COMMON TEST

AUD 689 (ADVANCED AUDITING)

TIME : 1 HOUR 45 MINUTES
ANSWER ALL QUESTIONS

Question 1

A. Auditors are required to identify and assess the risks of material misstatement in the financial
statement, through understanding the entity and its environment, including the entity’s
internal control.

Required:

i. Explain two (2) importance of setting materiality threshold when performing the audit of
financial statements.
(4 marks)

ii. Explain the common approaches use by auditor in setting up the materiality level and
provide one (1) example for each approach identified.

(4 marks)
(Total: 8 marks)
Question 2

A. ISA 315, Identifying and assessing the risks of material misstatement through understanding
the entity and its environment, requires a discussion among the engagement team members
about the susceptibility of the financial statements to misstatement.

Required:

Provide FOUR (4) examples of matters to be covered in such discussions.

(6 marks)

B. Jaya Sdn Bhd involved in manufacturing health food products. The company has been
performing well in the past few years and is aiming to be listed on Bursa Malaysia next year.
However, they are now battling against rising prices of their raw materials due to the global
fuel price hike. They are unable to pass the increase in prices to the customers as the
industry is highly competitive and many new players have entered the market recently. The
chief executive officer, En Haron, is a result-driven person who will try to achieve targets at
all costs as his compensation package includes bonus that is based on the company’s
profitability. He has promised the chairman that he would ensure that the company will be
listed or would resign if he failed to do so. The chairman trusted En Haron implicitly and
never interfered with the day-to-day management of the company. Due to En Haron’s
aggressive management style, many senior managers, including the Finance Manager, left
the company and even the replacement staffs do not stay long.

1
 Required:

i. Describe any four (4) risks that are present in the above case.
(6 marks)

ii. Explain the audit procedures to be performed to identify the risk of material
misstatements.

(4 marks)
(Total: 16 marks)

Question 3

A. Audit firms are required to establish a system of control quality that implements policies and
procedures to monitor the firms’ practices. All firms are required to adhere to ISQC 1. In
adhering to ISQC 1, there are six elements that audit firms need to focus on.

Required:

i. Explain the following element of quality control under ISQC 1

a. Acceptance and continuance of client relationship
(2 marks)

ii. In dealing with quality assurance issue, the Malaysian Institute of Accountants (MIA) has
established a program called “Practice Review”. Explain three (3) reasons for practice
review program.
(6 marks)

B. Explain the three factors that the court stated must be proved for the auditors to be held
liable for negligence to a third party in a landmark case of Caparo Industries plc vs. Dickman
& Others.

(6 marks)

C. Explain the differences in liability to third parties under the foreseen user and foreseeable
user approaches to auditors’ legal liability.

(4 marks)
(Total:18 marks)

Question 4

A. Rafiq a chartered accountant was considering an appointment as the auditor in charge of Kapet Bhd.
His research about the company discovered in the past the company had a restatement because of a
significant error and falsification were discovered in its previous financial statements. Later, he
discovered the company was in financial problems and was negotiating for a loan from a local bank.
If accepted, Rafiq was also told to reduce the audit work to be performed so that the company can
meet the dead-line for submission purposes to the bank. He was also being convinced by the
company that the accountant that prepared the financial statements has expertise on the accounting

2
 matters and is reliable. Rafiq has just discovered in a school reunion a week before the offer of the
appointment that one of the significant managers was his close school friend and now his friend
insisted him accepting the appointment.

Required:

Discuss any three (3) ethical issues found in the above case and how to reduce the threats.

(12 marks)

B. A professional accountant in public practice may experience conflict of interest when

performing a professional service. A conflict of interest creates a threat to objectivity and
may create threats to the other fundamental principles.

Required:

Explain any three (3) examples of conflict of interest.

(6 marks)
(Total:18 marks)
TOTAL MARKS: 60 marks