Group audit and others

Jan 2018

A. Mariam is assigned to conduct financial statement audit on MLK Global Venture, a company
that have two subsidiaries in Singapore and Indonesia. The company also has three local
subsidiaries in Kuala Lumpur. The subsidiaries are audited by other audit firms. The
subsidiary in Indonesia was issued a modified opinion, due to its unverified sales and
inventories amount in its financial statement, while one subsidiary in Kuala Lumpur had
unmodified opinion with emphasis of matter paragraph. Mariam and her team is planning for
audit of MLK Global Venture.

Required:

i. Discuss TWO (2) advices on how Mariam should evaluate the work of other auditor.
(4 marks)

ii. Describe the type of audit opinion that might be issued for the holding company MLK
Global Venture Bhd.
(3 marks)

A. i. In evaluating the component auditor, the group engagement partner would advise the other
auditor of:
1. The independent requirements and obtained from the other auditors a written
representation that they have complied with independence issues
2. The accounting, auditing and reporting requirement and obtained from the other auditor
a written representation that the have complied with accounting, auditing and reporting
requirement.
3. The principal auditor would inform the other auditor of matters such as areas requiring
special consideration, procedures for identification of inter-company transaction for
disclosure and also timetable for completion of the audit.
4. Principal auditor should review the audit procedures applied, review a written
representation of the other auditor and review working paper of other auditor.

ii.
 Unmodified Report with unmodified opinion –Unqualified
 Modified Report with modified opinion - qualified

When group engagement partner (GEP) concludes that the work of the other auditor cannot be
used and the GEP has not been able to perform sufficient additional procedures regarding the
financial information of the component, the (GEP) should express:-
 Modified Opinion (Qualified) if not so material and not pervasive or
 Modified Opinion (Disclaimer) if material and pervasive

 If component auditor issued Modified report on the component:-

 GEP should consider the significance towards the whole group:-
 If immaterial effect to the group, GEP may express unmodified opinion
 If not so material effect to the group and not pervasive, GEP may express
modified opinion (except for)
 If significance (material) effect to the group and pervasive, GEP may express
modified opinion (disclaimer due to limitation of scope) or (adverse due to
disagreement)
 June 2014

A. Internal audit is an appraisal activity established or provided as a service to the entity. Briefly
discuss the importance of effective internal audit function in order to achieve good corporate
governance.
(4 marks)

B. You are the manager responsible for the audit of Perusahaan Bersatu Bhd, a manufacturing
company with a year ended 31 December 2013. In the previous years, several investment
properties have been purchased to provide rental income. The properties have been revalued
at the year-end in accordance with FRS 140 Investment Property. The properties have been
recognised on the balance sheet at a fair value of RM8 million, and the total assets of
Perusahaan Bersatu Bhd are RM160 million at 31 December 2013. An external valuer has
been appointed to determine the fair value for each property.

Required:

Explain the factors need to be considered before placing any reliance on the work of the
external valuer.

(6 marks)

C. You are an audit partner in a medium audit practice. Recently, your firm has been appointed as
the auditor to Dynamic Bhd. Dynamic Bhd intends to develop and install a new on-line
computer based accounting system. As you are the partner in charge for the audit of Dynamic
Bhd, the directors are seeking your guidance on the controls to be included in the new system.

Required:

i. Identify four (4) characteristics of a computerized accounting system which distinguishes

it from the conventional systems.
(4 marks)

ii. Explain the purpose of general control and application control and provide two (2)
examples of each type of control.
(6 marks)
(Total: 20 marks)

solution

A. The Institute of Internal Auditor (IIA) identifies the four cornerstones of corporate governance
as being: the audit committee, executive management, the internal auditors, and the external
auditors. The internal audit function can help management and the board identify and manage
risk and help ensure the compliance of the organisation /with applicable laws, rules, and
regulations. In addition, if reporting responsibilities are properly defined, the internal audit
function can assist the audit committee in ensuring that executive management is exercising
responsible and appropriate stewardship over the entity’s resources for the benefit of the
entity’s stakeholders//.
 A. Enquiries would need to be made for two main reasons, firstly to determine the competence,
and secondly the objectivity of the valuer.

AI 620 Using the Work of an Expert contains guidance in this area.

i. Competence
Enquiries could include:
– Is the valuer a member of a recognised professional body, for example a nationally or
internationally recognised institute of registered surveyors?
– Does the valuer possess any necessary licence to carry out valuations for companies?
How long has the valuer been a member of the recognised body, or how long has the valuer
been licensed under that body?
– How much experience does the valuer have in providing valuations of the particular type of
investment properties held by Perusahaan Bersatu Bhd?
– Does the valuer have specific experience of evaluating properties for the purpose of including
their fair value within the financial statements?
– Is there any evidence of the reputation of the valuer, e.g. professional references,
recommendations from other companies for which a valuation service has been provided?
– How much experience, if any, does the valuer have with Perusahaan Bersatu Bhd?

