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SET A - SUGGESTED ANSWERS

QUESTION 1

a) Emphasis on the establishment of proper quality control procedures is to ensure:


1. reduce audit expectation gap
2. gain public confidence
3. maintain integrity and professionalism of the auditor
4. minimise audit risk of issuing an incorrect audit report
(any 2 x 1 mark = 2 marks)

b) Six (6) elements of quality control for audit engagement

Elements Of Quality Control Policies And Procedures to be


established by the Audit Firm
Leadership responsibilities for The engagement partner shall take
Quality on Audits responsibility for the overall quality on
each audit engagement to which that
partner is assigned. The actions of the
engagement partner and audit team
should emphasize the importance of audit
quality and quality is essential in
performing audit engagements

Relevant ethical requirements Throughout the audit engagement, the


engagement partner shall remain alert
through observation and making inquiries
as necessary for evidence of non-
compliance with relevant ethical
requirements by members of the
engagement team.

Acceptance and Continuance of The engagement partner shall be satisfied


Client Relationships and Audit that appropriate procedures regarding the
Engagements acceptance and continuance of client
relationships and audit engagements have
been followed and shall determine that
conclusions reached in this regard are
appropriate.

Assignment of Engagement Teams The engagement partner shall be satisfied


that the engagement team and any
auditor’s experts who are not part of the
engagement team, collectively have the
appropriate competence and capabilities
to:
 Perform the audit engagement in
accordance with professional
standards and applicable legal and
regulatory requirements and

2
 Enable an auditor’s report that is
appropriate in the circumstances to be
issued

Engagement performance The engagement partner is ultimately


responsible for the performance of the
audit team. The engagement partner shall
take responsibility for:
 direction, supervision and performance
of the audit engagement in compliance
with professional standards and
applicable legal requirements
 reviews being performed in
accordance with the firm’s review
policies and procedures
 undertaking appropriate consultation
on difficult or contentious matters

Monitoring An effective system of quality control


includes a monitoring process designed to
provide the firm with reasonable
assurance that its policies and procedures
relating to the system of quality control are
relevant, adequate, and operating
effectively. The engagement partner shall
consider the results of the firm’s
monitoring process as evidenced in the
latest information circulated by the firm
and, if applicable, other network firms and
whether deficiencies noted in that
information may affect the audit
engagement.

(6 x 1.5 marks = 9 marks)

c) Four (4) factors to be considered by the quality control reviewer when reviewing
the work performed by the audit engagement team.

1. The work has been performed in accordance with professional standards and
legal requirements
2. Significant matters have been raised for further audit considerations
3. The evidence obtained is sufficient and appropriate to support the audit report
4. Appropriate consultations have taken place and the resulting conclusons have
been documented and implemented
5. Audit work performed support the consideration for the need to revise the
nature, timing and extent of work performed and also support the conclusions
reached by auditor
(any 4 x 1 mark = 4 marks)
(Total: 15 marks)

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QUESTION 2

A
a) The three major steps in assessing control risk in the inventory process are:

1. Understand and document the inventory internal control system based on


the planned level of control risk.
2. Plan and perform tests of controls on inventory process transactions.
3. Assess and document control risk for the inventory process.
(3 marks)

b) During the observation of the physical inventory count, the auditor should perform
the following procedures:

1. Ensure that no production is scheduled. If production is scheduled, ensure


that proper controls are established for movement between departments in
order to prevent double counting.
2. Ensure that there is no movement of goods during the inventory count. If
movement is necessary, the auditor and client personnel must ensure that
the goods are not double counted and that all goods are counted.
3. Make sure that the client’s count teams are following the inventory count
instructions.
4. Ensure that inventory tags are issued sequentially to individual
departments. If the client uses another method of counting inventory, such
as detailed inventory listings, the auditor should obtain copies of the
listings prior to the start of the inventory count.
5. Perform test counts and record a sample of counts in the working papers.
6. Obtain tag control information for testing the client’s inventory compilation.
Tag control information includes documentation of the numerical sequence
of all inventory tags and accounting for all used and unused inventory tags.
7. Obtain cut-off information, including the number of the last shipping and
receiving documents issued on the date of the physical inventory count.
8. Observe the condition of the inventory for items that may be obsolete, slow
moving, or carried in excess quantities.
9. Inquire about goods held on consignment for others or held on a ‘bill and
hold’ basis. The auditor must also inquire about goods held on
consignment for the client.
(any 6 x 1 mark = 6 marks)

c) Substantive tests that would document management’s completeness assertion for


year-end inventory would be:

1. Observation of physical inventory counts.


2. Analytical procedures for the relationship of inventory balances to
purchase, production, and sales activities.
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3. Inspection of shipping and receiving documentation for proper amounts
and dates to verify proper cut-off procedures.
4. Obtaining of confirmation of inventories at locations outside the entity.
5. Tracing of test counts recorded during the physical inventory observation
to the inventory listing.
6. Accounting for all inventory tags and count sheets used in recording the
physical inventory counts.
7. Recomputation of the inventory calculations for clerical accuracy.
8. Reconciliation of physical counts to perpetual records and general ledger
balances and investigation of significant differences.
(any 6 x 1 mark = 6 marks)

a) The key internal controls related to Realty’s property, plant and equipment, that
Alice may consider in assessing control risk include the following:

