Académique Documents
Professionnel Documents
Culture Documents
Code
: AUD 610
Credit Unit
: 3
Lecturer
Office
Week
Topic
Hours
Reference
0.5
Companies Act
1965
5.5
MIA By-Law
PART A
Section 100
Section 110
Section 120
Section 130
Section 140
Section 150
Section 200
Section 210
Section 220
Section 230
Section 240
Section 250
Section 260
Section 270
Section 290
Section 500
Section 540
Chapter 18
Clients
o Management Responsibilities
o Preparing Accounting Records and
Financial Statements
Fees
o Fees-Relative Size
o Fees-Overdue
o Contingent Fees
Gifts and Hospitality
Part II
B. Members in Public Practice
Method of Practice
- Method of Practice
- Establishment and Registration of Member Firm
- Branches
Referrals
3
2. Legal Liability
Liability under Statute liability to shareholders and
auditees
Liability under Common Law liability to third parties
o Candler vs. Crane, Christmas and Co
o Hedley Byrne vs. Heller and Partners
o JEB Fasteners vs. Marks Bloom and Co
o Caparo Industries plc vs. Dickman and Others
o Royal Bank of Scotland vs. Bannerman Johnston
Maclay and Others (2002)
Chapter 20
(Messier et al.
Malaysian text
book)
5.
6 & 7 6.
AI 315:
Understanding the
Entity and Its
Environment and
Assessing the
Risks of Material
Misstatement
Chapter 6
Relevant IASs
and IFRSs
Chapter 13, 14 &
15
AI 520: Analytical
Procedures
AI570: Going
Concern
AI560:
Subsequent
Events
AI510: Initial
Engagements
Opening Balances
AI710:
Comparatives
AI540: Audit of
Accounting
Estimates
AI 580:
Management
Representations
AI550: Related
Parties
AI701:
Modifications to
the Independent
Auditors Report
Chapter 16
11
ISA 700
Forming an
Opinion and
Reporting on
Financial
Statements
ISA 705
Modification to the
Opinion in the
Independent
Auditors Report
ISA 706
Emphasis of
Matter Paragraphs
and Other Matter
Paragraphs in the
Independent
Auditors Report
Chapter 17
12
AI610:
Considering the
Work of Internal
Auditing
AI620: Using the
Work of an Expert
Chapter 19
ISRE 2400:
Engagements to
Review Financial
Statements
ISRE 2410:
Review of Interim
Financial
Information
Performed by the
Independent
Auditor of the Entity
ISRS4400:
Engagement s to
Perform Agreedupon Procedures
Regarding
Financial
Information
ISRS4410:
Engagements to
Compile Financial
Information
ISAE 3400: The
Examination of
Prospective
Financial
Information
Chapter 20
Page 616 649
ISAE 3000:
Assurance
Engagements
Other Than Audits
or Reviews of
Historical
Financial
Information
13 & 14 15. Other Services
Consultation, Secretarial services and Taxation
Due diligence review
Forensic accounting/ auditing
Types of investigation
14
ISAE 3000:
Assurance
Engagements
Other Than Audits
or Reviews of
Historical
Financial
Information
Current articles
from various
journals.
Methods of Instruction
Lectures
Tutorials
Students Presentation
Assessment
Continuous assessment (40%) is as below:
Tests
15%
Quizzes (2 Quizzes)
10%
Group Assignments
15%
Final examination (60%)
Format of the final examination: Answer all 5 questions include 1 case study question
Main Texts
References
Auditing and Assurance Services William F. Messier, Steven M. Glover & Douglas
F. Prawitt (Second Edition US Edition)
Auditing and Assurance Services An Integrated Approach Alvin A. Arens, Randal J.
Elder & Mark S. Beasley 14th Edition
Companies Act 1965
Date
Topic
1 &2
29/2 13/3
Entrance Survey
29/2 4/3
7/3 11/3
Test
Exam
14/3 18/3
Legal Liability
Test
Exam
21/3 25/3
Test
Exam
Test
Exam
Test
Exam
Test
Exam
1&
2
3
4&
5
28/3 1/4
4/4 8/4
TBA
Test 1 (10%)
9/4 17/4
Semester Break
TBA
Test 2 (10%)
18/4 22/4
25/4 29/4
9&
10
2/5 6/5
9/5 13/5
11
16/5 20/5
12
23/5 27/5
Assessment
Hour
Exam
Sampling
6
3
(contd)
Computerized Information System
Exam
Quiz
Quiz
Exam
Quiz
Exam
Group Audit
Quiz
Exam
Quiz
Exam
Internal Auditing
Quiz
Exam
Quiz
Exam
Other Services
Quiz
Exam
28/5 5/6
Special Holiday
13 &14
6/6 19/6
Exit Survey
13
6/6 10/6
14
13/6 17/6
18/6 22/6
Revision Week
23/6 21/7
Exam
3
6
3
6
Measuring
Economic Events
External events, i.e.
transactions, events of value between
two or more entities.
Communicating
Management Assertions
Classes of Transactions:
Occurrence
Completeness
Accuracy
Cutoff
Classification
Account Balances:
Existence
Rights and Obligations
Completeness
Valuation and Allocation
Presentation and Disclosures
[March 2016]
Established Criteria
Approved Accounting Standards
Degree of Correspondence
[Reasonable Assurance:
In All Material Respects]
To Reasonably Assured, the Chartered Accountants Accumulate and Evaluate Evidence:
To Determine on the Degree of Correspondence
To Report on the Degree of Correspondence
Competent, Independent Person Chartered Accountant
Faculty of Accountancy, UiTMKampusPuncakAlam
[March 2016]
Types of Assertions:
Transaction-related audit objectives,
[March 2016]
o Credit sales
o Cash collection
Abuse of authority
Segregation of duties
Easy to misappropriate cash.
Abuse of authority
Performance review
No independent checking of the work done.
Performance review
No review of aging report.
Information processing
Documents are not completely recorded.
[March 2016]
Testimonial
Analytical
External
Recomputation
Procedures
Confirmation
Obsv
Repef
Computation
Inqr
ExCom
Recom
AProc
[March 2016]
Timeliness of evidence
Low
Obtained
Internally
Degree of objectivity
9
9
Acceptable
AR
IR
CR
Planned
DR
RoMM
Audit risk model expresses the general relationship of Acceptable AR and the components of the
model (IR, CR&Planned DR) useful when planning risk levels (High, Moderate,Low or
Very Low) for audit procedures.
Conclude whether the audit tests met with the assertions.
Faculty of Accountancy, UiTMKampusPuncakAlam
[March 2016]
80%
Inqr
AProc
Insp
Obsv
Repef
ExCom
100%
Recom
o Reasonable assurance is obtained when the auditor has accumulated and evaluated sufficient
appropriate audit evidence, to reduce theaudit risk to an acceptably low level.
Faculty of Accountancy, UiTMKampusPuncakAlam
[March 2016]
Example
Extract from a balance sheet:
(RM)
281,790
28,763
253,027
Accounts receivable turnover ratio is 42 days. It is the management policy to grant credit only for
14 days.
Analysis of the aging report gave information that the allowance for doubtful debts is inadequate.
An additional allowance of RM33,897, which is materialis needed to bring the ratio to a more realistic
average of collection period.
True that the accounting information portray by the accounts receivable is appropriate, pertinent, and
connected to the economic events, i.e. sales, return discount allowed, and cash receipts. However, the
accounting information has been measured and disclosed in a manner, which is not objective and with
prejudice to interests of the management in the company.
If the management agree to adjust the allowance for doubtful debts with the additional adjustment of
RM33,897, then the auditors opinion on the accounts receivable is true and fair view.
Accounts Receivable
Allowance for Doubtful Debts
[March 2016]
THE AUDIT PROCESS: HOW FINANCIAL REPORT ASSERTIONS (AUDIT OBJECTIVES) ARE MET
Financial Statement Audit
Audit Evidence
Financial
Statements
Statement of
Comprehensive
Income
Statement of
Financial
Position
Statement of
Cash Flow
Notes to the
Accounts
Fieldwork:
Interim Audit
Fieldwork:
Final Audit
Knowledge of
Clients Business
Transaction-Related
Audit Objectives
Business Risk
Analytical Procedures
(Preliminary)
Fieldwork
Internal Control
Financial Statements
Substantive Tests
Test of Controls
Substantive Test
of Transactions
Inherent Risk
Conceptual
Framework
Approved
Accounting
Standards
Bookkeeping:
Source Documents;
Journals; Ledgers;
Internal Control
Audit Report
Issue
the Audit Report
Complete
the Audit
Modified
Audit Report
Substantive
Tests
Subsequent
Events
complete with
Test of Controls
(forHIGH RISK)
Internal Control
Control Risk
Substantive Tests
Going Concern
Contingencies
Fraud Risk
Tests of Details of
Balances
Commitments
Detection Risk
Analytical
Procedures
(Substantive)
Analytical
Procedures
(Final)
Audit Programmes
and Sampling
Unmodified
Audit Report
[March 2016]
Auditing
Accountants responsible
in developing the accounting and internal control systems
to make sure that the entitys economic events
are properly recorded
on a timely basis and at a reasonable cost.
Auditors knowledge
of the economic events,
and accounting and internal control systems
is limited to that acquired during the audit.
10
[March 2016]
ACCOUNTINGVS.INTERNAL CONTROL
Management Responsibility Accounting and Internal Control
Control
Activities
Classifying
(To Identify & Measure)
Authorization
Information Processing
Physical Controls
Recording
(Journal & Ledger)
Segregation of Duties
Performance Reviews
Summarizing
(To Communicate)
Financial Statement
Management Assertions
Classes of Transactions
Account Balances
Presentation and Disclosures
Economic Information
External Events
Internal Events
e.g.
purchase of
raw material from
suppliers
e.g.
supply of
raw material from
a store to production
11
[March 2016]
Commitment to
Competence
Organizational Structure
Risk Assessment
Control Activities
Monitoring
Adequate
separation of duties
People
Internal Auditors
Assess significance of
risks and
likelihood of occurrence
Determine actions
necessary to manage risks
Data
Proper authorization of
transactions and activities
Accounting System
(Manual vs. Automated)
Adequate
documents and records
12
[March 2016]
Company
Shareholders
Accountability
Board of Directors
Managers
Executives
Clerks
Accountability
Company
Shareholders
Auditor
Board of Directors
Management
Report = Financial
Statements
Misstated
Shortcoming in management assertions
Bias/ Prejudice/ One-sidedness
13
[March 2016]
14
[March 2016]
15
[March 2016]
16
[March 2016]
17
[March 2016]
o Holders of:
Bachelor of Accountancy (Honours), UniversitiTeknologi MARA
Diploma in Accounting, University of Malaya (post graduate)
Bachelor of Accounting, University of Malaya
Bachelor of Accounting (Honours), UniversitiKebangsaanMalaysia
Bachelor of Accounting (Honours), Universiti Utara Malaysia
Bachelor of Accounting (Honours), Universiti Putra Malaysia
Bachelor of Accounting (Honours), Universiti Islam Antarabangsa
18
[March 2016]
(1a)
(1b)
(1c)
(1c)
(2)
(4a)
(6)
19
[March 2016]
Shareholders at
General Meeting
Companies
Commission of
Malaysia
(3)
(2)
To reappoint retiredauditor
(8)
Directors
20
Exceptional
to the rule
[March 2016]
(16a) Shareholders
At General Meeting
Shareholders
Authorized to
the Directors
Directors
Companies
Commission of
Malaysia
(16b) Directors
(16b) Companies Commission of
Malaysia
21
[March 2016]
Notice
Resolution
Special 28 days
Ordinary 21 days
22
[March 2016]
23
[March 2016]
24
[March 2016]
Integrity
Objectivity
FUNDAMENTAL PRINCIPLES =
Professional
Competence and
Due Care
Confidentiality
Professional
Behavior
Faculty of Accountancy, UiTMKampusPuncakAlam
25
110
[March 2016]
Integrity
To be straightforward and honest in all professional and business relationships.
Relationships = Straightforward x Honest x (Fair Dealing x Truthfulness)
Integrity
o Not corrupted.
o Information provided in the reports, returns and correspondences are not false, not misleading, not
furnish recklessly, no omission, no obscurity.
Straightforward
Free from ambiguity.
Honest
Not leading into false statement.
Fair dealing
Not bias, not prejudice (justify the judgment with knowledge of the facts).
Truthfulness
Factual.
26
[March 2016]
120
Objectivity
To not allow bias, conflict of interest or undue influence of others to override professional or business
judgments.
Judgments = Unbiased x No Conflict of Interest x No Undue Influences
Objectivity
o Judgments are supported with evidence.
o Verifiability exists in that two auditors working independently of each other will come up with
similar conclusions.
o Absolute independence is impossible (Arens, 2nd. Ed., Ch.1, p.5).
Unbiased
Not prejudice.
No conflict of interest
Private interest vs. public obligation, uphold public obligation.
No undue influence
Mutual respect in auditor-client relationship, uphold professional rapport.
27
130
[March 2016]
28
[March 2016]
140
Confidentiality
To respect the confidentiality of information acquired as a result of professional and business
relationships and, therefore, not discloses 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 the personal advantage of the professional accountant or third parties.
