, with the responsibility to make all management decisions with
respect to the design and implementation of the hardware or software system;
The audit client makes all management decisions with respect to the design and
implementation process;
The audit client evaluates the adequacy and results of the design and
implementation of the system; and
The audit client is responsible for the operation of the system (hardware or
software) and the data used or generated by the system.

(1 mark for explanation + 1 mark for the identified safeguard measure x 5 = 10 marks)
(Total: 20 marks)
Question 2
Part A
Two (2) of the auditors liabilities under Statutory Law are:
1

Companies Act 1965: Duty to report companys financial statement (CA 1965) and become
whistle blower, i.e. to report a breach or non-compliance with any provision of the
Company Acts.

The recent amendment to Section 174 of the Companies Act 1965, which inserted
subsection 8A states that, an auditor who fails to inform the CCM on any serious offence
involving fraud or dishonesty is being or has been committed against the company or this
Act by officers of the company, can be fined up to a maximum of RM250,000 or
imprisonment up to seven (7) years or both. Hence, auditors are expected to be alert of any
error and fraud cases that could have been committed by their client.

Securities Industries Act 1983: (governed the trading of securities on the stock exchange).
The auditors need to report breach of securities law to authorities such as Securities
Commission.

14

BAFIA 1989: (licensing and regulation of banking institution). Any violation of BAFIA by the
bankers, the auditor needs to report to the central bank (Bank Negara) immediately.

AMLA 2001: (dealing with law and penalties of money laundering and measure for
preventing such activities). AMLA imposes a legal duty on a reporting institution including
auditor to report unlawful transaction to the Financial Intelligent Unit of Bank Negara.

SCA 1993: (establish Securities Commission as approving and registering body for
prospectus issued in connection with public securities offering). The auditor is responsible to
report non-compliance of the Act by the company or borrower in the case of issuing
debenture
(any 2 x 2 marks = 4 marks)

Part B
a

In this case, it is stated that the firm has performed several audit procedures to determine
whether the management of Total Wellnesss claim on the advice of the legal advisor and
pharmaceutical expert was valid (). However, the depth of such procedures could be
questioned () as to whether the legal advisor and the pharmaceutical expert have provided
substantial or concrete justification ()as why there is no valid ground to such claim by their
overseas partner (cum distributor). Based on the facts given, the audit firm should have
performed more substantive tests to verify the clients claim (). Thus, it would be probable
that Hassan and Co to be liable for being negligent.
( 4 () x 1 mark = 4 marks)

To owe duty of care, the following would have to be established: ()()


The financial statement was prepared on the basis that it would be conveyed to a third
party;
The financial statement would be conveyed for a purpose that was likely to be relied
upon by that third party.
The third party would be likely to act in reliance on the report, thus running the risk of
suffering the loss if the statement was negligently prepared.
This called for the Test of Proximity. i.e. testing to identify the primary, foreseen relationship
and the foreseeable third party relationship. Arguments should be supported with relevant
legal cases. (). In the light of the case in question, it would be unlikely that the investor
would be successful in their lawsuit against the audit firm as the financial statement was not
presented purposely to attract more investors. ()
4 () x 1 mark = 4 marks)

Part C

15

By Your Firm:
1. A member who is being asked to act by a prospective client should explain to the
prospective client that he has a professional duty, if ask to act, to communicate with the
existing auditor.
2. A member should request permission from the prospective client to give written authority
to the existing auditor to discuss the clients affairs with the member. If the prospective
client refuses to give the existing auditor permission to discuss the clients affairs with the
proposed auditor, the proposed auditor should not accept such appointment.
3. If permission is granted, the member should then write to the existing auditor seeking
information which could influence his decision as to whether or not he may properly
accept appointment.
4. If the existing auditor fails to respond within a reasonable time, the propective auditor
should contact the existing auditor by other means, e.g telephone etc.
5. Once the prospective auditor has received confirmation that there are no reasons not to
act, or has become satisfied that he can properly act, and is prepared to accept
appointment, he should inform the client.
(4 x 1 mark = 4 marks)

By Rashid & Co:


1

The existing auditor should obtain a written authority from the client to communicate with
the prospective auditor.

The existing auditor should quickly answer the communication from the prospective
auditor.

If there is such matter, he should inform the prospective successor of those factors
within his knowledge of which, in his opinion, the latter should be aware. It is not
sufficient to state that unspecified factors exist.

If client refuses to give the existing auditor permission to discuss the clients affairs with
the proposed successor, the existing auditor should report the fact to the prospective
auditor.
(4 x 1 mark = 4 marks)
(Total: 20 marks)

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