PMI/ACA/14/ASC(14)/001

Rev. No.:0

MANTISSA
ASSIGNMENT COVER
SECTION A:
Programme
Module Subject:
Module code:
Name of Lecturer:
Assignment title:
Assignment
Submission date

PERSONAL PARTICULARS

(PLEASE USE BLOCK LETTERS)

DIPLOMA IN BUSINESS ADMINISTRATION

INTRODUCTION TO ACCOUNTING
BM 120
MR. VASANTHAN
(PRINCIPLE OF AUDITING)
(1909 words)
Name of Group
Extension date agreed
Actual Late submission
Members
(Written approval from
date
Mantissa office)

Explanation for Late

submission (if
applicable)
Interim mark awarded

IMPORTANT:
1. All completed assignments must be accompanied by PGSM front cover sheet
when submitted.
2. Students are required to submit their work through MORE Portal to ensure the
originality of their work.
3. All references must be fully cited in Harvard/ APA notation.
4. Plagiarism in any form will result in severe penalties.
5. Work submitted within up to 7 calendar days late = 10 marks subtracted.
6. Work submitted up to 10 calendar days late = 20 marks subtracted.
7. Work submitted more than 10 calendar days late = 1 marks awarded.
Declaration: I declare that

a) No part of this assignment has been copied from any other persons work except where due
acknowledgement is made in the text.
b) No part of this assignment had been written for me by any other person except where such
collaboration has been authorized by lecturer concerned.
c) All grades obtained by students are final. Appeal can only be made (on FAIL case only) to the
Academic Borad along with a payment of RM 100.00 to formalise the Process.
d) The University/ College uses plagiarism detection software.
Student Signature:

Ranjini

Date:

18/03/2015

Question 1
a. Based on research using the Internet and other resources, define
materiality and describe how it is used in both accounting and auditing.
Materiality is an accounting guideline that authorize the violation of another accounting
guideline if the amount is insignificant. (Anon., 2013)The information is material if its omission
or misstatement could influence the economic decision of the financial statement users such as
the shareholders, board of directors and the management team. Hence, materiality transmits to
the significance of transaction, balance and errors contained in the financial statements. It
expresses the threshold or deadline point after which financial information becomes important to
the decision making needs of those users. Information that contain in the financial statements
must therefore be complete in all material respects in order for them to present a true and fair
view of the affairs of the particular entity. Materiality in a whole is relative to the size and
particular of individual companies. The larger the company, the larger the materiality limit will
be.

b. Should the determination of the materiality be discussed with the audit

committee and the management before the beginning of the audit
engagement? Explain your rationales.
Audit firms have procedures to help them ensure that they are not associated with clients
where the management teams integrity is in question or where a company might otherwise
present the audit firm with unreasonably high risk. (Gramling, et al., 2012)Hence, auditors
shouldnt inform the audit committee and the management about any misstatement in the
materiality before the beginning of the audit engagement. The management team of the particular
company will take information given by the auditor before the audit engagement to alter the
upcoming years financial statement which might end up not prepared properly. This is because
the management team will already have a rough idea on the percentage that the auditor will audit
in the financial statement. The last point in the auditing process is where the auditors will make
decision about whether there are enough evidence that are gathered to support the audit opinion
and what type of opinion that should be issued. This is where the auditors will to an audited
financial statement report, where they will state that the clients business is free from
misstatement such as fraud and also whether the financial statement is true and fair view opinion.

c. What factors might an auditor look at in determining materiality for an audit client
prior to the start of the audit?
Auditors will normally check on three main factors in determining materiality for the
audit client prior to the start of the audit process. The auditors will check on the ratio analysis of
the company. They will check on the ratio analysis percentages of each separate invoices. The
ratio analysis that is performed will be based on the number of invoices that are given, so that the
auditors will know whether there are materiality misstatement or not. The more invoices there
are, the more ratio analysis are to be performed by the auditor. Auditors will also check the
amount of transaction. By reviewing the amount in the transactions, auditors will know how
much materiality test needed to be done. The more the amount in the transaction the more test is
to be performed by the auditors. The last factor that auditors will look into is the frequency of the
transactions. This factor is very similar to the amount of transaction factor. The higher the
frequency of the business, the more the auditors need to check because there might be a higher
ratio of frauds. Thus, the auditors will be checking on the financial statements more.
Question 2
a. Does GAAP require disclosure of the situation? Cite specific applicable standards.
As the auditor, I will first identify the ethical issue in this situation. I will validate the by
going through the financial statements and also to see whether it tallies with the customers
invoices. From the examination, I will know the core issue of the situation and I will know why
this scenario happened. The company Peaceful Land Ltd, made an accounting error due to the
poor internal accounting control which effected the material sales. Certain material sales of the
invoices were not recorded, which the sales revenue was $500,000 were and the cost of goods
sold is only $300,000. Due to this scenario, there will be certain consequences that might happen
such as the government might reduce their tax on this company because the financial statement
showed a lower selling amount. This might be a positive advantage for the company for a small
amount of time because when the government finds out, the company will be blacklisted which
may cause bankruptcy in the near future.
Once I have enough evidence of the material sales and other issues if there is, I will
disclose it to the management team of Peaceful Land Ltd. As an auditor it is also my
responsibility to provide my opinion and advise them on what to do to eliminate this material
sales issue to prevent blacklist or bankruptcy of the company. I will advise them to put in the