Information = Do Not Disclose x Do Not Use
Confidentiality
o The unauthorized disclosure or use of information poses a threat to clients.
o Entitle to use the experience gained from a client on another client.
Alert to the possibility of inadvertent disclosure
o Close family member.
o Immediate family member.
o Prospective client.
o Within the firm.
Exemption
o Professional right to disclose
o Authorized by client.
Practice review.
o Permitted by law
To respond to an inquiry or investigation.
Subpoena for legal proceeding.
To protect the professional interest.
To the public authorities.
To comply with technical standards and ethical requirements.
o Use as evidence in legal proceeding.
Pre-requisite to the exemption
o The interests of all parties are not harmed.
o Disclosed information Complete and substantiated.
o Recipient of information Known and with authority.
29
150
[March 2016]
Professional Behavior
150.1 Professional Behavior
To comply with relevant laws and regulations and should avoid any action that discredits the
profession.
Conduct = (Laws x Regulations)(e.g. Companies Act 1965, Banking and Financial
Institutions Act 1989, Capital Market and Services Act 2007)
x Honor Profession (including By-Laws)
Avoid actions that a reasonable and informed third party to conclude adversely affects the
good reputation of the profession.
150.2 Advertising, Marketing and Promotions
In accordance with laws;Professionally dignified; In good taste; Not making exaggerated
claims; Not making disparaging comparison with the work of another Chartered Accountant.
Not bring the profession into disrepute
o Professionally dignified (honorable) and in
good taste(within the normal social standards).
o In accordance with the relevant legislation.
30
[March 2016]
INDEPENDENCE
Importance; Relevance; Significant; Why?
o Public interest.
o To enhance the credibility of financial statements.
o To provide high or limited level of assurance.
Audit of financial statements
High level of assurance (i.e. reasonable assurance)
Review of financial statements Limited level of assurance
Types of Auditors Independence
(para.(xxxi), p.8)
(a)
Independence of Mind
The state of mind that permits the expression of a conclusion without being affected by influences
that compromise professional judgment, thereby allowing an individual to act with integrity, and
exercise objectivity and professional skepticism.
(b)
Independence in Appearance
The avoidance of facts and circumstances that are so significant that a reasonable and informed
third party would be likely to conclude, weighing all the specific facts and circumstances that a
firms, or a member of the audit assurance teams, integrity, objectivity or professional skepticism
has been compromised.
31
[March 2016]
32
[March 2016]
33
[March 2016]
Self- Interest
Threat
Self- Review
Threat
Advocacy
Threat
Familiarity
Threat
Intimidation
Threat
34
[March 2016]
(a)
Self-interest threat
The threat that a financial or other interest will inappropriately influence the professional accountant
judgment or behavior;
Self-review threat
The threat that a professional accountant will not appropriately evaluate the results of a previous
judgment made or service performed by the professional accountant, or by another individual within
the professional accountants firm or employing organization, on which the accountant will rely when
forming a judgment as part of providing a current service;
35
(c)
[March 2016]
Advocacy threat
The threat that a professional accountant will promote a clients or employers position to the point that
the professional accountants objectivity is compromised;
Familiarity threat
The threat that due to a long or close relationship with a client or employer, a professional accountant
will be too sympathetic to their interests or too accepting of their work; and
Intimidation threat
The threat that a professional accountant will be deterred from acting objectively because of actual or
perceived pressures, including attempts to exercise undue influence over the professional accountant.
36
[March 2016]
Types of Safeguards
(para.200.9-200.15, pp.35-37)
Safeguards
Safeguards created by
The profession,
The legislation, or
The regulation.
Engagement-Specific
Safeguards
37
Clients
Systems and Procedures
[March 2016]
o Safeguards created by
The profession,
The legislation, or
The regulation.
(para.100.10, p.21)
(a)
(b)
(c)
(d)
(e)
(f)
Educational, training and experience requirements for entry into the profession.
Continuing professional development requirements.
Corporate governance regulations.
Professional standards.
Professional or regulatory monitoring and disciplinary procedures.
External review by a legally empowered third party of the reports, returns, communications or
information produced by a professional accountant.
Leadership of the firm that stresses the importance of compliance with the fundamental principles.
Leadership of the firm that establishes the expectation that members of an assurance team will act
in the public interest.
Policies and procedures to implement and monitor quality control of engagements.
Documented policies regarding the need to identify threats to compliance with the fundamental
principles, evaluate the significance of those threats, and apply safeguards to eliminate or reduce the
threats to an acceptable level or when appropriate safeguards are not available or cannot be applied,
terminate or decline the relevant engagement.
38
[March 2016]
(e)
(f)
Documented internal policies and procedures requiring compliance with the fundamental principles.
Policies and procedures that will enable the identification of interests or relationships between the
firm or members of engagement teams and clients.
(g) Policies and procedures to monitor and, if necessary, manage the reliance on revenue received
from a single client.
(h) Using different partners and engagement teams with separate reporting lines for the provision of
non-assurance services to an assurance client.
(i) Policies and procedures to prohibit individuals who are not members of an engagement team
from inappropriately influencing the outcome of the engagement.
(j) Timely communication of a firms policies and procedures, including any changes to them, to all
partners and professional staff, and appropriate training and education on such policies and procedures.
(k) Designating a member of senior management to be responsible for overseeing the adequate
functioning of the firms quality control system.
(l) Advising partners and professional staff of those assurance clients and related entities from which
independence is required.
(m) A disciplinary mechanism to promote compliance with policies and procedures.
(n) Published policies and procedures to encourage and empower staff to communicate to senior levels
within the firm any issue relating to compliance with the fundamental principles that concerns them.
39
[March 2016]
safeguards
(a) Having a professional accountant who was not involved with the
non-assurance service review the non-assurance work performed or
otherwise advise as necessary.
(b) Having a professional accountant who was not a member of the assurance
team review the assurance work performed or otherwise advise as necessary.
(c) Consulting an independent third party, such as a committee of independent
directors, a professional regulatory body or another professional accountant.
(d) Discussingethical issues with those charged with governance of the client.
(e) Disclosing to those charged with governance of the client the nature of
services provided and extent of fees charged.
(f) Involving another firm to perform or re-perform part of the engagement.
(g) Rotating senior assurance team personnel.
40
[March 2016]
Engagement-Specific Safeguards
To Justify Independent
The client requires persons other than management to ratify or approve the appointment of a firm
to perform an engagement.
The client has competent employees with experience and seniority to make managerial decisions.
The client has implemented internal procedures that ensure objective choices in commissioning
non-assurance engagements.
The client has a corporate governance structure that provides appropriate oversight and
communications regarding the firms services.
41
[March 2016]
(b)
42
Significance
Safeguards
of the Threats?
Not significant. Not significant, then
Explain why? apply the safeguards
To eliminate the
threats, or
To reduce the
threats to an
acceptable level.
Significant. Significant, then
Explain why? no safeguard is
available
To eliminate the
interest or
activities.
To decline/
discontinue the
engagement.
[March 2016]
43
[March 2016]
Indirect financial interest A financial interest beneficially owned through a collective investment vehicle,
estate, trust or other intermediary over which the individual or entity has
no control or ability to influence investment decisions.
44
[March 2016]
Identified threats
Self-interest
Evaluate significance
of the threats
f (The position of the person holding the financial interest; Direct vs. indirect
financial interest; The materiality of the financial interest)
Identified threats
Self-interest
Evaluate significance
of the threats
The following person has a direct financial interest or a material indirect financial
interest in the audit client:
A member of the audit team,
Immediate family* of a member of the audit team, or
The firm.
* Immediate family Spouse or dependant.
Close family
Parent, child or sibling who is not an immediate family
member.
Apply safeguards
45
[March 2016]
Safeguard
Direct FI
Member of Audit Team
Immediate Family
Firm
Indirect FI
Self-Interest
Material
No Safeguard
290.103
Direct FI
Close Family
Material
Indirect FI
Immaterial
Apply Safeguard
290.105
46
[March 2016]
Question 1
A close family of a member of the audit team has a direct financial interest (or a material indirect financial
interest) in the audit client.
Identified threats
Self-interest
Evaluate significance
of the threats
f (Direct vs. indirect financial interest; The materiality of the financial interest)
Apply safeguards
To eliminate the threat The close family disposing as soon as practicable all of
the financial interest.
To reduce the threat to an acceptable level The close family disposing a
sufficient portion of an indirect financial interest so that the remaining is no
longer material.
To apply the following safeguards
o Having an auditor who was not a member of the audit team review the audit
documentation.
o Removing the member from the audit team.
47
[March 2016]
Self-interest
Evaluate significance
of the threats
Apply safeguards
48
[March 2016]
Safeguard
Normal
Bank
Member of Audit Team
Immediate Family
Abnormal
290.118
Non-Bank
Self-Interest
No Threat
290.120
No Safeguard
Material
290.121
Non-Bank
Immaterial
290.121
Firm
Abnormal
Bank
290.118
Normal
Apply Safeguard
290.119
Faculty of Accountancy, UiTMKampusPuncakAlam
49
[March 2016]
Question 2
The auditor obtained a loan from ABC Bank only by submitting the application form. The form is not
supported with the photocopy of the NRIC and evidence of income. Immediate approval is given by the
bank.
Identified threats
Self-interest
Evaluate significance
of the threats
Apply safeguards
50
[March 2016]
Commercial relationship
Self-interest; Intimidation
Evaluate significance
of the threats
Apply safeguards
51
[March 2016]
Safeguard
Immaterial
Firm
Self-Interest
&
Intimidation
Joint Venture/
Product/ Service/
Distribution/
Marketing
Apply Safeguard
290.124
Material
290.124
No Safeguard
Material
Member of Audit Team
Immediate Family
290.124
Immaterial
Apply Safeguard
290.124
Firm
Purchase of
Goods/ Service
Nature/
Magnitude
Apply Safeguard
290.126
Member of Audit Team
Immediate Family
Normal/
Arms Length
No Threat
290.126
Faculty of Accountancy, UiTMKampusPuncakAlam
52
[March 2016]
Question 3 (a)
The client is a parking management company that leases, manages and owns parking facilities. The client
operates 800 parking lots. The audit firm rented 5 lots, 2 for the partners and 3 for the managers. The lease
rental is charged at a prevailing current rate.
Identified threats
Evaluate significance
of the threats
Apply safeguards
n/a
Question 3 (b)
The auditor entered into a contact with the client to renovate his house. The renovation involves an extension
of kitchen, new tiles for the whole house, new coat of paint,cornice, lightings and landscape.
Identified threats
Evaluate significance
of the threats
Apply safeguards
53
[March 2016]
Evaluate significance
of the threats
f (Immediate family member vs. Close family member; Role of the family member
or other individual within the client; Responsibilities of the individual on the audit
team)
Identified threats
Evaluate significance
of the threats
Apply safeguards
54
[March 2016]
Question 4
An immediate family member of a member of the audit team is an employee in a position to exert significant
influence over the clients financial position, financial performance or cash flows.
Identified threats
Evaluate significance
of the threats
Apply safeguards
55
[March 2016]
Familiarity; Intimidation
Evaluate significance
of the threats
f (Former member of the audit team/ Former partners of the firm; Join the audit
client and hold a position as director/ officer/ employee in a position to exert
significant influence over the preparation of accounting records/ financial
statements; Still remain significant connection = Individual entitle to benefits and
payments that are material from the firm/ Individual continue to participate of
appear to participate in the firms activities)
Apply safeguards
56
[March 2016]
Question 5
A former member of the audit team or partner of the firm has joined the audit client in such a position, and
no significant connection remains between the firm and the individual.
Identified threats
Familiarity; Intimidation
Evaluate significance
of the threats
f (The position the individual has taken at the client; An involvement the individual
will have with the audit team; The length of time since the individual was a
member of the audit team or partner of the firm; The former position of the
individual within the audit team or firm, e.g. whether the individual was
responsible for maintaining regular contact with the clients management)
Apply safeguards
57
[March 2016]
Self-review
Evaluate significance
of the threats
Apply safeguards
58
[March 2016]
Evaluate significance
of the threats
f (Served during the period covered by the audit report; The position the individual
held with the client = Served as director/ officer/ employee in a position to exert
significant influence over the preparation of the clients accounting records or the
financial statements)
Apply safeguards
59
[March 2016]
Question 6
Ali is a former staff of ABC Sdn Bhd. The work performed by Ali in the prior audited period, while
employed by the client, is to be evaluated in the current audit period.
Identified threats
Evaluate significance
of the threats
f (Served before the period covered by the audit report; The position the individual
held with the client = Served as director/ officer/ employee in a position to exert
significant influence over the preparation of the clients accounting records or the
financial statements; Length of time since the individual left the client; The role of
the professional on the audit team)
Apply safeguards
60
[March 2016]
290.150 290.155 LONG ASSOCIATION OF SENIOR PERSONNEL (INCLUDING PARTNER ROTATION) WITH
AN AUDIT CLIENT
Identified threats
Self-interest; Familiarity
Evaluate significance
of the threats
f (How long the individual has been a member of the audit team; The role of the
individual on the audit team; The structure of the firm; The nature of the audit
engagement; Whether the clients management team has changed; Whether the
nature or complexity of the clients accounting and reporting issues has changed)
Public interest entity An individual shall not be a key audit partner for more than
five (5) years; Shall not be a key audit partner for the client for two (2) years.