1. An annual budget is prepared and monitored to forecast and control


acquisitions and retirements of property and equipment.
2. Advance approval in accordance with management’s criteria is required for
property and equipment transactions.
3. Property and equipment transactions are adequately documented.
4. There are written policies covering capitalizing expenditures, classifying
leases, and determining estimated useful lives, salvage values, and
methods of depreciation and amortization.
5. There are adequate policies and procedures to determine whether
property and equipment are received and properly recorded, such as a
system that matches purchase orders, receiving reports and vendors’
invoices.
6. There are adequate procedures to determine whether disposition of
property and equipment are properly accounted for and proceeds, if any,
are received in accordance with management’s authorization.
7. A property and equipment subsidiary ledger is maintained showing
additions, retirements, and depreciation, and the ledger is periodically
reconciled.
8. Property and equipment is physically inspected and reconciled at
reasonable intervals with independently maintained property and
equipment records.
9. Adequate safeguards to protect property and equipment.
10. Property and equipment are insured in accordance with management’s
authorization.
11. Documents evidencing title and property rights are periodically compared
with the detailed property records.
(any 7 x 1 mark = 7 marks)
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b) The following substantive analytical procedures can be used in the audit of
property, plant and equipment:
1. Compare prior-periods balances in property, plant and equipment and
depreciation expense with current-period balances, taking into account any
changes in conditions or asset composition.
2. Compute the ratio of depreciation expense to the related property, plant
and equipment accounts, and compare to prior years’ ratios.
3. Compute the ratio of repairs and maintenance expense to the related
property, plant and equipment accounts, and compare to prior years’
ratios.
4. Compute the ratio of insurance expense to the related property, plant and
equipment accounts, and compare to prior years’ ratios.
5. Review capital budgets and compare the amounts spent with amounts
budgeted.
(any 3 x 1 mark = 3 marks)
(Total: 25 marks)

QUESTION 3

a) Assurance in the context of this Framework refers to the auditor’s satisfaction as


to the reliability of an assertion being made by one party for use by another party.
To provide such assurance, the auditors assess the evidence collected as a result
of procedures conducted and express a conclusion. The degree of satisfaction
achieved and, therefore, the level of assurance, which may be provided, is
determined by the procedures performed and their results.
(2 marks)

b) 1. In an audit engagement, the auditor provides a high, but not absolute, level of
assurance that the information subject to audit is free of material misstatement.
This is expressed positively in the audit report as reasonable assurance.
2. In a review engagement, the auditor provides a moderate level of assurance that
the information subject to review is free of material misstatement. This is
expressed in the form of negative assurance.
3. For agreed-upon procedures, as the auditor simply provides a report of the factual
findings, no assurance is expressed. Instead, users of the report assess for
themselves the procedures and findings reported by the auditors and draw their
own conclusions from the auditor’s work.
(3 x 2 marks = 6 marks)

c) In providing a negative assurance in a review engagement, the practitioner


provides limited level of assurance and a negative form of expression of the
conclusion. For example in an engagement to review financial statements, the
practitioner states in his report that nothing has come to his attention that causes
him to believe that the financial statements do not give a true and fair view and is
not in accordance with approved accounting standards.
(2 marks)
(Total: 10 marks)
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QUESTION 4

A. a. Purpose of engagement letter:

1. To establish an understanding between client and auditor of the terms of the


engagement and the nature of the work.
2. To avoid quarrels and misunderstandings between client and auditor.
3. To avoid disputes over the audit fee.
4. To avoid legal liability based on failure to do work that the auditor may not
have contemplated or agreed to do.
(any 3 x 1 mark = 3 marks)

b. The following factors may make it appropriate to revise the terms of the audit
engagement or to remind the entity of existing terms:

1. Any indication that the entity misunderstands the objective and scope of the
audit.
2. Any revised or special terms of the audit engagement.
3. A recent change of senior management.
4. A significant change in ownership.
5. A significant change in nature or size of the entity’s business.
6. A change in legal or regulatory requirements.
7. A change in the financial reporting framework adopted in the preparation of the
financial statements.
8. A change in other reporting requirements.
(any 3 x 1 mark = 3 marks)

B. a. Purpose of audit planning:

1. To devote appropriate attention to important areas of the audit.


2. To identify and resolve potential problems on a timely basis.
3. To properly organize and manage the audit engagement so that it is
performed in an effective and efficient manner.
4. To assist in the selection of engagement team members with appropriate
levels of capabilities and competence to respond to anticipated risks, and the
proper assignment of work to them.
5. To facilitate the direction and supervision of engagement team members and
the review of their work.
6. To assist, where applicable, in coordination of work done by auditors of
components and experts.
(any 3 x 1 mark = 3 marks)

b. To benefit from the partners wide experience and insight, thereby enhancing the
effectiveness and efficiency of the planning process and outcome.
(2 marks)

c. The methods and sources of information for understanding a client's business:

