AUD589 – JAN 2018

SUGGESTED SOLUTION
AUD589 – JAN 2018
QUESTION 1
A. a. Information is material if its omission or misstatement could influence the
economic decision of users (√) taken on the basis of the financial statements.
Materiality depends on the size of the items or error judged in the particular
circumstances (√) of its omission or misstatement. Thus materiality provides a
threshold or cut-off point (√) rather than being a primary qualitative
characteristic which information must have if it is to be useful.
(3 marks)

b. Steps in applying materiality on an audit:

 Establish a preliminary judgement about materiality.
 Allocate the preliminary judgement about materiality to account
balances or classes of transaction.
 Estimate likely misstatements and compare totals to the preliminary
judgment about materiality.
(3 answers x 1 mark each = 3 marks)

c. Qualitative factors:
 Amount involving irregularities are usually considered more important
that unintentional errors of equal ringgit amount.
 Misstatements that are otherwise minor may be material if there are
possible consequences arising from contractual obligations.
 Misstatements that are otherwise immaterial may be material if they
affect a trend in earnings.

Quantitative base for materiality is a percentage (typically 3 to 5 percent) of:

 Total assets
 Total revenues
 Income before taxes
 Income from continuing operations
 Gross profit
 Three-year average of income before taxes
(Any 2 with explanation for each type of factors x 1.5 marks each = 6 marks)

B. a. Benefits of analytical procedures performed during the planning stage:

 To better understand the business and to design the nature, timing and
extent to audit procedures.
 To assist in planning the nature, timing and extend of audit procedures.
 To identify potential errors.
 To determine areas that require detailed checking and substantive test.
(Any 3 with explanation x 2 marks each = 6 marks)

b. Examples of analytical procedures on current assets:

 Review the current ratio over several reporting periods.
 Compare account balances in inventories and costs of goods sold
accounts with the preceding year or years.
 Other relevant answers.
(Any 2 X 1 mark each = 2 marks)
(Total: 20 marks)

1
 AUD589 – JAN 2018
QUESTION 2

A. a. Audit evidence is the information used by the auditor in arriving at the

conclusions by which the audit opinion is based. It is the info use by auditors
to determine the validity of the management assertions in order to form an
opinion whether the financial statements give true & fair view.
(2 marks)

b. Explain the term “sufficient” and “appropriate” audit evidence with relevant
example for each of the terms.

 Sufficient - Adequacy of audit evidence which is measured primarily by the

sample size the auditor selects. e.g.: the quantity of evidence obtained
determined its sufficiency
 Appropriateness - Refers to the degree to which evidence can be
considered believable/trustworthy. e.g.: If an auditor counted the
inventory, that evidence would be more appropriate rather than the
management gave the figures.

(1 mark + 0.5 mark for example = 3 marks)

B. a. Circumstances under which the working paper can be used by other people.
 Can be used by client if auditor wants to release them after careful
consideration
 Can be subpoenaed by a court & thereby become court’s property
 Can be released to other users if auditor obtain permission from the
client
(Any 2 x 2 marks = 4 marks)

b. Explain why is it important for the auditor to document his audit work with
sufficient information.

 To aid the auditor in providing reasonable assurance that an adequate

audit was conducted in accordance with auditing std.
 To provide a basis for planning current year audit. For instance: by
making reference to previous year’s internal control system
 To provide a record of evidence accumulated
 To provide data for deciding the proper type of audit report
 To provide basis for review by partner/supervisor
(Any 3 x 2 marks= 6 marks)

C. External or internal evidence:

i. Bank reconciliation (Internal)
ii. Debtors aging report (Internal)
iii. Bank statements (External)
iv. Supplier invoice (External)
v. Purchase requisition form (Internal)
(5 marks)
(Total: 20 marks)

2
 AUD589 – JAN 2018
QUESTION 3

a, b & c
Weaknesses (a) Possible Effect (b) Recommendation (c)
No segregation of duties Payments made to fictitious There should be a
between the recording employees segregation of duty
and preparation of the between the person in
payment instruction to charge of recording and
the bank. preparing the payment
instruction.
The punch cards are not Possibility of missing punch A pre-renumbered punch
pre-numbered with serial card cannot be traced. card need to be
number. introduced.
Bank reconciliation is Concealment of defalcation Bank Reconciliation needs
prepared every month - that would normally be to be prepared by the
only prepared once in 2 detected by reconciliation of authorized person every
months. the related report month.