Apply safeguards
61
[March 2016]
Evaluate significance
of the threats
f (Management responsibility:
Setting policies and strategic direction; Directing and taking responsibility for
the action of the entitys employees; Authorizing transactions; Deciding which
recommendations of the firm or other third parties to implement; Taking
responsibility for the preparation and fair presentation of the financial
statements; taking responsibility for designing, implementing and maintaining
internal control)
Deemed not to be management responsibility routine and administrative:
Executing an insignificant transaction that has been authorized by management;
Monitoring the dates for filing statutory returns; Providing advice and
recommendations to assist management in discharging their responsibilities.
Apply safeguards
62
[March 2016]
Self-review
Evaluate significance
of the threats
f (Management responsibility:
Originating or changing journal entries, or determining the account
classification of transactions; Preparing or changing source documents or
originating data; Evidencing the occurrence of transactions)
Non-assurance services:
Providing technical assistance on matters such as resolving account
reconciliation problems; Providing technical advice on accounting issues such
as conversion to newly promulgated accounting standards; Analyzing and
accumulating information for regulatory reporting.
Apply safeguards
63
[March 2016]
Self-interest; Intimidation
Evaluate significance
of the threats
Apply safeguards
Public interest entity > 15% in each year over two consecutive financial periods.
64
[March 2016]
290.223
FEES
(FEES-OVERDUE)
Identified threats
Self-interest
Evaluate significance
of the threats
f (Remain unpaid for a long time; Overdue fees might be regarded as being
equivalent to a loan to the client)
Apply safeguards
65
[March 2016]
Identified threats
Self-interest
Evaluate significance
of the threats
Apply safeguards
Non-Assurance
Identified threats
Self-interest
Evaluate significance f (The range of possible fee amounts; An authority determines the outcome;
of the threats
Nature of service; Effect of the event or transaction on the financial statements)
Apply safeguards
66
[March 2016]
290.230& 260
Identified threats
Self-interest; Familiarity
Evaluate significance
of the threats
Apply safeguards
67
220
[March 2016]
Conflict of Interest
Circumstances giving rise to conflicts of interest that may potentially create threat to compliance with
the fundamental principles
Competing directly with the client.
Having a joint venture or similar arrangement with a major competitor of a client.
Performing services for clients whose interest are
o in conflict with each other.
o in dispute with each other.
Conflict of interest creates threat to objectivity and confidentiality.
f (Compete directly with the client; Joint venture or similar arrangement with major competitor of a client;
Provide services for clients whose interests are in conflict or the clients are in dispute with each other)
68
[March 2016]
230
Second Opinion
Circumstances giving rise to second opinions that may potentially create threat to compliance with the
fundamental principles
Situations where a professional accountant in public practice is asked to provide a second opinion on
the application of accounting, auditing, reporting or other standards or principles to specific
circumstances or transactions by or on behalf of a company or an entity that is not an existing client
Second opinion creates threat to professional competence and due care.
Second opinion is not based on the same set of facts that were made available to the existing
accountant, or is based on inadequate evidence.
f (Not an existing client; Threat to professional skepticism (i.e. professional competence and due care);
Made available the facts and assumptions relevant to the expression of a professional judgment;
Permission to communicate with existing auditor; Opinion is based on the same set of facts that were
made available to the existing auditor)
69
[March 2016]
240
540
Referrals
f (Referring continuing client; Do not impair the position of the auditor in the
continuing work for the client; Obtain consent for other professional services to the client)
70
For
Non-Audit
Service
[March 2016]
280
71
[March 2016]
METHODS OF PRACTICE
(para.500.1-500.13, pp.175-179)
Method of Practice
o (para.500.1-500.6, pp.175-177)
An auditor should not use
o A trade or association name (i.e. not a personal name or not a
composite of personal name).
Allowed to practice as chartered accountant
o In own name.
o In the name(s) of partner(s).
Branches
o (para.500.13, p.166)
Head office and branch(s) are not allowed to be under the management and control of a person who is not
a chartered accountant.
72
[March 2016]
PROFESSIONAL APPOINTMENT
(para.210.1-210.14, pp.38-42)
Client Acceptance(para.210.1-210.5, p.38)
For new and recurring To
determine
whether
acceptance
would
create
any
threats
client engagements
to compliance with fundamental principles (e.g. threats to integrity or
professional behavior).
E.g. of issues associated with the client that may create threats
o Client involvement in illegal activities (e.g. money laundering).
o Client dishonesty.
o Client questionable financial reporting practices.
Safeguards
o Obtain knowledge and understanding of the client (including its owners, those charged with
governance, managers and those responsible for its business activities)
o Securing the clients commitment to improve corporate governance practices or internal controls.
Engagement Acceptance(para.210.6-210.8, pp.35-36)
To determine whether acceptance would create any threats to compliance with fundamental principles
(e.g. self-interest threat to professional competence and due care)
A threat, if the auditors do not possess, or cannot acquire, the competencies necessary to properly carry
out the engagement.
Safeguards
o Obtain knowledge and understanding of the client and its industry.
o Possess experience with relevant regulatory or reporting requirement.
o Assign sufficient staff with the necessary competencies.
o Use expert where necessary.
o Agree on a realistic time frame for the performance of the engagement.
o Comply with quality control policies and procedures.
Faculty of Accountancy, UiTMKampusPuncakAlam
73
[March 2016]
74
[March 2016]
75
[March 2016]
76
[March 2016]
Safwan, a chartered accountant in Safwan & Co. (located in Ipoh), was approached by
Amir Arshad, CEO of Rain Plastic Manufacturer Sdn Bhd, to undertake the
computerization of the companys inventory system. Since the companys factory is
located in Kuantan, Safwan decided to ask his friend in Kuantan, Noreen, to take the
engagement. Noreen is a chartered accountant from Nor & Associates and she agreed
to pay 10% of the non-audit fee received as commission to Safwan & Co.
Noreen accepted the offer and conducted the audit accordingly. Amir Arshad was very
impressed with the job well done by Nor & Associates and proposes Nor & Associates
to perform a special assignment to review a small manufacturing company for its
acquisition.
Noreen agreed to accept the assignment and commenced the job without informing
Safwan & Co.
Required:
Discuss the ethical issues in respect of the MIA By-Law (On Professional Ethics,
Conduct and Practice) that have arisen in the above case.
(6 marks)
Samiha is an audit manager in Sam & Co. One of the audit clients, U-Dee, is a
company specialising in the transportation of heavy vehicles throughout Peninsular
Malaysia and has been Sam & Cos audit client for five years. Samiha is currently the
audit manager for the audit, while Mr Sam has been the audit partner since the first
year audit. Samiha is planning the audit for the year ending 30 April 2013. Following
an initial meeting with the directors of U-Dee, she has obtained the following
information:
i.
U-Dee is preparing for the company to be listed on Bursa Malaysia in the next
two years. Sam & Co. Is assisting in the preparation for the listing.
ii.
Sam & Co has been preparing the companys financial statements for the current
and previous years.
iii.
U-Dee has indicated that the fee for taxation services rendered in the year to 30
April 2013 will be paid as soon as the tax authority agrees to the companys
taxation liability. You have been advising U-Dee regarding the legality of certain
items as allowable for taxation purposes and the taxation authority is disputing
these items.
Required:
Identify and explain three (3) issues which may threaten the independence of Sam &
Cos auditors when performing the audit of U-Dees financial statements for the year
ending 30 April 2013. Briefly suggest how each threat should be managed.
(9 marks)
Mr Goon is the senior manager in the audit department of Tan & Co. He is currently
reviewing two situations which have arisen in respect of audit clients, which were
recently discussed at the monthly audit managers meeting:
i.
Goodway Bhd is a significant audit client which develops software packages. Its
managing director, Mr Ramesh, has contacted the partners of Tan & Co
regarding a potential business opportunity. The proposal is that Goodway Bhd
and Tan & Co could jointly develop accounting and tax calculation software, and
that revenue from sales of the software would be equally split between the two
firms. Mr Ramesh thinks that Tan & Cos audit clients would be a good customer
base for the product.
ii.
Required:
Identify and discuss the ethical and professional issues raised in respect of:
i.
ii.
Azam, a partner in Azam & Co, has been the audit engagement partner for Jasa Baik
Bhd (JBB) for the past seven years. Azams son has just accepted a job offer as a
sales manager in JBB and his position entitled him to shares in JBB as part of his
remuneration package. Azam & Co has recently been appointed as JBBs internal
auditor. JBB has suggested that the external audit fee should be renegotiated with at
least 25% of the fee being based on the profit after tax of JBB as they feel that this will
align the interests of Azam & Co and JBB.
Required:
i.
Explain the ethical threats which may affect the independence of Azam & Co
with respect to the audit of JBB.
(4 marks)
ii.
B.
The followings are the ethical issues arise in situations at Parveen & Co:
i.
Parveen & Co is facing competition from a new audit firm, and Parveen & Co is
advertising its services in a national newspaper.
Required:
Explain the rules on advertising for new clients.
(3 marks)
ii.
One of the audit managers say that our firm had lost an audit client to a
competitor because of lowballing.
Required:
a.
Define lowballing.
(1 mark)
b.
i.
Dahlan is the audit manager with Choo & Co for the past ten years. He has been
asked by the partner to review a situation which has recently arisen with respect
to a potential audit client of the firm.
Teras Jaya Sdn Bhds managing director, Juliana, has approached Choo & Co to
invite the firm to tender for its audit. Teras Jaya Sdn Bhd is a small, ownermanaged company providing financial services such as arranging mortgages
and advising on pension plans. The companys previous auditor Ali & Partners
has recently resigned. Juliana states that this is due to a disagreement on the
accounting treatment of commission earned, and because they think our controls
are not very good. You are aware that Teras Jaya Sdn Bhd is being investigated
by the financial services authority for alleged non-compliance with its regulations.
Besides providing audit services, Juliana would like Choo & Co to give business
development advice.
Required:
Discuss the ethical and other professional issues raised in the above scenario.
(5 marks)
ii.
Tahir & Co, an audit firm has opened another branch at Kuala Terengganu. Due
to short of staff, the branch is controlled by a senior staff that has several years
of experience but unfortunately is not a member of MIA (Malaysian Institute of
Accountants).
Required:
Discuss the rules under MIA By-Laws under Section 500 Methods of Practice.
(4 marks)
You are a manager in Nee Lee & Partners for the last five years, an audit firm, with
three branches and 9 partners. Almost half of the firms clients are audit clients; the
remainder are clients for whom Nee Lee & Partners perform tax, accounting and
business advisory services. The firm is considering how to generate more revenue,
and you are asked to evaluate the suggestion made by one of the partners that is in
charge on the business development of the firm. The partner has proposed to place an
advertisement in the national newspapers to attract new clients. The draft
advertisement is given to you for review:
Nee Lee & Partners is the largest local audit firm in Malaysia and has been in
operation for the last 20 years. Nee Lee & Partners offer a range of services in
addition to audit, which are guaranteed to improve your business performance and
will save your company from paying taxes.
If you are unhappy with your auditors, Nee Lee & Partners can offer a second
opinion on the report that has been issued. Introductory offer: for all new clients we
offer a 20% discount when both audit and tax services are provided.
Our rates are approved by MIA.
Required:
Identify and explain on the advertisement suggestions made above, commenting on
the ethical and professional issues raised.
(9 marks)
SAB Sdn Bhd had a disagreement with the existing auditors, Aida & Co., on the
previous audit. Currently, SAB approaches you and indicates that they wish to appoint
your firm, Wani & Associates as their new auditors. The Managing Director of SAB has
asked you for advice on the procedures for change in auditors appointment.
Required:
Discuss the procedures that should be taken, for the change in professional
appointment according to the MIAs By-Laws (On Professional Ethics, Conduct and
Practice).
i.
ii.
B.
It is known that the auditors are required to adhere to the Fundamental Principles of
the MIA By-Laws to safeguard the profession.
Required:
Explain the Fundamental Principle on Professional Behavior as prescribed in MIA ByLaws.
(3 marks)
Auditors
Ernst & Young
Andersen
Andersen
PricewaterhouseCoopers
Ernst & Young
Deloitte
KPMG
Clients
Cendant
Waste Management
Sunbeam
Microstrategy
Savings & Loans
YBM Magnex International
Rite Aid
77
[March 2016]
are
held
liable
to
their
clients
78
[March 2016]
79
[March 2016]
Types of Litigation
AuditorsLegal Liability
Statutory Law:
Parliament
(Violation of Statutes)
Common Law:
Case Law
(Auditor fail to provide the services and
not exercise due care)
Law of Contract
(Breach ofContract)
Client
Company
Law of Tort
(Negligence)
Non-Client
Third Parties
Company = S h a r e h o l d e r s A c t i n g a s a B o d y
= Client
80
[March 2016]
[March 2016]
Why professional competence and due care is a fundamental principles in the MIAs By-Laws?
o Only a competence auditor can perform an audit with due care.