1. Inspection i.e. review of prior year audit documentation.


2. Inquiry of audit personnel who worked on the audit in prior years.

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3. Inquiry and interviews with the company's management, directors, and audit
committee.
4. Observation, i.e. take a tour of the company's physical facilities, keeping eyes
open for activities and things that should be reflected in the financial reports.
The tour is the time to see company personnel in their normal workplaces.
5. Study numerous sources, e.g. accounting and auditing standards, specialized
trade magazines and journals, general business magazines and newspapers.
(any 4 x 1 mark = 4 marks)

C. The auditor shall investigate the inconsistency by

1. Inquiring of management and obtain appropriate audit evidence relevant to


management’s responses.
2. Reviewing aging report for debts that are long outstanding.
(2 marks)

D. 1. Inherent risk – Lack of accounting and financial reporting skills as the accounts
executive is not qualified.
2. Inherent risk – The company’s operations are subject to regulations.
3. Detection risk – Incorrect sampling method. The test of controls should not deal
with monetary values.
4. Detection risk – Not corroborating with other procedures to obtain reasonable
assurance. Analytical procedures and inquiry will give moderate assurance.
(4 marks)

E. Types of assertions for tests of controls on sales transactions:

1. Occurrence
All sales recorded are bona fide transactions for service actually rendered to
the customers.

2. Accuracy
All sales have been appropriately recorded as to the monetary value and
information of sales transactions.

3. Classification
All sales have been recorded in the proper accounts.

4. Completeness
All sales rendered have been invoiced and recorded in the accounting records
(any 4 x 1 mark = 4 marks)
(Total: 25 marks)

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QUESTION 5

a. Appropriateness for “testing all the transactions”


1. There are very few items that make up the account balances, e.g. property, plant
and equipment.
2. Item of special importance, e.g. directors’ remuneration
3. Extraordinary item or one-off item.
4. Account with potential risk.
5. Auditor is put on inquiry.
(2 marks)

b. The factors which must be present before using statistical sampling


1. The population must be sufficiently large.
2. The internal control and accounting system is reliable.
3. All items within a particular population must be homogenous.
4. Items in the population must be both identifiable and accessible.
(4 marks)

c. If sampling has not provided a reasonable basis for conclusion.


1. Request management to investigate misstatements that have been identified and
the potential for further misstatements and to make any necessary adjustments; or
2. Tailor the nature, timing and extent of those further audit procedures to best
achieve the required assurance. For example, in the case of tests of controls, the
auditor might extend the sample size, test an alternative control or modify related
substantive procedures.
(2 marks)

d. Non-sampling risk, because it is the risk that the auditor reaches an erroneous
conclusion from using inappropriate audit procedures.
(2 marks)
(Total: 10 marks)

QUESTION 6

A. The errors/omissions are as follows

1. The title of the report should include the addressee. The title should be
“Independent Auditor’s Report to the Members of Retail Harian Sdn. Bhd.”

2. The report should consist of 4 paragraphs

a. Introductory paragraph
b. Directors’ responsibility for the financial statements
c. Auditor’s responsibility
d. Auditor’s opinion

3. The introductory paragraph should identify the entity and state which
financial statements are covered by the audit report. The usual wording is
“We have audited the financial statements of Retail Harian Sdn. Bhd. on
pages x to xx”.

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4. The paragraph of the directors’ responsibility for the financial statements
shall include an explanation that management is responsible for the
preparation of the financial statements in accordance with the Malaysian
Financial Reporting Standards.

5. The paragraph of auditor’s responsibility would then continue to state that


the audit was conducted in accordance with International Standards on
Auditing.

6. Auditors do not “certify” the financial statements. Auditors are required to


give an opinion as to whether the financial statements give a true and fair
view (not a fair and reasonable view)

7. Auditors are not required to form an opinion on the directors’ report,


although we are required to report if the information included in the
directors’ report is not consistent with the accounts.

8. Auditors are not required to ensure that all relevant sections of the
Companies Act have been complied with. However, auditors should state
that the financial statements have been properly prepared in accordance
with the Companies Act 1965.

9. The report should be signed both in the name of the audit firm and
personal name of the auditor.

10. The report should be dated and have the auditor’s address (e.g. city)
(any 9 x 1 mark = 9 marks)

B. i. Type of auditor’s opinion – Disclaimer.


Reason – The scope of the audit is restricted. Here, the auditor did not observe
the counting of the physical inventories as of 31 December 2012. Since, inventory
represents a substantial proportion of the shareholder’s fund in the financial
statements, therefore the effect on the financial statement is material and
pervasive.

ii. Type of auditor’s report – Adverse.


Reason – Here, the auditor found many significant irregularities in the internal
control over the purchases. Therefore, the misstatements do not confine to
purchases, but also to the accounts payable, inventories, and cash payments. As
a result, the effect on the financial statement is material and pervasive.

iii. Type of auditor’s report – Emphasis of a matter.


Reason – To avoid giving the impression that a qualification is intended. The
unqualified report meets the criteria of a complete audit with financial statements
provide the necessary disclosure, hence showing a true and fair view.
(6 marks)
(Total: 15 marks)

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