FAR 360 – INTEGRATED ACCOUNTING STUDYAUDIT OF FINANCIAL STATEMENTS

TUTORIAL

QUESTION 1

A. Companies Act 1965 requires financial statements to be audited by an approved company auditor

Required:

I. State the Companies Act 1965 requirements on the disqualification of auditor.(3 marks)

II. Explain the auditor’s responsibilities under section 174 (2) of the Companies Act 1965, in relation to the reporting of financial statements.

(2 marks)

B. Juwita & Co, a public accountant firm was newly formed a few months ago. One of the audit partner, Juwita was an accounting graduate from UiTM and has been working with establish accounting firm for the past five years. With her vast experience, Juwita managed to be accepted as the MIA member and be awarded with the audit license to practice.

In promoting her audit services, Juwita & Co has printed name card for the partner and the audit manager. In the business card, it stated the name of the audit firm, address and contact number. Other than this, there are also personal particulars on the designation and qualification of the partner as well as audit manager.

Recently, Juwita has been approached by Citra Bina Sdn Bhd a construction company to become their company’s auditor. Without further investigation, Juwita accepted the offer. During the course of the audit, Juwita & Co did not encounter any problem with the assignment. As such, Juwita decided to charge the audit fee at RM300 with the intention to secure more professional engagement later in the future. In return for the services provided, the management of Citra Bina Sdn Bhd offered Juwita a share amounting to RM10,000 in a subsidiary company which is not audited by Juwita & Co. Juwita accepted the offer.

Required:I. From the case described above, explain two (2) situations which are in line with

the MIA By-Law or Companies Act 1965. State and explain the related By-law or Companies Act 1965 which is being followed by the firm.

Present your answer in the following format.Situations according to the By-Law/Companies Act 1965

The MIA By-Law/Companies Act 1965 followed.

(6 marks)

II. From the case described above, explain three (3) situations which are violate the MIA By-Law or Companies Act 1965. State and explain the related By-law or Companies Act 1965 which is being violated.

FAR 360 – INTEGRATED ACCOUNTING STUDYAUDIT OF FINANCIAL STATEMENTS

TUTORIAL

Present your answer in the following format.Situations violated the By-Law/Companies Act 1965

The MIA By-Law/Companies Act 1965 violated.

(9 marks)

QUESTION 2

A. An internal control system should be designed and operated to provide reasonable assurance that an entity’s objectives are being achieved.

Required:I. Briefly explain any four (4) limitations of internal control system.

(4 marks)

II. Explain the procedures to be performed by the auditors in order to ascertain or understand client’s internal control system.

(6 marks)

B. AI 300 planning states that auditor should plan audit work so that the audit will be performed in an effective manner.

Required:I. Explain the factors that an auditor should consider before accepting appointment

of a new client?(4 marks)

II. If a new client has previously been audited, explain the responsibilities of the successor auditor to the predecessor auditor.

(6 marks)

QUESTION 3

I. Explain why external evidences are more reliable than internal evidences(2 marks)

II. For each of the following audit procedures, indicate type of evidence is being gathered: (1) physical examination, (2) computation, (3) inspection of documentation, (4) confirmation, (5) analytical procedures, (6) inquires from client personnel, or (7) observation.

FAR 360 – INTEGRATED ACCOUNTING STUDYAUDIT OF FINANCIAL STATEMENTS

TUTORIAL

a. Examining a new factory equipment to ensure that the major acquisition was received.

b. Comparing the current year gross profit percentage with the gross profit percentage for the last four years.

c. Obtaining a letter from the client’s solicitor indicating that there were no lawsuits in progress against the client.

d. Performing test counts of the warehouse personnel’s count of the raw material.

e. Send confirmation letter to representative sample of debtors to ascertain the debtors’ amount

f. Carry out the subsequent clearance test on the bank reconciliation statement of the client

(6 marks)

QUESTION 4

A. Audit report is the final stage in the entire audit process. It is written communication of audit findings to the shareholders.

Required:

For each of the following independent situations, assume you are the audit partner on the engagement. State with reasons the appropriate type of audit report and opinion to be issued.

1. The controller of Hayatti Hotel Bhd will not allow you to confirm the receivable balance from three of its major customers. The amount of the receivable is material in relation to Hayatti Hotel’s financial statements. You are unable to satisfy yourself as to the receivable balance by the alternative procedures.

2. In the last three months of the current year, Palma Oil Refining Bhd decided to change direction and go significantly into the oil drilling business. Management recognizes that the business is exceptionally risky and could jeopardize the success of its existing refining business, but there are potential rewards. During the short period of operation in drilling, the company has had three dry wells and no successes. The facts are adequately disclosed in the notes.

3. The audit work on Sri Kompang Resources Sdn Bhd, revealed that an investment in quoted shares stated in the balance sheet at RM500,000, has suffered a material permanent fall in value of RM300,000. However, the company refused to make an allowance for diminutions in value in the account on the ground of expectations that the impact is temporary even though they admitted that loss has occurred.