82
[March 2016]
1. Duty of Care
Basic rule Auditors always owes a duty of care to the client.
Owing Duty of Care to Third Parties
o Negligence legal action = f (Misrepresented financial statements; Inaccurate audit reporting)
o Difficulty faced by third parties To prove that the auditorsduty of careand this duty of care
areextended to them.
o Ultramaresvs. Touche, et al. (US, 1931)
If an auditor was negligent, the auditor is liable to the third party, if the third party was deemed
to be primary beneficiary.
A primary beneficiary is one about whom the auditor was informed before conducting the
audit (a known third party)
o Chandlervs. Crane Christmas & Co. (UK, 1951)
Legal perception Uphold doctrine of privity of contract; Owed duty of care to the clients.
Doctrine Principle of law
Privity Contractual/ Fiduciary relationship
o Hedley Byrne vs. Heller & Partners (UK, 1963)
Legal perception Owed duty of care to third parties.
Special relationship to establish the existence of duty of care.
Foresee The auditor knew of the identity of the third party that intend to rely on the
financial statements for that purpose.
The auditor had direct knowledge that the financial statements are to be
used for a particular purpose by the third party.
Faculty of Accountancy, UiTMKampusPuncakAlam
83
[March 2016]
84
[March 2016]
Caparo
8 Potential Investors
8 Individual Shareholders
85
9 Shareholders as a Body
[March 2016]
The clients.
Having knowledge of
the third party.
Conceivable knowledge
about third parties.
3rd Party
User of
Financial Statements
Contractual
Relationship
86
Proximity,
Known Recipient of
Financial Statements
[March 2016]
87
[March 2016]
88
[March 2016]
89
[March 2016]
90
[March 2016]
2. The auditor failed to act with duty of e.g. Negligence; Substandard work; Noncompliance
with standards.
care to the 3rd party.
3. There is a causal relationship between The decision made by the 3rd party was based on the
flawed audited financial statements; If audit
the auditors negligence and the
iscompetently carried out, the loss would have been
damage incurred by the 3rd party.
avoided.
rd
4. The 3 party suffered actual loss or e.g. Loss of investment; Overpayment for investment.
damage.
91
[March 2016]
92
[March 2016]
The auditor owed no duty of care to investors making decisions on the strength of audited accounts.
o Caparo Industries plcv. Dickman& Others (U.K., 1990)
Three tests must be met in order to establish whether a duty of care can be imposed
Harm must be a reasonably foreseeable result of the auditor's conduct
A relationship of proximity(Nearness = Space x Time x Relationship)between the auditor and the third party.
It must be fair, just and reasonable to impose liability
Fairness Judgment that do not serve a particular interest group at the expense of others.
Justice Equitable treatment accorded to all interested parties.
Reasonableness Able generate conclusions from premises; not extreme.
The court found that it was unreasonable to establish a relationship of proximity between the
auditors and the third party who was not the intended recipient of the audit report. The court
maintained that the purpose of statutory audit and audited accounts was for the company and the
shareholders. Therefore, the significant element in the Caparo case
The auditors owe a duty of care to shareholders as a body
The auditors were found not to owe a duty of care to potential investors or to individual
shareholders. However, the auditors would be liable to the third party, if
the accounts were prepared specifically for a particular purpose for him/ her
the intention was made clear to the auditors at the time of the audit engagement.
Post Caparo cases ruled against the auditors
o Royal Bank of Scotland Plc v. Bannerman JohnstoneMaclay (U.K., 2005)
The court held that the auditors owe a duty of care to a third party when the auditors
did not disclaim their responsibility relating to the audited accounts to any other persons (other
than the shareholders as a body)
knew (or ought to have known) that the third party would rely on the audited accounts
Faculty of Accountancy, UiTMKampusPuncakAlam
93
[March 2016]
94
[March 2016]
95
[March 2016]
96
[March 2016]
Angkasa Wira Bhd was recently declared bankrupt as the company was unable to pay
its mortgage loan totalling RM5 million. It was discovered by the liquidators of the
company that the assets had been overstated by RM800,000 as a result of fictitious
non-current assets being recorded in the financial statements. The liquidators of
Angkasa Wira Bhd are now suing the auditor, Rahana & Co, for breach of contract and
negligence.
The auditors have not carried out adequate procedures to verify the non-current assets
and had relied mainly on the managements non-current assets schedule. However,
the auditors claimed that they are not liable for the loss because the loss was not
caused by their negligence.
Required:
Discuss whether the auditors had been negligent in the audit of Angkasa Wira Bhd,
leading to the bankruptcy of the company.
(8 marks)
Your firm has been the auditor of Teduhan Ilmu Publication Berhad (Teduhan Ilmu) for
several years. Teduhan Ilmu is a book retailer listed on Bursa Malaysia and has a 30th
June year end. The auditors reports for the previous years were unmodified.
Back in 2010, Teduhan Ilmu installed a new accounting system specifically designed
to accommodate Teduhan Ilmus accounting and reporting requirements. Both your
firm and Teduhan Ilmus internal audit division reviewed the system prior to
implementation and found it to be satisfactory.
However in March 2013, Teduhan Ilmus internal audit department discovered that,
due to a programming problem, the application of the cost and net realizable value for
stock was inaccurate. This resulted in material misstatements of the profits for the
three preceding years financial statements.
You have a good working relationship with the directors and senior management.
Teduhan Ilmu is your fifth largest client. Its accounting system is complex and you
have engaged an expert to assist in the development of a specialized audit software.
This software is still being used and maintained by your IT audit department.
In April 2013, the shareholders of Teduhan Ilmu commenced legal action against your
firm. They claimed that the past three years audits were negligently performed, given
the problems with the accounting system and the undiscovered material misstatements
in the financial statements.
Required:
Discuss the relevant issues in deciding whether your firm has been negligent in the
performance of its duties as auditor of Teduhan Ilmu.
(11 marks)
Aina and Associates is the auditor for Bistro Sdn Bhd, a private company. Based on
the audited account of Bistro Sdn Bhd, Ramada Bhd acquired the entire share capital
of Bistro Sdn Bhd. A year after acquisition, Bistro Sdn Bhd went into liquidation.
Ramada Bhd sue the auditor and accused that the audited financial statements has
negligently performed by blindly accepting high inventory valuation placed by Bistro
Sdn Bhd.
i.
ii.
Explain any FIVE (5) methods that may be used by an audit firm to minimize its
audit failure.
(5 marks)
Required:
In the context of auditors liability, explain the following terms:
i.
ii.
iii.
Privity of contract
Ordinary negligence
Professional indemnity insurance
(6 marks)
Zaki is the manager with Zureeda and Partners and has been the auditor for Sepantas
Transport Sdn Bhd (STSB) for the last ten years. During the financial year ended 31
December 2013, STSB has secured hire purchase loan to acquire 20 passenger
buses from HBB Bank Bhd. On 28 April 2014, the license to operate the inter-state bus
service was revoked by Land Public Transport Commission (SPAD). Zaki confronted
the management of STSB on the revocation of license by SPAD but they argued that
they are in the process of negotiating the license with the authority. Despite the issue
of revocation of license by SPAD, Zaki issued an unqualified audit report, since there
is no official letter issued by SPAD to STSB.
Required:
i.
Differentiate the auditors liability under Common Law and Statutory Law.
(3 marks)
ii.
Based on the case above, discuss whether the auditors are liable to the bank.
(8 marks)
Azah is the senior auditor for Ali & Partners and she has been the auditor-in-charge for
Pembinaan Sekutu Sdn Bhd (PSSB) for the past three years. She is now assigned to
audit PSSB again for the financial year ended 31 October 2014. During the current
audit, Azah found that the company is facing going concern problem. Due to the going
concern problem, PSSB shareholders fund is negative and the company is not able to
meet its loan obligations. The Chief Executive Officer is able to convince Azah that the
bank is willing to reschedule the loan and the going concern problem will be solved.
Thus, Azah issued a standard unqualified report. However, several months after the
issuance of the financial statement, the auditors were sued by the investors, who relied
on the financial statements, on the ground of negligence.
Required:
i.
ii.
iii.
Explain whether a duty of care existed between the auditor and the shareholders.
(4 marks)
Auditors are challenged with increasing litigation cases. These cases revealed marked
difference in the judgement that the extent of auditors liability is unclear. Hence, it is
vital that auditors exercise reasonable care and skills.
Required:
i.
ii.
iii.
Explain the three (3) conditions that should be met in order to establish the duty
of care.
(3 marks)
97
QC is addressed at
The professional level MIA
The firm level across the board
The engagement level specific
[March 2016]
QC
ISQC 1
Firm Level
ISA 220
Engagement Level
Objectives of QC
98
[March 2016]
Implementing the QC
To promote an internal culture that quality is Recognize and reward high quality work.
essential.
Communicate by training, seminars, meetings,
formal or informal dialogue, mission statements,
The managing board of partners assumes
newsletters, briefing memoranda.
ultimate responsibility of QC system.
Sufficient resources for the development and
Set the right tone at the top.
support QC.
Commercial considerations never override
quality of work.
99
Implementing the QC
[March 2016]
100
[March 2016]
Implementing the QC
To decide whether
To accept or continue a client
relationship.
To decide whether to perform a specific
engagement for that client.
Likelihood of association with a client
whose management lacks integrity is
minimized
101
[March 2016]
Implementing the QC
102
[March 2016]
Implementing the QC
Engagement team = Engagement Partner +Audit Supervisor
+Audit Senior (experienced) +Audit Assistant (less experienced)
On-the-job coaching
Team understand objectives and
Team work.
properly brief.
Supervision and review
Ensure adequate
Instructions have been properly
documentation.
carried out.
Experienced oversee
Consider significant matters.
less experienced.
Ensure sufficient appropriate evidence.
Consultation
Discuss with those inside and outside firm.
To solve contentious (i.e.
To improve professional
controversial) and difficult issue.
judgment and reduce risk.
Resolving difference of opinion
Differences over technical, ethical,
Differences within
or other matters.
team.
Differences between the engagement
Differences with
partner and QC reviewer.
those consulted.
Issue audit report only when the issue is resolved.
103
[March 2016]
Engagement QC review
To provide an objective evaluation of the significant judgments
and conclusions reached in issuing the audit report.
Complete the engagement QC review before issue audit report.
104
[March 2016]
Implementing the QC
Designate the responsibility to a person with experience and
authority.
To ensure QC remains relevant, adequate, and complied with.
Consider changes and improvements to QC
Periodic inspection if selected completed engagements.
Monitoring procedures:
Analyze and assess:
o Professional pronouncements.
o Independence confirmations.
o CPE and other professional development.
o Decisions on ACCE.
o Interviews of firm personnel.
Pre- and post-completion review of engagements
(selected only).
Communicate QCs weaknesses, level of understanding
or compliance.
Corrective actions and improvements to QC.
Prompt modification to QC policies and procedures.
105
[March 2016]
106
[March 2016]
107
[March 2016]
108
[March 2016]
[March 2016]
Error
9
Immaterial
Fraud
9
9
Material
110
[March 2016]
111
[March 2016]
Responsibilities of:
Auditor (Incidental)
112
[March 2016]
Conditions Indicative of Material Misstatement Due to Fraud Fraud Triangle/ Fraud Diamond
Pressure
Opportunity
Rationalization
Capability
An oppressive condition of
economic distress
113
An oppressive condition of
economic distress
[March 2016]
Incentive/Pressure
Incentives or pressures on the part of management or other employees to materially misstate the financial
statements.
(A reason to commit fraud)
E.g.
Financial stability or profitability is threatened by economic
Significant declines in customer demand affect companys operating conditions
Increasing business failures in either the industry or overall economy
Excessive pressure
Excessive pressure exists on management to meet the financial target and stability, especially
in the industry of high degree of competition.
Excessive pressure on management to meet the requirement or expectation of third parties such
as investment analyst, investors, bankers.
Financial need that cannot be satisfied with salary
Drug or alcohol dependencies
Greed
Gambling losses
To increase standard of living
Overextended credit
Frustration
Not being promoted
A feeling of alienation from other employees
Perception of being underpaid
A lack of devotion to the company
Dislike for a supervisor
Boredom with the work
114
[March 2016]
Opportunity
Circumstances that provide an opportunity to materially misstate in the financial statements.
(A favorable opening for covering up)
E.g.
The nature of the industry or the entitys operations
Significant estimatesprovide opportunity to engage in fraudulent financial statements
subjective judgments or uncertainties that are difficult to corroborate.
Lack of control elements
Authorisation
Documentation and filing
Safeguard.
115
[March 2016]
Attitude/Rationalisation
A situation in which individuals are able to rationalise committing dishonest act
(Ability to justify the fraud to oneself)
E.g.
The budget/ forecast imposes sufficient pressure on them to meet the goals or target
The practice by management of committing to managers or sales representatives to achieve overly
aggressive or unrealistic forecasts
I am only borrowing the money temporarily, and Ill pay it back.
Im not hurting anyone.
What Im doing is not that serious.
The money is for a good purpose.
Everyone is a little dishonest.
116
[March 2016]
Capability
The traits (ciri yang khusus) and abilities (keupayaanfizikal/ mental) to be the right person to succeed in
defrauding the company)
Opportunityopensthedoorwaytofraud,
Incentiveandrationalizationcandrawthe person towardthe doorway.