ii. Objectivity:
Enquiries could include:
– Does the valuer have any financial interest in Perusahaan Bersatu Bhd, e.g. shares held
directly or indirectly in the company?
– Does the valuer have any personal relationship with any director or employee of Perusahaan
Bersatu Bhd
– Is the fee paid for the valuation service reasonable and a fair, market based price?
With these enquiries, the auditor is gaining assurance that the valuer will perform the valuation
from an independent point of view. If the valuer had a financial interest in Perusahaan Bersatu
Bhd, there would be incentive to manipulate the valuation in
a way best suited to the financial statements of the company. Equally if the valuer had a
personal relationship with a senior member of staff at Perusahaan Bersatu Bhd, the valuer may
feel pressured to give a favourable opinion on the valuation of the properties.
The level of fee paid is important. It should be commensurate with the market rate paid for this
type of valuation. If the valuer was paid in excess of what might be considered a normal fee, it
could indicate that the valuer was encouraged, or even bribed, to provide a favourable
valuation.

C.
(i) Four (4) characteristics of a computerized accounting system which distinguishes it from the
conventional systems.
1. Processing of financial data & explanation.
2. Storage of financial data in the computer hence no audit trail.
3. Communication of financial data transmitted through computer as opposed more
paper and documentation in the conventional system.
4. Organizational structure and procedures employed would differs. Eg: Segregation of
duties may be lessen.

(ii) The purpose of general control and application control and provide two (2) examples
of each type of control.

 General control – relates to overall information processing environment & have a

pervasive effect on the entity’s IS & operations. They include controls over the
following:
 Data centre and network operations
 Systems software acquisition, change & maintenance
 Access security
  Application system acquisition, development & maintenance

 Application controls relates to specific computer applications such as:

 Data capture control
 Concerned with validity, completeness & valuation IC objective
 Data validation control
 Processing controls
 Output controls
 Error controls

December 2015

ISA 600 deals with group audit highlighting duties of group engagement partner and their
coordination with the component auditors. This ISA requires the group engagement partner to
obtain satisfaction on the work performed by the component auditor.

Required:

i. Explain your understanding of Group Audit.

(2 marks)

ii. Discuss the challenges for the group engagement partner in planning and performing
the group audit.
(6 marks)

A. ISA 600 deals with group audit.

i. Group audit….
Group audit is the audit of a parent company and its subsidiaries as a group. The group
auditor ie the group engagement partner is responsible for providing the audit opinion on the
group financial statements. Components of the group financial statements can include
subsidiaries, associates, joint ventures, and branches. The components may be audited by
the group auditor, but may instead be audited by a different firm of auditors known as the
‘component auditors.’
.

ii. The challenges for the group engagement partner in planning and performing the group
audit…
a. The group structure can be complex and the existence of numerous components
within the group means that there may be several firms of auditors involved.
b. The group auditor must ensure that the group audit is carefully planned and that
communications with other auditors are made early in the audit process.
c. The group auditor needs to gather two types of evidence. Evidence regarding
individual components of the group may be gathered using a joint audit arrangement,
though this is not without disadvantages. Evidence on the consolidation process must
 be thorough, and planned with regard to numerous complex financial reporting
standards.

June 2016

Skywalker Sdn Bhd is one of the subsidiaries of Kylo Bhd. In the process of consolidating the
group accounts, it was noted that the financial statement of Skywalker Sdn Bhd was modified
due to insufficient evidence obtained in respect of the company's inventory. The value of the
inventory is 50% of the company's current assets. The group engagement partner however
was not very sure of the percentage of misstatement due to poor documentation of audit
working paper prepared by the component auditor of Skywalker Sdn Bhd. Furthermore, the
audit was assigned to a junior staffs cause significant doubts on the quality of audit work
performed.

Required:

i. Four (4) matters that should be taken into consideration before accepting the
appointment as group engagement partner.
(6 marks)

ii. Discuss the type of opinion that you as the group engagement partner would issue for
the group's financial statements.
(4 marks)

i. Factors to be considered prior to accepting the appointment as principle auditor.

 The materiality of the portion of the financial statements which the principle auditor audit.
 The principle’s auditor degree of knowledge regarding the business of the components.
 The risk of material misstatements in the financial statements of the components audited b
the other auditor
 The performance of additional procedures by principle auditor.

ii) Prior in forming an opinion, the group engagement partner (GEP) should

- discuss with the component auditor the audit procedures applied,

- review a written summary
- review the component auditor’s working papers.
In this situation the GEP unable to determine the % of misstatement of inventory due to poor
documentation of audit working paper prepare by the component auditor. If he concludes the work
cannot be used and the GEP has not been able to perform sufficient additional audit procedures,
then he should modified the audit report – disclaimer report due inability of the GEP to get
sufficient evidence the amount is material and pervasive to the group.
Otherwise if the amount of the misstatement is not so material and not so pervasive to the group,
the GEP should modified the opinion by issuing a qualified opinion with except for (inventory)
 June2013

Briefly describe the audit objective and audit procedures for the audit of related parties
transactions.