missing sales material to the financial statement and come up with a new one. If the management
team doesnt do as requested I will have to disclose this issues to the shareholders and if that
fails, as an auditor I will have to write it in the audit report on my findings. If this process fails, I
will have to resign as their auditor because this situation is fraud.
b. Regardless of your answer to part (a), use the ethical framework developed in Chapter
Three of this subject to determine whether the auditor should require either a recording
or disclosure of the transaction. If you conclude that the transaction should be disclosed
or recorded, indicate the nature of disclosure and your rationale for it.
From the situation above, after I have detected the ethical issues which is there is a
material sales misstatement in the financial statement, I will counsel the management team of
Peaceful Land Ltd to put in the missing amount figure of the transaction into the financial
statement. I will also advice the accountant of the company to key-in the missing data to the
accounting system so that the new financial statement will be more accurate. I will also provide
my opinion on the affected parties and identify their rights. Company management has the right
to assume that confidential information obtained by the auditor, which in this case is me, will
remain confidential unless disclosure is permitted by the company. Although with the right I will
inform them, I have to determine the most important right which is the payroll processors do not
have confidential information improperly disclosed. I will tell them that I will disclose the
material transaction that wasnt recorded in the financial statement into the audit opinion report.
In this report I will compose that this business transaction is not free from fraud, and I will state
the material transactions into the report.
As an auditor, it is my ethical responsibility to advice the client to record their
transactions. I have to have an ethical behavior such as confidentiality, professional behavior,
integrity, objectivity and also professional competence and due care. Confidentiality is where, as
an auditor, I shall respect the confidentiality of information acquired and not disclose any such
information to third parties without proper and specific authority, unless there is a legal or
professional right or duty to disclose, nor use the information for their personal advantage or the
advantage of third parties. As an auditor I will also need to have professional behavior where I
have to be oriented to the attainment of ends or goals, to regulate, which involves expenditure of
energy and efforts or motivations. I will also need to have integrity where I need to be honest and
fair for the whole time I am auditing for that client. I will also need to set my objectivity as an
auditor. This is where I need to work as an auditor and make sure there is no conflict of interest

such as no friendships or relationships while auditing that company. Lastly, I have to maintain
professional knowledge and skills at the level required to ensure that clients or employers receive
competent professional service and also to act diligently in accordance with applicable technical
and professional standards when performing professional activities or providing professional
services. This is called professional competence and due care. By using all this ethical behavior I
will advise my client to change the transaction, and if they dont do as I suggested, I will declare
this situation in my audit report with their permission. If this doesnt change, I will resign as the
auditor of Peaceful Land Ltd.
In a normal situation, clients will normally listen to the auditor and put the amount back
in the transaction and come out with a new financial statement. This is because the client has a
general knowledge on the negativity that will impact the company if they dont do as the told.
They will have a rough idea on the blacklisting of the company which will drive the investors
and shareholders away, which will cause the company to go to bankruptcy.

Reference
Anon., 2013. Accounting Simplified. [Online]
Available at: http://accounting-simplified.com/financial-accounting/accounting-concepts-andprinciples/accounting-materiality.html
[Accessed 14 March 2015].
Gramling, A. A., Rittenberg, L. E. & Johnstone, K. M., 2012. Auditing. 8th ed. s.l.:SouthWestern, Cengage Learning .
Anon, (2015). [online] Available at:
http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00312.pdf
[Accessed 14 Mar. 2015].
Bradley.bradley.edu, (2015). Materiality and Audit Risk. [online] Available at:
http://bradley.bradley.edu/~simonp/atg457/materiality.html [Accessed 16 Mar. 2015].
Gov.uk, (2015). Tax codes - GOV.UK. [online] Available at: https://www.gov.uk/taxcodes/overview [Accessed 16 Mar. 2015].
Oag-bvg.gc.ca, (2011). 1192 Confidentiality, safe custody, integrity, accessibility, and
retrievability of engagement documentation. [online] Available at: http://www.oagbvg.gc.ca/internet/methodology/performance-audit/manual/1192.shtm [Accessed 17 Mar. 2015].