Butthepersonmusthavethecapabilitytorecognizetheopendoorway
asanopportunityand totakeadvantageofit bywalkingthrough,
notjustonce,butagainandagain
117
[March 2016]
Appropriateness of Evidence
Reliability
x Sufficiency of Evidence
Sample Size
118
[March 2016]
119
[March 2016]
20X1
Jan
Balance b/d
2,130
Jan
Receiptsin Jan
900
Jan
350
Feb
Receiptsin Feb
520
Feb
460
370
Mac
240
Dec
Balance c/d
9,850
4,680
9,850
20X2
Jan
Balance b/d
4,680
120
[March 2016]
Plausibility, i.e.
acceptable relationship
Balance Sheet
Non-CurrentAssets (FixedAssets)
Income Statement
Expenses
o Motor Vehicles
Proton Saga
Toyota Hi-Ace
o Furniture and Fittings
Executive Tables and Chairs
Cabinets
Air-Conditioners
o Office Equipment
Computers
o Lease Rental
Photocopier
o Repair and Maintenance
Air-Conditioners
Proton Saga
Computers
Roof Leaking
BMW
Toyota Hi-Ace
121
[March 2016]
Supplier
RM
Check
Supplier
Invoice
Check
Receiving
Report
Check
Purchase
Order
Check
Payment
Voucher
Check
Supplier
Receipt
10 Jan
20X1
ABC bin
XYZ
1,000
14Aug
20X1
ABC bin
XYZ
1,800
122
[March 2016]
Palm Oil
Storage
Tank
Oil level
Thermometer
Measuring
Tape
Fakulti Perakaunan, UiTM
69
123
[March 2016]
124
[March 2016]
The Objectives:
Business Prosperity
Corporate Accountability
Shareholder Value
Interests of Other Stakeholders
TheProcessandStructure
Used to Direct and Manage
The process and structure address issues associated with the division of power and
accountability among the board of directors and managers, and shareholders.
125
[March 2016]
The Objectives
Business prosperity
People, teamwork, leadership, enterprise,
experience, and skill produce prosperity.
Process
The system for decision making by boards of
directors and managers and for making them
accountable.
Corporate Accountability
The key to the legitimacy of the entire
corporate system. Accountability requires
appropriate rules and regulations.
Ultimate Objective
The interest of shareholders are served with
an appropriate return on investment. The
longer term interest of shareholders will be
well served, if the interests of other
stakeholders are addressed.
Structure
The legal and administrative framework,
including:
o companies legislation, securities
legislation, law of general application.
o memorandum and articles of association.
o resolutions of the board and
shareholders.
o listing rules.
o community standards.
126
[March 2016]
127
[March 2016]
Audit Committee
MCCG 2012, Principle 5 Uphold Integrity in Financial Reporting
o Recommendation 5.1
The Audit Committee should ensure financial statements comply with applicable
financial reporting standards.
Commentary
The board must recognize the value of an effective Audit Committee in ensuring the
companys financial statement is a reliable source of financial information.
The Audit Committee must, amongst others, ensure that the companys financial
statements comply with applicable financial reporting standards as this is integral to
the reliability of financial statements.
MCCG 2012, Principle 6 Recognize and Manage Risk
o Recommendation 6.2
The board should establish an internal audit function which reports directly to the Audit
Committee.
Commentary
The board should establish an internal audit function and identify a head of internal
audit who reports directly to the Audit Committee.
128
[March 2016]
The head of internal audit should have the relevant qualifications and be responsible
for providing assurance to the board that the internal controls are operating effectively.
Internal auditors should carry out their functions according to the standards set by
recognized professional bodies.
Internal auditors should also conduct regular reviews and appraisals of the
effectiveness of the governance, risk management and internal controls processes
within the company.
The audit committee refers to the governance body that is charged with oversight of the
organizations audit and control functions.
o To ensure independence, auditors both external and internal report to the audit committee.
o Audit committee should ensure that the audit function is adequately resources.
129
[March 2016]
Board of Directors
MCCG 2012, Principle 1 Establish Clear Roles and Responsibilities
o Recommendation 1.1
The board should establish clear functions reserved for the board and those delegated to
management.
o Recommendation 1.2
The board should establish clear roles and responsibilities in discharging its fiduciary and
leadership functions.
o Recommendation 1.3
The board should formalize ethical standards through a code of conduct and ensure its
compliance.
o Recommendation 1.4
The board should ensure that the companys strategies promote sustainability.
o Recommendation 1.5
The board should have procedures to allow its members access to information and
advice.
o Recommendation 1.6
The board should ensure it is supported by a suitably qualified and competent company
secretary.
o Recommendation 1.7
The board should formalize, periodically review and make public its board charter.
Faculty of Accountancy, UiTMKampusPuncakAlam
130
[March 2016]
131
[March 2016]
132
[March 2016]
133
[March 2016]
SHAREHOLDERS
REGULATORS
STAKEHOLDERS
(Laws,regulations,standards)
BOARDOFDIRECTORS
(AUDITCOMMITTEE)
MANAGEMENT
Directionandcontrol
(Executivesoperationalise policies,
strategiesandcorefunctions)
Accountability
134
[March 2016]
BOD
Providesleadership
anddirectionto
management
Board
Accountabletoregulatorsfor
conformancewithlawsand
toshareholders/stakeholders
forprofitandcorporate
results
Management
AccountabletotheBoD
FUNCTION
OFEACH
PLAYERS
Shareholders
Internalandexternalauditors
Haveresponsibilitytomakeuse
oftheirvotes
Monitorperformanceand
outcomes
Ultimately,theplayersshouldensurethecompanyisableto
havetherightbalancebetweenconformanceand
performance
135
[March 2016]
Transparency:Financial
andnonfinancial
informationshouldbe
easilyavailable
Socialresponsibility:Awell
managedcompany shouldbe
awareofandrespondtoissues
ofsocial concern.
Independence:Proceduresand
structuresofcompany shouldbe
putinplace tominimizeconflict
ofinterest.
Fairness:Allshareholders
shouldreceivedequal
considerationregardlessof
thesizeoftheirholdings.
Accountability:Decision
makersshouldbe
accountableforwhatthey
do.
Responsibility:Directors
shouldbeliablefortheir
performanceto
stakeholder.
136
[March 2016]
Enhancing
Shareholdervalue:
Accountability:
Appropriaterulesand
regulationsneedtobe
inplacetoensure
accountability.
Theultimate
objective,the
shareholderan
appropriatereturnon
investment.
Structure:
Directionand
managementofthe
businessandaffairs
areaffectedthrougha
setofrules.
Process:
BusinessProsperity:
Ultimategoalsof
Corporate
Governancetoensure
businessis
maintainedwithhigh
accountability,
businessprosperand
enhance
shareholdersvalue.
Directedatpersons
whohasthepowerto
directandmanagethe
businessandrefersto
thesystemfordecision
makingbytheparties
responsiblefor
directingandmanaging
thebusinessofa
company.
KEY
ELEMENTSOF
CORPORATE
GOVERNANCE
137
[March 2016]
Strengtheninglaws
governingshareholder
rights,directorsdutiesand
dutiesofothercorporate
participants
Identificationof
trainingandeducation
needsofdirectors,
otherkeycorporate
participants
Enhancingdisclosure
andtransparency
Corporate
Governance
focuson:
Developmentofa
MalaysianCodeofBest
PracticesinCorporate
Governance,whichseeksto
restructureboard
compositionandthereby
createeffectiveboards
Promotingeffective
environment
138
[March 2016]
Stewardship
Leadership
Control
EFFECTIVE
GOVERNANCE:
PRINCIPLESAND
BESTPRACTICES
FORBOD
Goodgovernancedependsoneffectiveinterrelationship
betweenBoardandmanagement.EffectiveBoardisa
boardwhichabletoestablishgoodleadership,stewardship
andcontrol.
139
LEADERSHIP
[March 2016]
EffectiveBoardwillenhancethe
competitivenessofthecompanyand
shareholdersconfident.Effectiveboard
alsowillassurethattheorganizationis
trustworthy,honestandincorruptible.
Boardalsoshoulddemonstratetheir
concernonsocialresponsible,notjust
focusingonprofits.Transparent,loyal,
careanddiligenceareamongimportant
attitudesandprinciplesrecognised
globallyforgoodcorporategovernance.
140
[March 2016]
STEWARDSHIP
Boardsasstewards(personofresponsible/care off)ofthecompanys assets
haveamoralandstatutoryobligation toworkwithmanagementtoaddvalue
tothoseassetsbycontributing invarious ways:
Strategicplanning:
Strategicplanning developsbymanagementandmonitorsbyboard onthe
achievement.
Riskmanagement:
Boardmustensurethatkeyriskareaofthebusinessareidentified,analysed
andmanaged.
Humanresourcesmanagement:
Anorganization musthaveahigheststandard ofselecting, compensating
andmonitoring performance ofkeypersonnelandseniormanagement as
theyarethekeypersons,theBoD trustand assistsBODindischarging their
duties.
141
[March 2016]
STEWARDSHIP(CONT)
Boardsasstewards(personofresponsible/care off)ofthecompany assets
haveamoralandstatutoryobligation toworkwithmanagementtoaddvalue
tothoseassetsbycontributing invarious ways:
Communication policy:
Communication linebeitinternalandexternalmustbeclearsoasto
effectivelyconveyinformation and accommodatefeedback.
Internalcontrol assurance:
Theboardshouldreviewtheadequacy andintegrityofthecompanys
accountingand financial reportingsystemandinternalcontrolsystemsand
othersystemsofthecompany andtoensurethesystemsareincompliance
withcurrentlawsandregulations.
142
[March 2016]
CONTROL
Thethirdcomponentofprinciplesandbestpracticefor
BODis monitoring.Thecompanycanhavethebest
systems,proceduresandtechnologyinplacebutifthey
donotwellmonitorandcontrol,thebusinessisbound
tofail.Continuousmonitoringwillalsoprovide
assuranceofthingsthataregoingrightandidentify
matterswhichneedtobeputright.
143
[March 2016]
TheDIRECTORSmustactinthebestinterestofthecompany,careanddiligenceintheir
functionandindealingwithstatutoryduties.Mustacthonestlyandavoidconflictof
interest.HemustactaccordingtoM&A,CompaniesAct,SecuritiesIndustriesActand
complytotheListingRequirement.
Specifically,the
directors
responsibilities
are:
Setcorporateobjectives,reviewandapproveandguide
corporatestrategiesandbusinessplan,budgetsandtomonitor
theimplementation;
Tooverseethemanagementofcompanybusinessandto
ensurecorporateperformance;
Tooverseehumanresourcesmanagement,staffselectionand
compensation,etc;
Todevelopandimplementinvestorrelationsprogramsto
effectivelycommunicatewiththeshareholders,other
stakeholdersandthepublic;
Toreviewtheadequacyandintegrityofthesystemsemployed
bythecompany.i.e.accountingsystem,financialreporting
systems,internalcontroletc;
ToselectCEO;and
Toprescribethetransactionsthatrequireboardapproval.
144
[March 2016]
Whyanaudit
committeeisneeded:
Majorfrauds,strong
criticismofthequality
ofexecutive
managementandthe
effectivenessofboard
supervision,and
financialinstitutions
causeitnecessaryfor
actionthatstrengthen
accountabilityand
corporategovernanceso
astoprovidegreater
protectionfor
shareholdersandthe
investinganddepositing
public.
AuditCommittee
istoassistBODin
dischargingtheir
dutiesrelatingto
company/entity
managementand
internalcontrol,
accounting
policiesand
financial
reportinganda
lineof
communication
betweenthe
boardandthe
auditors.
Audit
Committeesis
requiredon:
Alllisted
companiesand
thoseseeking
listingonBursa
Malaysia
AllFederal
Statutory
Bodies
Banksand
Financial
Institutions
145
[March 2016]
Board of Directors
Company
Secretary
Audit Committee
Internal Audit
External
Auditors
Control assessment
Review process
Risk
management
Committee
Risk identification
and assessment
Reporting
Risk mitigation
146
[March 2016]
Assistdirectorsindischarging
theirstatutorydutiesand
responsibilities:Thedirectors
liableonpreparingcompanys
financialstatementsandaudit
committeeminimizethe
involvementofBOD.
Monitordisclosure
requirements
Monitorcompany
activities:Abilityto
accesstheaccounting
recordsandindirectly
monitorthecompany
activities
ROLEOFANAUDIT
COMMITTEE
Tooverseethe
financialreporting
andgovernance
processessoasto:
Supporttheauditfunction:
Auditcommitteebecomes
closelywiththewhole
auditprocessanditwill
strengthenstheauditors
independence.
Increasepublicconfidence
inthecredibilityand
objectivityoffinancial
reporting.Thefinancial
statementisfreefrom
bias.
