AUD589 AUDITING 1
SUGGESTED SOLUTIONS
DECEMBER 2019

QUESTION 1

 A. Audit plan

planning:
ning:
i. List three (3) principal contents of an engagement letter:
 The objective of financial statement audit
 Management’s responsibility for the financial statements
 The scope of audit, including reference to applicable standards
 The form of opinion – inability to form opinion if audit is not completed
 The inherent limitations of an audit (fraud/error) and there are risk that material
misstatement may be uncovered
 Deadlines
 Schedules to be prepared for auditor 
  Audit fees
fees
C1 (Any 3 X 1 mark each = 3 marks)

ii. State three (3) benefits of planning an audit:

 Increase effectiveness and efficiency in audit work

Enable the auditor to obtain relevant and reliable evidence
 Helps to minimize audit costs by eliminating
eliminating unproductive works and focusing on
high risk areas
 Potential problems can be identified early and appropriate actions can be taken
to address the problem
  Audit procedures
procedures ca
can
n be performed
performed systematically
systematically
  Avoid misunderstand
misunderstanding
ing with the
the clients
C1 (Any 3 X 1 mark each = 3 marks)

iii. Explain any two (2) components of audit risk model:

 Inherent risk – Inherent risk is the risk posed by an error or omission in a financial
st
stat
atem
emen
entt due
due to a fa fact
ctor
or ot
othe
herr than
than a fail
failur
ure
e of inte
intern
rnal
al co
cont
ntro
rol.
l. In a
fin
finan
ancia
ciall audit
audit,, inhere
inherent
nt ris
risk
k is most
most likel
likely
y to occur
occur wh
when
en tra
transa
nsacti
ction
onss are

complex, or in situations that require a high degree of judgment in regard to

financial estimates.
 Control risk – Control risk, which is the risk that a misstatement due to error or 
fraud that could occur in an assertion and that could be material, individually or in
combination with other misstatements, will not be prevented or detected on a
timely basis by the company's internal control.
 Detection risk – Detection risk is the possibility that an auditor   will
will not detect
material
mate rial missta
misstatem
tement
ent in a client's
client's financial
financial stateme
statements
nts   after completing all
audit procedures.
procedures .
C2 (Any two X [1 mark for the name of the component + 1
mark for explanation] = 4 marks)

B. Aud
Audit
it risk MXM C
Commu
ommunica
nication
tion Sdn
Sdn Bhd:
Bhd:
 The company has just appointed a new CEO Encik Herman in 2019. This posed a
risk of familiarity threat due to the family relationship.
 

 The company had just opened two new branches in Sabah and Perlis – difficult to
manage due to diverse locations and the fact that they are new branches
branches opened at
more or less the same time.
 The company has purchase exclusive right of HEBAT phone – The mobile phone
model keep fastly changing across time.
 The sale of HEBAT phone has drop due to the competitor JAYYID phone – will affect
the revenues for MXM Communication Sdn Bhd.


The company
expansion increased the number of employees drastically by two fold – rapid
of business.
 The
Th e comp
compan
anyy hi
hire
red
d ne
new
w fr
fres
esh
h gr
grad
adua
uate
tes
s to pr
prep
epar
are
e fina
financ
ncia
iall st
stat
atem
emen
ents
ts –
inexperienced.
C4 (Any 5 with explanation X 2 marks each = 10 marks)
(Total: 20 marks)

QUESTION 2

 A. Audit evid

evidence
ence and audit proc
procedures:
edures:
i. Describe
Describe the term
term “suffi
“sufficien
cientt and appropria
appropriate”
te” audit
audit eviden
evidence:
ce:
 Sufficiency is the measure of quantity of audit evidence i.e. the amount of evidence
obtained must be enough that it can be used and considered by the auditor. The
quantity of audit evidence required depends
depends on the assessmen
assessmentt of risk conducted by
the auditor. If the risk of material misstatement is high then higher quantity of audit
evidence is required to establish (confirm) by the application of audit procedures.
C1 (2 marks)