No internal verification on Payroll transactions may be The accountant need to

the work performed by incorrectly posted or omitted verify the work performed
the payroll clerk. from the payroll summary by the payroll clerk
file.
No checking of the debit Errors on the debit advice The accountant needs to
advice against the total which might result in assign an account clerk to
amount in the payment company losses. check the payment
instruction and the instruction against the
payroll summary report is payroll summary report in
performed when the order to avoid any error.
debit advice is received.
A staff in the human Error or fraud may be Assign specific staff to be
resource department occurred in-charge in key in and
keys in the actual hours recording the transaction
worked by the
employees into the
payroll system
only the net salary Miscalculation or wrong Should provide details
amount figure showing deduction of salary will calculation of salary on the
on the salary-slip occur. Staff will experiencing payslips.
over or underpaid

(4 marks for weaknesses x 2 marks each = 8 marks)

(4 marks for possible effects x 1.5 marks each = 6marks)
(3 points for recommendations x 2 marks each = 6 marks)
(Total: 20 marks)

3
 AUD589 – JAN 2018
QUESTION 4

A. Audit procedures to be performed for the audit of shareholder’s equity:

 Verify the amount of authorised share capital against MOA & AOA
 Examine whether total number of shares issues as per balance sheet agrees
with the total shares as per share register.
 Examine minutes of BOD meeting to ensure issuance and redemption of
shares during the year has been approved by BOD.
 Recompute the amount of share premium credited during the year.
 Check the computation of tax credit during the year.
 Inquire the management if there is any restriction on the payment of
dividends.
 Verify the number of shares held by the directors against the share register
(Any 3 + explanation x 2 marks each = 6 marks)

B. Advantages for sending for bank confirmation:

 The evidence should be reliable because banks usually maintain a high level
of internal control over records of customer balances
 Audit evidence is more reliable when it is obtained from knowledgeable
independent sources outside the entity.
 Any other relevant answers.
(Any 2 + explanation x 2 marks each = 4 marks)

C. a. Requirement that need to be fulfilled by auditors to ensure the effectiveness of

client’s internal control in handling the inventory:
 Be present at the time client count their inventory
 Observe the client’s counting procedure
 Make inquiries of client personnel about their counting procedures
 Make their own independent tests of the physical count
(Any 2 + explanation x 2 marks each = 4 marks)

b. Factors that affecting the complexity of auditing the inventory:

 Inventory is often the largest account on the balance sheet.
 Inventory is often in different locations, making physical control & counting
difficult.
 Diverse inventory items such as jewels, chemicals and electronic parts are
often difficult for auditors to observe and values.
 Inventory valuation is also difficult when estimation of inventory
obsolescence is necessary and when manufacturing costs must be
allocated to inventory.
 There are several acceptable inventory valuation methods.
(4 points x 1.5 marks each = 6 marks)
(Total: 20 marks)

4
 AUD589 – JAN 2018
QUESTION 5

A. Content of an audit report:

1. Title
2. Addressee
3. Introductory paragraph
4. Scope paragraph
5. Opinion paragraph/reporting
6. Name & signature of the auditors
7. Address of the audit report
8. Auditor’s report date

(Any 4 with brief explanation x 1.5 marks each = 6 marks)

B. Types of audit report and justification:

i. Modified – Adverse Opinion due to disagreement of client to disclose the

information in the FS as it will mislead the user if not disclose it accordingly.
ii. Modified - Disclaimer Opinion due to limitation on scope of audit as auditor
unable to perform procedures and incapable to form an opinion regarding the
receivable. The information is pervasive as it is significant to the FS as a
whole.
iii. Unmodified - Emphasis of matter due to going concern matter however the
information already disclosed in the notes to the accounts.
iv. Unmodified - Standard unqualified Audit Report - Auditor able to conduct
audit procedures to confirm the amount of inventories. No limitation on scope
of audit incurred.
(1 mark for type + 1 mark for justification = 8 marks)

C. Matters that need to be considered by the auditor before a standard unqualified

opinion is being issued.
 The auditors have obtained, without any restriction, all the information and
explanations he required
 The financial info has been prepared in accordance with Approved Acc
Standards (AAS) & presents a true & fair view of the transactions occurred
during the financial year
 There is adequate disclosure of all matters to present a true & fair view of all
financial information
 All auditors reporting duties under S.174 have been satisfied
 There are no circumstances requiring the addition of an explanatory
paragraph/modification of wording of the audit
(Any 3 with explanation x 2 marks each = 6 marks)
(Total: 20 marks)

END OF SOLUTION