Beruflich Dokumente
Kultur Dokumente
QUESTION 1
(2 marks)
b. A practitioner is unable to provide assurance on the ultimate achievability of the results
contained in the prospective financial information (PFI) because:
i. PFI is based on assumptions on future events which may or may not materialize.
ii. The evidence available to support the assumptions also tends to the future
oriented.
i. Audit expectation gap – the difference between the expectations of the users of the
financial statements and the reality that the auditors can provide. For example,
users expect auditors to guarantee the accuracy of financial statements while
auditors can only provide reasonable assurance that financial statements are free
from material misstatements.
ii. Deep pocket theory – the tendency of the injured party to sue the auditors
regardless whether they are at fault or not. This is because auditor is often time
perceived as the only one left with financial resources to compensate the plaintiff in
cases of business failure.
(Total = 10 marks)
QUESTION 2A
a. As the auditor for both clients, Viva and Savy, such situation will give rise to conflict
of interest. As such, it is not advisable for the auditor to advise Savy on this matter so
as to maintain an unbiased opinion and to be independent.
(3 marks)
b. The audit manager holds 1% of the total shares in the client that he audits. The audit
manager’s shareholding is insignificant, further since the audit partner did not hold
any shares, there is no violation of the by-law. However, in the best interest of the
audit firm, it is best that this audit manager is not involved in the audit of Viva.
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(3 marks)
c. The audit fees worked out to be 12.5% of the total income for the audit firm. It
appeared that the audit firm is too reliant on the single client, as such the
independence may be threatened.
(3 marks)
QUESTION 2B
(1 mark)
(2 marks)
Trade receivables
Most of the company’s sales are on credit. The slow collection from trade receivable in
particular sales to Government hospitals posed a threat to the company’s cash flow in the
long run as such may pose high audit risk in ECM Libra Sdn Bhd.
Overseas expansion
The management’s plan to expand overseas under current condition may also be
contributing to the overall risk in the audit of ECM Libra Sdn Bhd. Uncertainty in the
economic situation in overseas market is one of the risk factors that need to be considered.
Due consideration needs to be given on the need to be familiarized with the change from
manual to accounting systems.
It is apparent that the company is looking at cutting down cost from the implementation of
computerized system, as such the risk involved may be high in this situation.
(Total: 20 marks)
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QUESTION 3A
(2 marks)
QUESTION 3B
(3 marks)
ii. The company has used a replacement cost inventory rather than the lower market
cost or market. The auditor was not able to verify the valuation. An ADVERSE
OPINION should be issued as the amount is material and pervasive.
(3 marks)
iii. The auditor was not able to examine all records as the company has lost some of
the records and also was engaged after the balance sheet date. Due to the
limitation of scope and because the amount is material and pervasive, a
DISCLAIMER REPORT should be issued.
(3 marks)
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QUESTION 3C
QUESTION 4A
ii) Under the test data approach, the auditor creates a set of simulated transaction data
for testing. The test data should include both correct and incorrect data. The
auditor manual calculated the processing result and run the test data through the
client’s application program. The application program tested by the auditor must
be the same as the client used for processing transactions and general control
relating to program changes, access and library functions are in place and
reliable. The results are compared to the predetermined result. The correct data
should be properly processed and incorrect data should be rejected as errors.
(3 marks)
QUESTION 4B
QUESTION 4C
Companies Act 1965 requires the principal auditor to express an opinion on all the group
financial statements as a whole but does not require all subsidiaries to be audited by the
principal auditor. As such, when the principal auditor did not audit all the subsidiaries in the
group, he has to comply with additional reporting requirements (S174 (2)(c) (i) and (ii):
(i) The name of the subsidiaries of which he has not acted as auditor; and
(ii) Whether he has considered the financial statements and auditors’ reports of
all the subsidiaries which he has not acted as auditor.
QUESTION 4D
Forensic accounting is where an assurance provider investigates a specific issue, often with
a legal consequence, such as a suspected fraud. Specifically it is the process of gathering,
analysing and reporting on data for the purpose of finding facts and/or evidence in the
context of financial/legal disputes and/or irregularities.
(2 marks)
The relevance here is that the external auditor is likely to be asked to provide a forensic
accounting service to Acepack Sdn Bhd. The investigation will consider two issues – firstly
whether the fraud actually happened, and secondly, if a fraud has taken place, the financial
value of the fraud. The investigation should determine who has perpetrated the fraud, and
collect evidence to help prosecute those involved in the deception. In this case the suspicion
that inventory is being stolen should be investigated, as there could be other reasons for the
discrepancy found in the inventory records.
(a) The provisions of MIA By-laws in avoiding conflicts of interest in the provision of
non-audit services to an audit client including the following principal areas:
i. Objectivity might be threatened by the provision of services other than audit. One
significant danger of providing non-audit services is that the product of those
services may be judged as part of the audit, example Aziah and Co advised on
the designed of the system and then tested the system as part of the audit.
Because of the involvement in the system implementation, Aziah and Co may be
less willing to comment adversely on the system.
ii. One way the regulations diminish this threat is to warn against any staff of the
audit firm becoming involved in executive management roles at the client, so that
audit staff are not given responsibilities which then have to be reported on by the
firm. In addition, objectivity may be improved by having different partners and
staff involved on the audit and non-audit work.
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On the provision of Companies Act 1965 are stated in Section 9(1) b, c and d.
* (Students must provide at least 2 points from CA 1965 and 2 points on MIA By-Laws)
(b)
There are several applicable requirements in ISA240 for the auditor’s responsibility
for fraud and errors:
Fraud is an intentional act by one or more individuals among management, those charged
with governance (management fraud), employees (employee fraud), or third parties
involving the use of deception to obtain an unjust or illegal advantage.
(c)
(3 marks)
(3 marks)
(3 marks)
(d)
The likelihood of success is due to the principal for duty of care of auditors. The Caparo
case indicates that the auditors have a duty of care to the company. However, whether this
duty of care means that the auditors will be liable is doubtful for the following reasons:
i. The auditor’s terms of engagement should have stated that the auditor carry out
procedures so as to have a reasonable expectation of detecting fraud that
materially impacts upon the accounts. It is questionable whether this fraud would
have had a material impact.
ii. Although the auditors did not comment on weaknesses in their management
letter, they may nonetheless be able to prove that they conducted an audit that
was in accordance with auditing standards.
iii. The letter of engagement should also state that the directors are responsible for
safeguarding the assets of the company, and for the prevention and detection of
the fraud. The directors do not seem to have taken their duties seriously enough
if approval of suppliers was just a formality.
(Any 3 points x 2 marks = 6 marks)
(Total: 30 marks)