  Appropriateness is the
 Appropriateness the measure of quality
quality of audit evidence.
evidence. A
Audit
udit evide
evidence
nce is said to
be appro
appropri
priate
ate if it is rel
releva
evant
nt and
and rel
reliab
iable
le in the
the given
given se
sett of circum
circumsta
stanc
nces.
es.
However, the appropriateness of audit evidence is affected by the time, source and
the circumstances under which such evidence is obtained.
C1 (2 marks)

ii. Identify the type of audit

audit evidence for
for each of the given
given audit procedure:
procedure:

Audit Procedure Audit Evidence

a. Compare duplicat
duplicate
e sales invoice with
with Documentation
sales journal for customer’s name and
account.
b. Obtain a letter from the
the bank
bank confirming Confirmation
the outstanding balance owed by the
client.
c. Count petty
petty cash to make sure the petty Physical examination
cash balance is properly accounted for in
the book.
d. Calculate the amount
amount of depreciation
depreciation Recalculation
charge for disposed assets.
C1 (1 mark each = 4 marks)
 

iii. Illustrate the purpose

purpose of conducting analytical
analytical procedures at three different
different phases:
 Planning:
- ana
analytic
lytical
al proced
procedures
ures can bebe use
usedd as ri
risk
sk as
assess
sessment
ment proc
procedu
edures.
res. IItt helps
helps
auditors identify significant matters requiring special consideration later in the
audit engagement, such as to:
o Understand the client’s industry and business
o  Assess going
going concern
concern
o

o
Indicate possible tests.
Reduce detailed misstatements

 Testing:
- ana
analytic
lytical
al proced
procedures
ures can be
be use
used
d as su
substa
bstantiv
ntive
e pro
proced
cedures
ures in
in col
collect
lecting
ing
appropriate audit evidence. They can be performed together with other
substantive procedures (substantive tests of transactions and tests of details
of balances) and they help to:
o Indicate possible misstatements
o Reduce detailed tests.

 Completion of audit:
- ana
analytic
lytical
al proced
procedures
ures can be
be use
used
d as p
part
art o
off an overa
overallll revi
review
ew of the ffina
inancia
nciall
statements for the auditors to reach conclusions about the fair presentation of 
the financial statements. The auditor shall design and perform analytical
procedures near the end of the audit that assist the auditor when forming an
overall conclusion as to whether the financial statements are consistent with
the auditor’s understanding of the entity. The analytical procedures help the
auditors to take a final review of the audited financial statements objectively
and help to:
o  Assess going
going concern
concern
o Indicate possible misstatements.
C3 (2 marks each with explanation = 6 marks)

B. Au
Audit
dit docum
documen enta
tatio
tion:
n:
i. Explain twotwo (2) p
purposes
urposes for the auditor to
to maintain
maintain audi
auditt docume
documentation:
ntation:
 It provides evidence of the auditor’s basis for a conclusion about the achievement of 
the overall objective.
 It provides evidence that the audit was planned and performed in accordance with
ISAs and other legal and regulatory requirements.
 It assists the engagement team to
team to plan and perform the audit.
 It assists team members responsible for supervision to direct, supervise and review
audit work.
 It enables the conduct of quality control reviews and inspections (both internal and
external).
C3  (1.5 marks each with brief explanation = 3 marks)
C3

ii. Compare between ‘permanent

‘permanent file’ and ‘c
‘current
urrent file’:
 Permanent file – Contain data of continuing importance from one year to
another. E.g: Company’s constitutions, organization chart.
 Current file - Contain data of applicable current year audit. E.g: Working
trial balance, Current year minutes of meetings
C3 (1.5 marks each = 3 marks)
 

(Total: 20 marks)
QUESTION 3

A.  Analyse six
six (6) interna
internall control weaknesse
weaknesses:
s:
B. Explain the impact of each of the weaknesses:

No A. Weaknesses B. Impact
.
1. Da
Daya
yang
ng is auth
author
oriz
ized
ed to open
open th
the
e mail
mails
s Dayang could have taken the cheques
containing cheques and to complete the (especially cash cheques) for her
recording of cheques without personal use and manipulate the
supervision. recording of cheques.
2. De
Depo
posi
sits
ts of
of ch
cheq
eque
uess int
into
o the
the bank
bank are Possibility for the cheques to be
made on a weekly basis. mishandled/misplaced due to gaps of
time as well as voluminous of
voluminous  of
cheques at the end of the week.
3. No se
segr
greg
egat
atio
ionn of
of d
dut
utie
ies
s as
as D
Dayayan
ang
g is
is Dayang could have committed fraud
responsible from end-to-end in handling and manipulate the recording of
the cheques including the the updating cheques.
of the cash receipt journal.
4. Erni
Erniee al
alon
onee iis
s aut
autho
horirize
zed
d to si
sign
gn Unauthorised issuance of cheques by