147
[March 2016]
ROLEOFANAUDIT
COMMITTEE
Tooverseethefinancial
reportingandgovernance
processessoasto:
SatisfytheBoardthatinternalcontrol
existandareeffective.Aninternal
controlsystemisanintegralpartofthe
managementprocessandthecommittee
shouldensurethatthecontrol
frameworkinplaceisadequateto
provideassuranceon:
Accomplishmentofestablishobjectives
Theeconomicalandefficientuseof
resources
Safeguardingofresources
Thereliabilityandintegrityof
information
Compliancewithpolicies,plans,
procedures,laws
148
(CONT)
Satisfytheboardthatadequate
attentionisbeinggiventorisk
management.Organizationshould
havepreventionandresponse
mechanismsinplacetohelpthem
keepriskatacceptablelevel.Audit
committeeshoulddeterminethe
systematicmethodsemployedto
evaluatedbusinessrisks.
[March 2016]
Drawbacksofanauditcommittee
Auditcommitteeshavenoteeth:Audit
Interferenceinexecutivedecisiononoperational
committeearejustwindowdressingto
matterswhichwill tendtounderminethe
complyBursaMalaysiaListingRequirement.
authorityoftheboard.Theremaybeconflictof
Howtoovercome/prevent:Auditcommittee
mistrustandmisunderstandingamongthe
mustbeandbeseentobeindependent,with
committee,management,internalauditorsand
theexternalauditors.Howtoovercome/prevent:authoritygiventobackuptheir
Auditcommitteeshouldhavecleartermsand responsibilities.BODmustgivetheirfull
responsibilitiesandcommunicationbetweenall supporttothecommitteeincludingfinancial
andadministrativeresourcestocarryouttheir
partiesshouldbemadeonatimelybasison
duties.
professionalmanner.
Someoftheproblemsare:
Thefullboardisdistancedfromfinancial
mattersandtheexternalauditor.Thishappen LegalLiabilityofAuditCommitteemembers:
AuditcommitteedoesnotrelievetheBODof
whenBODhasdischargedhisdutytoaudit
itsresponsibilityforthefinancialreporting
committeeBUTtheystillhasfull
responsibilitiesonthefinancialmattersofthe process.However,auditcommitteemembers
company.Howtoovercome/prevent:TheBOD mayincreasetheirexposuretopossible
additionalliabilitybecausetheextra
mustrequireoralandwrittenreportonall
activitiesofthecommitteeandmayevencall responsibilitiesentrustedtothem.
theauditorstoattendthemeetings.
149
Assistinestablishgood
internalcontrolandrisk
managementpolicies
Measuretodetect
misstatement
Provideassuranceof
integrityandreliability
oftheinternalcontrol
andriskmanagement
systemofclients
Ensureawarenesson
andusesrelevant
measurestodetect
misstatementin
financialstatement
Ensureperformaudit
quality
[March 2016]
Adhereto
auditing
standards
150
Ensure
independentin
performingthe
audit
Reduce
expectationgap
through
communication,
educationand
professional
development
[March 2016]
151
[March 2016]
152
[March 2016]
Audit Risk
Audit Failure
Auditor failed to exercise
due care.
Auditor issues an erroneous
audit opinion as the result of
an underlying failure to
comply
with
the
requirements of Approved
Standards on Auditing.
E.g. assign unqualified audit
assistants to perform audit
tasks who then fail to find
material misstatements that
qualified auditors would
discover.
153
[March 2016]
x Sufficiency
(Sample Size =
Material Items)
Material = An item is considered to be materially misstated, if the misstatement can influence or affect
the decision made by the users of financial statements.
Risk of Material Misstatement = Inherent Risk x Control Risk
Inherent risk = Susceptibility of an assertion to misstatement
Control risk = Internal control failed to prevent, detect, correct misstatement on timely basis;
Why? Limitation of I/C.
Risk is a fundamental concept that underlies the Audit Process.
Audit Process = A Systematic process of ObjectivelyObtaining and EvaluatingEvidence
(Figure 1-3,p.17) = (Planning
x Fieldwork
Evaluating the
Audit Test
client acceptance &
(i.e. Nature,
continuance
Timing, Extent)
Understand the client &
itsenvironment
RISK
Establish materiality
154
x Completing)
Going Concern
Confirm the
knowledge
x Reporting
True & Fair
[March 2016]
AR
IR
CR
DR
Will not detect
misstatement
that exist in an
assertion.
Fieldwork
Nature
o Tests of Controls
o Substantive Tests
Low
High
Both
(Tests of Controls x Substantive Tests)
Both
(Interim Audit x Final Audit)
Only
Final Audit
SmallSample Size
for Substantive Test
LargeSample Size
for Substantive Test
Timing
o Interim Audit
o Final Audit
Extent
o Small Sample Size
o Large Sample Size
155
[March 2016]
High
: Timing
Final Audit
: Extent
Detection Risk
Chances of detecting
a material misstatement,
if present
High
Low
Materiality
Rule of Thumb = > 5% is Material
(e.g. 50 Samples)
High %age
Low %age
e.g. of %age
7-10%
2-3%
156
[March 2016]
FUNDAMENTAL
CONCEPT
1. Audit Risk
2. Materiality
3. Evidence
Assertions
Material misstatements
Nature
o Test of control
o Substantive test
Substantive test of transactions
Analytical review
Test of details of balances
Timing
o Interim
o At/ Near balance sheet date
o Final
Extent
o Risk Materiality Sample Size
Persuasive Evidence
Types of evidence Relevant to assertions
Tangible (Insp, Obsv, Repef)
Testimonial (Inqr, ExCom)
Computation (Recom, AProc)
Reliable
157
[March 2016]
Materiality
Definition (p.100)
o Influence economic decision
o Reasonable user of financial statements, i.e. they are assumed
to possess reasonable business and accounting knowledge ,and
to be able to make rational economic decisions based on the information in financial
statements.
o Size (RM) and nature (error vs. fraud; Companies Act 1965)
Types of materiality:
o Quantitative Size in term of monetary value; Cumulative effect
o Qualitative Improper description of accounting policy; Misappropriation of assets
Purpose of Audit
To ensure the financial statements are stated in accordance with specified financial reporting criteria in all
material respects.
Financial statements are free from material misstatements.
o Detect error = Primary
o Detect fraud = Incidental
158
[March 2016]
Audit Risk
Risk is a fundamental concept that underlies the audit process.
159
[March 2016]
160
[March 2016]
Audit Planning
Risk assessment procedures Understanding the entity and its environment Identifying
(p.76-82)
business risk
HIGH RISK OF MATERIAL MISSTATEMENT
LOW MATERIALITY
HIGH MATERIALITY
MODERATE MATERIALITY
161
[March 2016]
AR
IR
CR
DR
e.g. AR
First audit engagement
New client mgmt team
e.g. IR
S/holders = Directors
Credit sales
Sales on cash basis
No staff training
F/S Net liability
e.g. CR
Segregation of duty
Independent check
Documentation
Serial number
Timely record
e.g. DR
Working papers.
Supervision
Competent and due
care
Skepticism
162
[March 2016]
AR
IR
CR
DR
3
163
[March 2016]
AR
=
IR
CR
4. Step 4 Auditor uses the determined level of DR (in Step 3) to design audit procedures that will
reduce AR to an acceptable level (Very Low).
164
[March 2016]
AR ( .05)
DR ( .10)
IR ( .80)
CR ( .60)
Low ()assessment of DR ( .10) implies that the auditor will conduct a more detailed
examination of substantive test
165
[March 2016]
Instead of AR( .05), IR( .80), CR( .60) and DR( .10), it is more appropriate to use
Large sample
(Detailed Substantive Test c/w
Tests of Controls)
Moderate (DR) Fair sample
(Test of Control/
Detailed Substantive Test)
High (DR)
Small sample
(Test of Control/
LessDetailed Substantive Test)
Low (DR)
166
[March 2016]
E.g. 1
AR ()
Very Low ()
Low ()
Moderate ()
IR ()
CR ()
Low ()
Moderate ()
High ()
AR ()
Very Low ()
Low ()
Moderate ()
IR ()
CR ()
DR ()
DR ()
Low ()
Moderate ()
High ()
167
[March 2016]
AR
IR
CR
DR
High
High
Materiality
Very Low
2.
Low
Low
Low
2% - 3%
Moderate
Moderate
Moderate
5%
High
High
7% - 10%
AR
IR
CR
DR
High
High
Materiality
Very Low
Low
Low
Low
2% - 3%
Moderate
Moderate
Moderate
5%
High
High
7% - 10%
168
[March 2016]
3.
AR
IR
CR
Low
Low
DR
Materiality
Very Low
4.
Low
Low
Low
2% - 3%
Moderate
Moderate
Moderate
5%
High
High
7% - 10%
AR
IR
CR
DR
Low
Low
Materiality
Very Low
Low
Low
Low
2% - 3%
Moderate
Moderate
Moderate
5%
High
High
7% - 10%
169
[March 2016]
Sampling risk
o < 100%; uncertainty
o Sample is not representative of the population
o Incorrect conclusion of account balance and class of transactions
170
[March 2016]
AUDITEVIDENCE(ISA500)
Theauditorshouldobtainsufficientappropriateaudit
evidencetobeabletodrawreasonableconclusionson
whichtobasetheauditopinion.
Informingtheauditopinion,theauditordoesnotexamine
alltheinformationavailablebecauseconclusionsordinarily
canbereachedbyusingsamplingapproachesandother
meansofselectingitemsfortesting.
171
[March 2016]
DEFINITION
ISA530:Samplinginvolvestheapplicationofauditprocedurestolessthan
100% ofitemswithinanaccountbalancesorclassoftransactionsuchthatall
samplingunitshaveanequalchance ofselection.Thisenabletheauditorto
obtainandevaluateauditevidenceaboutsomecharacteristicoftheitems
selectedinordertoformorassistinformingaconclusionconcerningthe
populationfromwhichthesampleisdrawn
ExpressopinioninAuditorsReport:AnAudit
includesexamining,onatestbasis,referstothe
auditworkcarriedonsamplingbasis
Auditsamplingcanuseeitherastatistical
oranonstatisticalapproach
172
[March 2016]
Samplingrisk(DEFINITION) isthattheauditors
conclusionbasedonthesamplemaybe
differentfromconclusionthatwouldbe
reachedifa100%examinationwerecarried
out.
SAMPLING
RISK
Example:Auditortestingoncontrolprocedures
forpaymentcycle.SupposeAuditorsknow
clienthas1000paymentvoucherduringthe
yearand50ofthosepaymentvouchersarenot
properlyapproved(5%).Therefore,if20
representativesampleselected,shouldcontain
19samplecorrectlyapprovedand1not
properlyapproved(5%).BUTsometimesfrom
20samplesmaybecontained5sampleswere
notproperlyapproved(25%,considered
material)ORmaybeallthesamplesare
properlyapproved(Consideredimmaterialat
all).
Auditorcanlowerthesamplingriskby
increasingthesamplingsize.
173
[March 2016]
Twotypesofsamplingrisk
IntheCompliancetestor
testoncontrol
IntheSubstantivetest
Type1:Riskofassessing
controlrisktoohigh isthe
riskthattheauditorwill
concludethattheriskis
higherthanitisactuallyis
Type1:Riskthattheauditor
willconcludethatthereisa
materialerrorwhen,infact,it
doesnotexist
Type2:Riskofassessing
controlrisktoolow isthe
riskthattheauditorwill
concludethattherisklower
thanitisactuallyis
Type2:Riskthattheauditor
willconcludethatamaterial
errordoesnotexist,infact,it
doesexist
174
[March 2016]
NONSAMPLINGRISK
Nonsamplingriskreferstofactorsthatcauseauditorstoreacha
conclusionotherthanthesamplingsize.Example:Auditorrelyon
anotherrepresentationonerroneousinformation
Otherexamples:Misinterpretationofevidence,humanmistakes
suchasfailingtorecognise errorsindocumentsandapplying
auditingproceduresthatareinappropriatetotheauditobjectives
* Non Sampling risk can never be a mathematical measured. However, to
keep this risk to minimum level, proper planning and supervision and adhere
to the quality control standards is essential.
175
[March 2016]
TYPESOFAUDIT
SAMPLING
NONSTATISTICAL
SAMPLING
STATISTICALSAMPLING
(PROBABILISTICSAMPLING)
(NONPROBABILISTICOR
JUDGMENTALSAMPLING)
176
[March 2016]
STATISTICALSAMPLING(PROBABILISTICSAMPLING)
Statisticalsampling meansanyapproach tosamplingthat
hasthefollowingcharacteristics:
Useofprobability
theorytoevaluate
sampleresults,
including
measurementof
samplingrisk
Random
selectionofa
sample
Statisticalsampling
permitthe auditor to
relyonasmaller
sampleforanintensive
checkingand make
representativetoa
largepopulation
Defendmeasureat
thecourt asitis
systematicapproach
ofselectingsample
177
[March 2016]
NONSTATISTICALSAMPLING
(NONPROBABILISTICORJUDGMENTALSAMPLING)
Asamplingapproach
thatdoesnothave
abovecharacteristicis
considerednon
statisticalsampling
Whenauditoruseshis
professionaljudgment
toselectthesample
andevaluatesample
whenconductingaudit
test
Auditormayusenon
randomselectionmethods
&requiresmore
subjectivityinmaking
samplingdecisions
Theauditormustrely
onhisprofessional
judgmentratherthan
thelawsofprobability
toreachaconclusion
abouttheaudittest
Auditorwillselectthose
samplesitemthathe
believesabletoprovide
usefulinformation
178
[March 2016]
Monetary
Unit
Sampling
Attribute
Sampling
Classical
Variable
Sampling
3
CATEGORIES
OF
STATISTICAL
SAMPLING
179
[March 2016]
AttributeSampling
Usedtoestimatetheproportionofapopulationthatpossesaspecified
characteristics(Example:lookingfordeviationrate).Themostcommonuseis
fortestofcontrolsuchasauditorwantstodeterminethedeviationratefor
controlimplementedinaccountingsystemorinternalcontrolstructure.