(9 marks)

FAR 360 – INTEGRATED ACCOUNTING STUDYAUDIT OF FINANCIAL STATEMENTS

TUTORIAL

B. Analytical procedures are an important type of procedures on an audit. They consist of evaluations of financial information made by a study of comparisons and relationships among both financial and non-financial data.

Required:

I. Briefly describe three (3) main purposes of analytical procedures during different stages of audit.

(6 marks)

II. State and explain two (2) types of analytical procedures commonly used during audit.

(5 marks)

QUESTION 5

During the audit of Gemilang’s financial statements for the year ended 31 December 2007, supposed your team concludes that there is a possibility that inventories are materially overstated. Your team did not observe the physical counting of the inventories as at 31 December 2007, since that date was prior to the time you were initially engaged as the auditor of Gemilang. Furthermore, Gemilang refused to allow you to expand the scope of your audit sufficiently to verify whether the balances are actually misstated.

Discuss the condition of the above situation and recommend the appropriate audit report to be issued if the misstatement is considered to be material but not pervasive. Draft an audit report to incorporate the situation.

(10 marks)

QUESTION 6

Malaysian Institute of Accountants (MIA) has issued the by-laws on professional ethics and conduct (called “MIA By-Law [on Professional Ethics, Conduct and Practice]”) to provides a set of standard of conduct in daily professional life of accountants and it is important for gaining public confidence in auditors’ services. These by-laws are issued by the Council of MIA on 24 November 2006 and came into operation on 1 January 2007, revoke and supersede the by-laws revised January 2002. One of the important matter promotes by the by-laws is auditors must be and be seen independence from an audit client.

Explain with an example of the specified circumstances that may create potential threats to the independence.

(10 marks)

FAR 360 – INTEGRATED ACCOUNTING STUDYAUDIT OF FINANCIAL STATEMENTS

TUTORIAL

QUESTION 7

Audit documentation is also referred as working papers. Explain clearly the following audit working papers and give an example for each.

a) Permanent Filesb) Current Files

(6 marks)

QUESTION 8

Hanun is the major shareholder of Bumi Indah Berhad. She does not understand why some companies have both internal and external auditors. She argues that both types of auditors are actually performing similar functions. Do you agree with her argument? Discuss.

(6 marks)

QUESTION 9

The company records its inventory based on cost. In the audit findings, the net reliasable value of the inventory was RM389,000. The auditor has advised the management to amend the inventory figure. However, the management refused to do so. Except the inventory balance, other figures have been fairly presented.

a. Discuss the type of report that should be issued by the auditor and the reason for the type of report issued.

(5 marks)

b. Briefly explain FOUR (4) types of audit techniques used in collecting audit evidence.

(8 marks)

QUESTION 10

Syarikat Pusaka Amin Press is a medium size entity involve in printing business activities. The company consists of five different departments. You have been assigned to review the operation manual in purchasing and payment system implemented by the company. Brief descriptions of the operating procedures are as follows:

Samad is the clerk in the Purchasing Department. Upon receiving the purchase requisition, (from any department) he will select an appropriate vendor by searching through the vendor catalogues that registered with the company. He then will call the selected vendor and request a price quotation from the vendor. After negotiating the price and getting a verbal confirmation from the vendor, he then issued four copies of pre-numbered purchasing order and sends them to following departments; a copy each to the requisition department head, receiving department, accounts department and one copy will be kept in his own file.

FAR 360 – INTEGRATED ACCOUNTING STUDYAUDIT OF FINANCIAL STATEMENTS

TUTORIAL

Taufiq who is in-charged in receiving department, upon receiving the pre-numbered purchase order, will keep the document in an open file. When the particular goods have been received, he then will take out the pre-numbered purchase order and matched it with the delivery note which is attached with the goods delivered by the supplier. He will stamps the pre-numbered purchase order with the date received, and if applicable, using marker, he will note down any differences between the quantity stated in the purchase order and the quantity stated in the delivery notes from the supplier. He then will issue good received notes and forward it to the accounts department for payment processing and verbally notify the requesting department to collect the goods.

Samira, the accounts clerk will filed up the purchase order and good receive notes from receiving department. When the vendor’s invoice has been received, she then match it with the applicable purchase order and good receive notes and prepare a payment voucher. Then the voucher is forwarded to En Mazlan, Assistant Accountant for his approval and Samira will prepare a cheque which will be signed by the Accountant, En Azhar who is the head of Accounts Department. While signing the cheque, En Azhar also will counter sign the payment voucher as an authorization and approval for the payment made to the supplier. Then, Samira sends the cheque to respective suppliers and recorded the transaction in the account. Lastly she will file the payment voucher and its supporting documents in the paid invoice file.

Required:

a. Identify ten (10) weaknesses in the system and give five (5) recommendations to improve the system.

(15 marks)

b. Segregation of duties is an important element in Internal Control. Briefly describe why it is important to maintain a proper segregation of duties.

(3 marks)

c. What are the problems that may exist in implementing a formal internal control in small companies?

(2 marks)

GOOD LUCK