5. cheques
Pa
Paym
ymenentt below
in
inst
stru
ructRM100,000
ctio
ion
n fo
form
rms
s were
were Ernie
Ferhadmight
couldnot be detected.
have provided incorrect
presigned by the signatories and payment instruction for salary
information on the form were not payments to the bank.
verified by an officer before they are
submitted to the bank.
6. Ba
Bank
nk rrec
econ
oncicili
liat
atio
ion
n stat
statem
emen
ents
ts wer
were
e
Bank reconciliation statements should
prepared on a bi-monthly basis. have been prepared on a monthly
basis as the two-month gap would
make it difficult to reconcile the figure
between the bank account and bank
statement.
C4 & C5 (1 mark each for weaknesses + 1 mark each for impact X 6 answers = 12
marks)

C.  Assess two (2) strengths of internal control system implemented

implemented in the Finance and
 Accounts Departmen
Departmentt of Dinamik
Dinamik Utara Sdn
Sdn Bhd:
  Cheques issuance exceeding RM100,000 requires two signatories
  Salaries are paid through the bank account of the employees
  Bank reconciliation statements are prepared and verified by different person
C6 (Any 2 with explanation X 2 marks each = 4 marks)

D. Describe two (2) internal control objectives relevant to the activities carried out in the
Finance and Accounts Department of Dinamik Utara Sdn Bhd:
  To ensure that the company receives all cash that it is entitled from the customers
  To ensure that payments are made to genuine suppliers
  To ensure payments are made only for the goods that have been received
  To ensure employees’ salaries are paid on a timely basis
 
To ensure employees’ salaries and deductions are correctly computed
 

C6 (Any 2 with explanation X 2 marks each = 4 marks)

(Total: 20 marks)
QUESTION 4

 A. Audit of cash

cash and bank ba balances:
lances:
i. State two (2) risk factors in auditing cash and bank balances:
 Cash is the highly liquid asset in a company and it is an area of high inherent risk
since there is a relatively high risk of misappropriation.
  Almost all busines
business
s transactions
transactions will be ultimately settled through the cash
accounts, the audit of cash accounts also assists in the verification of other asset
and liability accounts as well as revenue and expenses.
 Handling of petty cash could be exposed to lack of control due to inherent nature
of the petty cash.
C2 (Any 2 X 1 mark each = 2 marks)

ii. Illustrate four

four (4) substantive
substantive audit procedures
procedures that
that an audito
auditorr would perfor
perform
m to obtain
sufficient and appropriate audit evidence in auditing cash and bank balances in Bistari
Endah Bhd:
 Obtain Bistari Endah Bhd bank account reconciliation and cast to check the
additions to ensure arithmetical accuracy.
  Agree the balance per the bank
bank reconciliation
reconciliation to an origi
original
nal year-en
year-end
d bank


statement
 Agree and to thetion’s
reconcilia bankbalance
the reconciliation’s confirmation
bala thletter.
nce per the e cash book
book to the year-end cash boo
book.
k.
 Trace all the outstanding lodgements to the pre year-end cash book, post year-
end bank statement and also to paying-in-book pre year end.
 Trace all unpresented cheques through to a pre year-end cash book and post
year-end statement. For any unusual amounts or significant delays, obtain
explanations from management.
  Any other answers.
other relevant answers
C3 (Any 4 with explanation X 2 mark each = 8 marks)