E.g.Examinationonhowoftenacreditcheckisnotperformed(deviationfrom
normalprocedures,i.e.beforeapprovalsalescredit,weshouldcheckthecredit
availabilityofacertaincustomer)oncustomerordersbeforedeliverthegoodor
beforeapproveanothercreditsales.
Thismeasurementofdeviationratedetermineswhethertheinternalcontrol
canbereliedupontoprocessaccountingtransactionsproperlyandsupport
auditorsassessedlevelofcontrolrisk.
180
[March 2016]
MonetaryUnitSampling
Itusesattributesamplingtheoryandtechniquestoestimatetheamountof
misstatementforaclassoftransactionsoranaccountbalance.
Designedprimarilytotestforoverstatementerrorsandmostappropriate
forlowerrorratepopulationofthesampleresults.
Itexpressaconclusioninmonetaryamountsratherthanasarateof
occurrence:
E.g.auditingaccountsreceivable,loans,investmentsecuritiesand
inventory
E.g.Assumethatauditorhasestablishedamaterialitylevelof
RM100,000,anymisstatementmorethanthatconsideredmaterial
181
[March 2016]
ClassicalVariableSampling
Itusesnormaldistributiontheorytoevaluatethecharacteristicsofa
populationbasedonsampledataofwhichdatashouldhaveequalchance
ofselection.
Determinetherangeofthedataandselectingsamplebaseonrandom
tableorcomputerauditsoftwarecurrentlypracticedbymostbig
accountingfirmfortheirbigclients.
Thepurpose:
Toestimatetheamountforaclassoftransactionsoraccountbalance
Todetermineifaclassoftransactionsoraccountbalanceismaterially
misstated
E.g.auditingaccountreceivableinwhichalargeamountofmisstatementis
expected,andinventoryinwhichsignificantauditdifferencesareexpected
fortestcountsandpricingtests.
182
[March 2016]
Whentousestatisticalsampling
Thedecisionwhethertouseastatisticalornonstatistical
samplingapproachisamatterfortheauditorsjudgment
regardingthemostefficientmannertoobtainsufficient
appropriateauditevidenceintheparticularcircumstances
Examplesituationswherestatisticalsamplingcanbeused:
Theclientsaccountingandinternalcontrolsystemare
reliableandeffective
Thepopulationareverylarge
Allitemsinthepopulationarehomogeneous
Allitemsinthepopulationareidentifiableandaccessible
183
[March 2016]
ADVANTAGES:Ithelpstheauditorto:
Designanefficientsample
Measurethesufficiencyofevidenceobtained
Quantifysamplingriskbecausesampleisselectbasedonstatisticaltheory
Permittheauditortorelyonasmallersample
Permittheauditoramoreintensiveexaminationofsampleitemssincewith
smallersamplesizes
Plantheauditapproachinsystematicandscientificmanner
Defendmeasureatthecourtasitissystematicapproachofselectingsample
DISADVANTAGESincludeadditionalcostsof:
Trainingauditorsintheproperuseofsamplingtechniques(statistic)
Designingandconductingthesamplingapplication(Software)
184
[March 2016]
Asdiscussedabove,samplingapproachthatdoesnothave
abovecharacteristicisconsiderednonstatisticalsampling
Whyauditorsusednonstatisticalsampling:
Partofthereasonsisduetotheauditorneedstoconsiderthe
relationshipbetweenthecostofobtainingauditevidenceandthe
usefulnessoftheinformationobtained
Oftenlesscostlyandlesstimeconsumingbutcanbejustas
effectiveinsatisfyingauditobjectives
185
[March 2016]
ADVANTAGESOFNONSTATISTICALSAMPLING
Thelowertraining
costofnonstatistical
sampling
Theeaseof
implementationof
nonstatistical
sampling
Proposedadjustment
basedonquantitative
analysis
DISADVANTAGESOFNONSTATISTICALSAMPLING
Training
difficulties no
systematicways
Potential
litigation
problems
Theabsenceof
consistency
anduniformity
186
Maycauseincorrect
evaluationof
samplingrisk
[March 2016]
STATISTICALSAMPLING
NONSTATISTICALSAMPLING
Needtohaveknowledgeonstatistical
formula
Baseonexperienceandcommonsense
Objectiveresults samplesare
mathematicallyproventorepresent
population
Subjectiveresults thesamplemay
notrepresentthepopulation
Differentauditorwiththesame
approachwillgivesameanswer
Differentauditorwillhavedifferent
approachandasaresultwillgive
differentanswer
Itisanefficientmethodandcan
delegatetheresponsibilitytoselect
auditsampletolowerrankauditstaff
Itisnotanefficientmethodandneed
moreseniorauditstafftodevisethe
sampleandselectthesample
Defensibleinthecourtoflaw
Notdefensibleinthecourtoflaw
187
[March 2016]
Auditsamplingamongfirms
Varybetweeneachauditfirmspractices.
Commonapproachisrandomsampling.
Othertypesoftesting:
Highvalueditems.100%testonindividualitemsselected
becausetheyarehighvalueorsuspectedtobeerror
suchasoverdueaccountreceivables.Otheritems,if
immaterialtestingbasedonsampling.
Otheritems.Basedsamplingonacertainamount.E.g.
testing80%onallbalancesheetitems.
188
[March 2016]
The concept of materiality recognizes that some matters will be taken either
individually or in the aggregate for the fair presentation of the financial statements
taken as a whole. The concept of materiality is crucial to the process of recognition,
aggregation, classification and presentation of financial information.
Required:
i.
ii.
Fraud is defined as an intentional act by one or more individuals. Thus, there are
various fraud risk assessment processes where auditor might be able to detect the
risks of misstatement due to fraud.
Required:
Discuss four (4) methods that an auditor should perform in identifying the risks of
misstatement due fraud.
(8 marks)
Audit risk and materiality significantly impact the auditors evidence decisions. The
auditors consider both concepts in the nature, timing and extent of audit procedures.
According to the standards, the auditor shall perform risk assessment procedures to
provide a basis for the identification and assessment of risks of material misstatement
at the financial statement and assertion levels.
Required:
i.
ii.
iii.
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the
financial statements are materially misstated.
Required:
i.
ii.
B.
Risk Assessment
Audit Procedures:
o Nature
o Extent (AR = IR x CR x DR Material)
o Timing
189
[March 2016]
Control Environment
o Assignment of Authority and Responsibilities
Manual system department is responsible for its own data/ information
DBMS access by multiple user; database administrator is the key responsible person
o Human Resources Policies and Practices
Skills and expertise to operate and oversee IT
Control Procedures
o Information Processing
Authorization (Application)
Documentation and Records (Soft copy)
Maintenance screen vs. View screen
o Adequate Separation of Duties
Authorization + Recording + Safeguard = One Person
General Controls = Data Centre
Access
= Segregation of Duties
OS(Acq Chg Maint), and
AS (Acq Dev Maint)
o Physical Control Over Assets and Records
Maintenance screen vs. View screen
Backup off-premise
Faculty of Accountancy, UiTMKampusPuncakAlam
190
[March 2016]
Benefits of IT (p.237)
o Consistent application of rules
o Complex calculation and analysis
o Timeliness, availability, accuracy
o Security control
o Reduce circumvention
o Performance monitoring
Risk of IT (p.237)
o Programmes errors/ outdated
o Loss/ corrupt of data
o Unauthorized access
o Unauthorized change master files/
programmes
o Manual intervention
o Advanced systems
Online, real-time processing
Extensive database systems
Distributed data processing
systems
Network
E-Commerce
Lack/ loss of audit trail
Controls are automated or
programmed
Audit approach = CAAT
191
[March 2016]
Types of Controls
General Controls
Application Controls
Access Security
System:
Acquisition
Change/ Development
Maintenance
Processing Controls
Operating System
Output Controls
Application System
192
Error Controls
[March 2016]
Access Security
Physical protection
o Computer
o Software
o Data
Theft & unauthorized use
o Loss of assets
o Loss of information
Door security
Fire protection
Power supply
Off-premise backup
Firewalls
Encryption
Password
193
[March 2016]
Error Controls
Error identified by data processing, output,
i.e. omitted/ invalid data
194
[March 2016]
Completeness
Accuracy
Process
Record
Validity
To test general control = IT environment
Types of CAATs
Generalized Audit
Software
e.g. IDEA, ACL
Custom Audit
Software
Test Data
Integrated
Test
Facility
195
Parallel
Simulation
Concurrent
Auditing
Techniques
[March 2016]
196
[March 2016]
CAATs are computer programs and data that the auditor uses as part of the audit
procedures to process data of audit significance contained in a clients computer
information system (CIS). The types of CAATs include generalized software, custom
audit software and test data.
i.
ii.
iii.
Briefly describe how the auditor uses the test data to test the application controls
in the clients computer programs.
(3 marks)
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.
ii.
Explain the purpose of general control and application control and provide two
(2) examples of each type of control.
(6 marks)
ii.
Explain the extent to which the audit software can assist auditors in performing
their audit work.
(4 marks)
Azim the senior auditor for Dahlan and Associate are responsible for the audit of
inventory for Maju Jaya Bhd. Azim will be attending the year-end inventory count on 30
June 2015. The manager for Dahlan and Associate wishes to utilise the computerassisted audit techniques (CAAT) for the first time for controls and substantive testing
in auditing the Maju Jaya Bhds inventory.
Required:
i.
Describe four (4) audit procedures that could be carried out using computerassisted audit techniques (CAATs).
(6 marks)
ii.
Explain two (2) advantages and two (2) disadvantages of using computerassisted audit techniques (CAATS).
(4 marks)
The use of information technology (IT) for financial reporting and operational purposes
is common in every sector of the business and industry today. Auditor must be familiar
with effects of IT on the entitys internal control and the auditors risk assessment
approach.
Required:
i.
ii.
Discuss two (2) factors that affect the control environment with the
implementation of an IT in an entity.
(4 marks)
iii.
Describe two (2) areas in which control procedures can be affected by the use of IT.
(4 marks)
Management
Assertions
FINANCIAL
STATEMENTS
2
Auditors
Responsibility
Management
Assertions
Audit Tests/
Procedures
Audit
Evidence
AUDIT
REPORT
The financial statements reflect managements assertions about the various classes of transactions and
account balances.
The auditor accumulates and evaluates audit evidences to determine whether each relevant management
assertion is being supported.
The audit procedures are guided by the management objectives.
197
Management
Assertions
Occurrence
Transaction-Related
Assertions
1. Occurrence(Transaction Cycle)
Existence
Balance-Related
Assertions
1. Occurrence(Special Transaction)
2. Existence
[March 2016]
4. Completeness
3. Accuracy
Allocation/ Measurement
4. Cutoff
5. Classification
5. Allocation
Valuation
Presentation and Disclosure
6. Valuation
Transaction-Related Assertions x Balance-Related Assertions x Understandability
198
[March 2016]
Audit proceduresare the detailed instructions for the collection of [type of] audit evidence.
The detailed instructions are spelt out in sufficiently specific terms in the audit programmes.
Therefore, an audit procedurespelt out (1st) the types of instructions;
(2nd) the types of evidences, and
(3rd) the types of audit objectives/ management assertions.
Audit programme is the list of audit procedures for an audit area or an entire audit.
Audit programme = f (nature, timing, and extent of audit procedures)
199
[March 2016]
(ii)
Assertion Sales invoiced to the customers were for the shipments that have occurred.
Trace (the types of instruction) a sample of sales invoice to match to duplicate shipping document
(the types of evidence documentation) to determine that each sales had been shipped/ occurred (the
types of audit objectives occurrence).
200
[March 2016]
Management Assertions
Motor Vehicles
Additions and disposals are authorized and supported.
Occurrence (Special)
Existence
JPJs registration cardsstated the motor vehicles are under the companys name.
All motor vehicles that are existed and owned are included in the financial statements.
Register of noncurrent assets agreed with the general ledger
Acquisition cost is as per the invoice (excluding the road tax and insurance).
The recording entry for acquisition is as per the account code.
Completeness
Accuracy
Classification
Cut-Off
Rights
201
Presentation and
Disclosure
[March 2016]
Management Assertions
Sales
Sales invoices are authorized; supported with shipping documents, credit approval
Occurrence (Cycle)
and sales orders.
Completeness
Sales invoices are recorded in the order of prenumbered/ serial number.
Accuracy
Selling prices are charged according to approved price list.
Classification
Cash sales and credit sales are written in different journals.
Sales are recorded on the dates the transactions occurred.
Cutoff
Total sales are posted periodically to the general ledger.