. The audit objective for related party transaction is to ensure appropriate disclosure in the financial
statement as to the parties to the transaction, the nature of the transaction and amount , if any.

Procedures that can be taken are:

(i) review last year working paper to identify related parties and their transactions, review
minutes, corporate structure
(ii) discuss with management the purpose and nature of the transactions
(iii) inspect documentary evidence
(iv) obtain a representation letter as to the adequacy of disclosure.

Dec 2010

ISA 580: Management Representations states that an auditor should obtain written confirmation of
appropriate representations from management before issuing the audit report.

Required:

i. Explain the main purpose of a representation letter and the extent to which it
constitutes sufficient appropriate audit evidence.
(3 marks)

ii. Explain the effect on the audit and the action to be taken by the auditor if the directors
refuse to sign the representation letter.
(4 marks)

iii. Differentiate the differences between representation letter and management letter.
(3 marks)

i. The main purpose of the management representation letter is to provide written audit
evidence on matters that are material to the financial statements when other audit evidence
cannot reasonably be expected to exist (ISA 580) The letter also includes confirmation that
all matters occurring since the balance sheet date that should be brought to the attention of
the auditors have been brought to their attention, and that all the accounting records have
been made available to the auditors .

Letter of representations do not necessarily constitute sufficient evidence Auditors must

consider all available evidence and their reliability in forming an opinion.
 Even though representations may be the only evidence, which can reasonably be expected
to be available, but they cannot be a substitute for other audit evidence where more
reliable evidence would be expected to be available.

ii. If directors refused to sign, the auditor must determine the reasons for such refusal and to
consider the effects on the overall sufficiency of evidence.

The auditor should explain to the directors the need of that letter in coming up with the audit
opinion. Explanation may include the fact that the letter will not extend the directors’
responsibilities for financial statements . After all, signing of that letter was also mentioned
in the engagement letter. The auditor must clearly explain that if sufficient appropriate
evidence is not obtained, then the audit report will have to be modified .

If management still refused to sign, and the auditor feels that the matter is significant to the
financial statements, it may be necessary to qualify the audit report with an except for or
even disclaimer of opinion, on the basis of a limitation on the scope of the audit uncertainty.

iii. Representation letter is a letter from the client management to auditor to reply inquiries
made by auditor on matters that are material to the financial statement when other form of
audit evidence is not expected to exist. Whereas management letter is a letter from the
auditor to client management to communicate internal control weaknesses of the client
company after the completion of the audit

March 2015

A. Usaha Gemilang Sdn Bhd (UGSB) is an investment holding company with several subsidiaries.
For the financial year ended 30 September 2014, the audited financial statements of two main
subsidiaries, Glom Pte Limited and Super Pte Limited, both incorporated in Syria, are not
available due to the war situation. Given the circumstances, the consolidated financial
statements of UGSB have been prepared using the unaudited management accounts of the
two subsidiaries.

The financial effects of these two subsidiaries are material to the consolidated financial
statements of UGSB.

Required:

i. Describe any four (4) factors to be considered by the auditor of UGSB when planning to
rely on the work of component auditor.
(6 marks)

ii. Explain any two (2) procedures that the principal auditor should carry out when planning
to rely on the work of component auditor.
(2 marks)
B. Dana Jewels Bhd, a jeweller, has recently appointed your firm as its auditors. The company’s
inventories include diamonds, rubies and other precious stones which are in different stages of
processing. The company has informed you that it will appoint a valuer (an expert) to value the
inventories for the year-end audit.

Required:

Explain any four (4) criteria that should be considered when deciding whether you can rely on
the work performed by the valuer (expert).

(6 marks)

QUESTION 4
A.
i. Factors to be considered when planning to rely on the work of component auditor include:
(i) The competence of the another auditor including their professional membership, training
and education
(ii) The risk of material misstatements in the financial statements audited by the component
auditor
(iii) The ethical standards or the independence of the component auditor
(iv) The audit method adopted by the component auditor
(v) The scope of work that the component has performed
(vi) Effective communication with the component auditor at the planning stage and review of the
financial statements at the final stage of the audit.

ii. procedures required when planning to rely on the work of another auditor
1. Consider the professional competence by reviewing their working papers of the
component auditor
2. Group Engagement Partner should perform procedures to obtain sufficient appropriate
audit evidence that the work of the component auditor is adequate.
3. The Group Engagement Partner should consider by checking the significant findings of
the component auditor.

B. When planning to use the work of an expert, the auditor should assess the professional
competence of the expert. This will involve considering the expert’s:
 professional certification or licensing by, or membership in, an appropriate professional
body;
 experience and reputation in the field in which the auditor is seeking audit evidence.
 The auditor should assess the objectivity of the expert. The risk that an expert’s
objectivity will be impaired increases when the expert is:
i. employed by the entity; or
ii. related in some other manner to the entity, for example, by being financially
dependent upon or having an investment in the entity.
 The scope and quality of the expert’s work whether relevant and adequate to meet
auditor’s objective.