B. Audit of inventory:
i. Expl
Explai
ainn th
the
e fu
func
ncti
tion
on of ea
each
ch of th
the
e fo
foll
llow
owin
ing
g docu
docume
ment
nts
s us
used
ed for
for inve
invent
ntor
ory
y
management:
a. Re
Rece
ceiv
ivin
ingg rep
repor
ort:
t:
- reco
records
rds the
the receip
receipts
ts of goods
goods from
from supplie
suppliers.
rs. A c
copy
opy of
of thi
this
s doc
docume
ument
nt us
usuall
ually
y
accompanies the goods to warehousing department and is used to update
the perpetual inventory records.
C5 (2 marks)

b. Mat
Materi
erials
als requis
requisiti
ition
on for
form.
m.
- used
used by m man
anufa
ufactu
cturin
ring
g depa
departm
rtmen
entt to trac
track
k raw ma
mate
teria
rials
ls du
durin
ring
g the
production process. This document is used to authorize the released of raw
materials from the store/warehouse department.
C5 (2 marks)

ii. Expla
Explain
in th
three
ree (3) facto
factors
rs th
that
at may ca
cause
use co
compl
mplex
exity
ity for the
the audi
auditor
tors
s in audi
auditin
ting
g
inventory:
 

 inventories are usually major items in the balance sheet/

inventories sheet/SOFP
SOFP and it is often the
largest item making up the account included in the working capital.
 Inventories are sometimes placed in different locations which make the physical
control and counting difficult and time-consuming.
 Diversity of items (from raw materials, WIP and finished goods) creates difficulty
in valuing the closing stock, and that expose to the risk of occurring errors.



Obsolences
The of inventory make misappropriation
risk of pilferage/inventory it challenging for valuation.
is high especially if the control is
lacking.
C5 (Any 3 with explanation X 2 marks each = 6 marks)
(Total: 20 marks)

QUESTION 5
 A. Explain th
three
ree (3) con
contents
tents of an auditor’s
auditor’s report:
 Title
 Adressee
 Auditor’s opinion
opinion
 Basis for opinion
 Management’s responsibilities for the financial statements
 Auditor’s responsibi
responsibilities
lities for the financial
financial statements
statements
 Key audit matters
 Name of the engagement partner 
 Signature of the auditor 
 Auditor’s address
address
 Date of the auditor’s report
C3 (Any 3 with explanation X 2 marks each = 6 marks)

B. Determine the type of audit opinion

opinion that
that you would
would issue a
and
nd the rea
reason
son for su
such
ch opinion
for the following independent situation:

Types of opinion Justification

i. Unmodified There is no reason to issue modified opinion as the
(standard restatement has been agreed by auditors and complied
unqualified) opinion with laws and regulations.
ii. Modifi
ified opinio
ion
n The financial statements were not presented in a true and
(Adverse) fair view because they do not comply with the MFRS. This
material mistakement is considered to be material and
pervasive.
 

Types of opinion Justification

iii.
iii. Mo
Modidifi
fied
ed opin
opinio
ion
n The auditor is unable to audit all the documents because it
(disclaimer) is not allowed by the client. This has caused lack of
evidence which is deemed material and pervasive that the
auditor cannot form an opinion on the financial statements.

Modified opinion The auditor is unable to audit all the documents because it
(qualified/except for) is not allowed by the client. This has caused lack of
evidence but only with this respect. For all other items the
auditor has been able to obtain sufficient and adequate
evidence. Therefore, this situation is material and but not
pervasive to the financial statements.
iv Modified opinion The financial statements present a true and fair view except
. (qualified/except for) with respect to inventory, where its valuation method does
not comply with the MFRS. Non-compliance with the
MFRS is a mistatement and is deemed as material but not
pervasive to the financial statements.

Modified opinion The financial statements were prepared not in compliance

(adverse) with the financial reporting framework. Hence it does not
show a true and fair view and the impact is viewed as

material
C4 (1 mark and
for type ofpervasive
opinion +to1the overall
mark financial statements.
for justification = 8 marks)

C. Justify thre
three
e (3) conditions
conditions that
that should be met for the issuance of
of an unmo
unmodified
dified opi
opinion
nion
(standard unqualified) expressed in the auditor’s report:
  All statements - statements of financial
financial position,
position, income statement/Statement of
comprehensive income, statements
statements of changes in equity, statemen
statementt of cash flows
and notes to the accounts - are included in the financial statements.
 The ISAs have been followed in all respects on the engagement.
 Sufficient appropriate audit evidence has been accumulated.
 The financial statements are presented in accordance with approved accounting
standards.
 There are no circumstances requiring the addition of an explanatory
paragraph or modification of the wording of the report.
C6 (Any 3 with explanation X 2 marks each = 6 marks)
(Total: 20 marks)

END OF SUGGESTED SOLUTIONS FOR AUD589