Accounts Receivable
You received the reply that confirm/ dispute the balance for accounts receivable.
The presentation and disclosures of accounts receivable complied with the AAS.
202
Management Assertions
Existence
Rights
Completeness
Accuracy
Classification
Cut-Off
Valuation and Allocation
(Realizable Value)
Presentation and
Disclosure
[March 2016]
203
[March 2016]
204
[March 2016]
Investments (pp.537-543)
Physical examination of the share certificates.
Confirmation with the issuer.
Confirmation with custodian.
Confirmation of unsettled transactions with the broker-dealer.
Reading executed joint venture or similar agreements.
Additional procedures for marketable securities:
o Examine brokers contract notes.
o Inspect monthly statements from MCD.
o Confirm with stock-broking firms of ADA.
All investments are included in the financial statements
Purchased value acquisition cost = fair value; examine brokers contract notes.
Market value official quotations of BursaMalaysia.
Non-current assets (long term investments) cost less impairment losses (p.540).
Current assets (investments) lower of cost and market value.
Management Assertions
Occurrence
Existence
Rights
Completeness
Measurement
Valuation
Presentation and
Disclosure
205
[March 2016]
Journal
Sales Journal
Date
Details
Invoice
No.
Account
Code
1001
AR021
Amount
(RM)
2010
Jan 3
7
Sejahtera Enterprise
10,600
Sentosa Trading
1002
AR034
11,350
14
AmanSdnBhd
1003
AR002
80,000
19
Syarikat Damai
1004
AR040
9,300
21
Nyaman Trading
1005
AR008
15,400
24
RestoranBayu
1006
AR015
21,210
27
Makmur Plantation
1007
AR005
14,570
31
162,430
206
[March 2016]
General Ledger
Date
2010
Jan 31
Particular
Balance c/d
Sales Account
Amount
Date
(RM)
2010
162,430 Jan 31
Particular
A/Receivable
162,430
Balance b/d
162,430
162,430
162,430
Feb 1
Amount
(RM)
Particular
2010
Jan 1
Jan 31
Balance b/d
Sales
Feb 1
Balance b/d
Accounts Receivable
Amount
Date
Particular
(RM)
2010
33,260
Cash Receipts
162,430
Discount Allowed
Jan 31 Balance c/d
195,690
195,690
207
Amount
(RM)
195,690
195,690
[March 2016]
Date
Particular
2010
Jan 1
Jan 14
Balance b/d
Sales
Feb 1
Balance b/d
Date
Particular
2010
Jan 1
Jan 27
Balance b/d
Sales
Feb 1
Balance b/d
AmanSdnBhd (AR002)
Amount
Date
Particular
(RM)
2010
6,696
Cash Receipts
80,000
Discount Allowed
Jan 31 Balance c/d
86,696
86,696
Makmur Plantation (AR005)
Amount
Date
Particular
(RM)
2010
5,355
Cash Receipts
14,570
Discount Allowed
Jan 31 Balance c/d
19,925
19,925
208
Amount
(RM)
86,696
86,696
Amount
(RM)
19,925
19,925
[March 2016]
Date
Particular
2010
Jan 1
Jan21
Balance b/d
Sales
Feb 1
Balance b/d
Date
Particular
2010
Jan 1
Jan24
Balance b/d
Sales
Feb 1
Balance b/d
209
Date
Particular
2010
Jan 1
Jan 3
Balance b/d
Sales
Feb 1
Balance b/d
Date
Particular
2010
Jan 1
Jan 7
Balance b/d
Sales
Feb 1
Balance b/d
Amount
(RM)
21,998
21,998
Amount
(RM)
25,684
25,684
[March 2016]
210
Amount
(RM)
15,261
15,261
Amount
(RM)
13,610
13,610
[March 2016]
Date
Particular
2010
Jan 1
Jan19
Balance b/d
Sales
Feb 1
Balance b/d
Amount
(RM)
12,516
12,516
211
[March 2016]
Current
(RM)
(RM)
86,696
80,000
3,216
3,480
AR005 MakmurPlantn
19,925
14,570
3,238
2,117
AR008 NyamanTrd.
21,998
15,400
6,598
AR015 RestoranBayu
25,684
21,210
15,261
10,600
4,661
AR034 SentosaTrd.
13,610
11,350
2,260
12,516
9,300
195,690
162,430
2,778
(RM)
> 90days
(RM)
1,696
3,216
19,973
212
8,375
1,696
3,216
[March 2016]
Completeness
1001 1007
Shipping document (Shipping
Departments copy) sales journal
*
Occurrence, Timing
Accuracy
213
Classification
[March 2016]
Occurrence; Accuracy
Cutoff
214
RM162,430
Dr Accounts Receivable
Cr Sales Account
[March 2016]
Cutoff
[March 2016]
215
Classification
Work Done
216
[March 2016]
Valuation
(Realizable Value)
217
[March 2016]
Transaction-Related
Audit Objectives
Occurrence
218
[March 2016]
Completeness
Accuracy
Classification
Cutoff
219
[March 2016]
Tests of Controls
Class of Transaction: Sales
Transaction-Related
Audit Objectives
Audit Procedures
Work Done
Specimen signature
Sales invoice shipping document
sales order
Input form
0001 000x
Accuracy
Chart of accounts
Classification
Occurrence
Completeness
220
Input form
[March 2016]
Cutoff
0001 000x
Input form
221
[March 2016]
222
[March 2016]
223
[March 2016]
224
[March 2016]
Audit Report
Fieldwork
225
Statement of
Cash Flows
[March 2016]
Financial Statements
Statement of
Financial Position
Conclusion
(Office/ Client Premises)
Auditor Knowledge
Letter of Representation
Going Concern
Post Balance Sheet Event
Contingencies
Commitments
Comparatives Figures
Statement of
Comprehensive Income
(Client Premises)
Audit Procedures
= Nature
x Timing
x Extent
Mgmt Assertions
Audit Evidence
Perform
Interim Audit
Perform
Final Audit
Complete
The Audit
Issue
an Audit Report
Analytical
Procedures
Test of
Controls
Analytical
Procedures
Analytical
Procedures
Unmodified
Audit Report
Substantive Tests of
Transactions
Review for
Subsequent Events
Unmodified
Audit Report with
Emphasis of Matters
Tests of Details of
Balances
Going
Concern
Notes to theAccounts
Knowledge of
Clients Business
Management Assertions
Business Risk
Inherent Risk
Contingent
Liability
Internal Control
Conceptual Framework
Financial Reporting
Standards(FRS)
Control Risk
Capital
Commitment
Fraud Risk
Statutory
Registers/ Records
Bookkeeping:
Source Documents;
Authorization/ Approval,
Chart of Accounts,
Journals; Ledgers, Registers
Modified
Audit Report
Letter of
Representation
226
[March 2016]
Fieldwork
Conclusion
Analytical Review
Substantive Test
Analytical Review
Audit Risk
Accounts Receivable
Turnover = 72 days
(Client Policy
= 14 days credit period)
Conclusion:
Accounts Receivable gives
True and Fair View
(after provide adequate
allowance for doubtful debts)
Reconfirm the
Truth and Fairness of
Accounts Receivable
227
[March 2016]
SUBSEQUENT EVENTS
S.169(6)
Financial Year
20X0
Subsequent Events
20X1
1
January
31
December
15
May
Year-End
BODs
Meeting
approved
the audited
FS
Adjusting Events
Non-Adjusting Events
Faculty of Accountancy, UiTMKampusPuncakAlam
228
[March 2016]
Adjusting Events
The subsequent eventsprovide additional evidence.
Financial Year
20X0
Subsequent Events
20X1
1
January
31
December
15
May
5 October 20X0
Dr Accounts Receivable
Cr Sales
31 December 20X0
The RM10,000 is still not paid at the year-end (> 60 days outstanding).
The customer is in financial difficulty due to competition.
DR Bad Debts
Total of Accounts Receivable, RM200,000.
CR A/c Receivable
22 April 20X1
RM10,000
RM10,000
229
[March 2016]
Non-Adjusting Events
The subsequent eventsprovide additional evidence.
Financial Year
20X0
Subsequent Events
20X1
1
January
31
December
15
May
31 December 20X0
22 April 20X1
230
[March 2016]
1
January
Subsequent Events
20X1
31
December
15
May
12
June
30
June
Date of
AGM
The last
date for
AGM for a
company
with
year end 31
December
Already discussed
12 June onwards
231
[March 2016]
Modified Report.
232
[March 2016]
Client agree (True and Fair, Emphasis of Matter) Client disagree (Except For; Adverse)
233
[March 2016]
234
[March 2016]
Disclose
Disclose
Remote
More likely will not occur
Do not disclose
235
[March 2016]
236
[March 2016]
COMMITMENTS (p.561)
Long-term contractual commitments to acquire property, plant and equipment
to purchase raw materials at fixed price
to sell products at fixed price
Disclosure items = Notes to the financial statements
Audit Procedures for Commitments
Types of Evidence Inquiry from the Management
o Ask commitments
o Obtain letter of representation
Types of Evidence Documentation
o Read minutes directors/ committees meetings/ general meetings
237
[March 2016]
238
[March 2016]
239
[March 2016]
240
[March 2016]
241
[March 2016]
242
[March 2016]
243
[March 2016]
244
[March 2016]
Unmodified
Auditors Report
Standard
Explanatory Paragraph
Emphasis of a Matter
Types of
Audit
Report
Modified
Auditors Report
Except for
245
Disclaimer
Adverse
Types of
Audit
Opinion
[March 2016]
Addressee
Introductory
paragraph
We have audited the financial statements of XYZ Berhad, which comprise statement
of financial position as at 31 December 20XX, and statement of comprehensive
income, statement of changes in equity and statement of cash flows for the year
then ended, and a summary of significant accounting policies and other
explanatory information, as set out on pages AA to ZZ.
Directors
responsibility
paragraph
The directors of the Company are responsible for the preparation of financial
statements so as to give a true and fair view in accordance with Malaysian
Financial Reporting Standards, International Financial Reporting Standards
and the requirements of the Companies Act 1965 in Malaysia. The directors are
also responsible for such internal control as the directors determine is necessary to
enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
Auditors
responsibility
paragraph
(Scope
paragraph)
246
[March 2016]
amounts and disclosures in the financial statements. The procedures selected depend
on our judgment, including the assessment of risks of material misstatement of the
financial statements, whether due to fraud or error. In making those risk assessments,
we consider internal control relevant to the entitys preparation of financial
statements that give a true and fair view in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entitys internal control. An audit also includes evaluating
the appropriateness of accounting policies used and the reasonableness of
accounting estimates made by the directors, as well as evaluating the overall
presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our audit opinion.
Opinion
paragraph
In our opinion, the financial statements give a true and fair view of the financial
position of the Company as of 31 December 20XX and of its financial performance
and cash flows for the year then ended in accordance with Malaysian Financial
Reporting Standards, International Financial Reporting Standards and the
requirements of the Companies Act 1965 in Malaysia.
In accordance with the requirements of the Companies Act 1965 in Malaysia, we also
report that in our opinion the accounting and other records and the registers
required by the Act to be kept by the Company have been properly kept in
accordance with the provisions of the Act.
247
[March 2016]
Other matters
(Re: Royal Bank
of Scotland Plc)
Name and
signature of
o chartered
accounting
firm, and
o auditor
(Audit Firm)
[AF: 8888]
Chartered Accountants
Date
Date
Address
(Partner)
[9999/9/99 (J/PH)]
Chartered Accountant
248
[March 2016]
Elements of
Standard Unmodified Audit Report
Conditions for
Unmodified Audit Report
Report title
Addressee
Introductory paragraph
All Statement
Opinion paragraph
Other matters (Re: Royal Bank of Scotland Plc)
Name and signature of
o chartered accounting firm, and
o auditor
Date
Address
249
[March 2016]
250
[March 2016]
251
[March 2016]
cont'd
Material
Disclaimer
Adverse
Due to limitation on
scope
Auditor has not been able
to obtain sufficient
appropriate evidence to
form an opinion on the
overall financial
statements
Due to disagreement
Auditor is of the opinion
that the financial
statements as a whole is
misleading, hence do not
give a true and fair view
in accordance with
approved accounting
standards
252
[March 2016]
253
[March 2016]
Material
Except for
Disclaimer
Except for
Adverse
* Pervasive:
Misstatements that are not confined to specific accounts
o Sales x Accounts Receivable x Cash Receipts x Inventory x Net Profit
Misstatements that are confined to specific accounts, and the accounts represent a substantial
proportion of the financial statements
o Inventory x (Net Profit Net Loss)
254
[March 2016]
255
[March 2016]
256
[March 2016]
The International Standard on Auditing (ISA) 570 deals with the auditors
responsibilities in relation to management use of the going concern assumption in the
preparation of the financial statements.
Required:
Explain four (4) procedures that an auditor should carry out to ascertain whether an
entity is a going concern.
(6 marks)
You are the senior-in-charge for the audit of Aropluz Travel Sdn Bhd, a travel agent
that provides domestic and international travel arrangements for its customers. You
have completed the field work and now in the midst of finalizing the audit. The
financial year end is 31 October 2012. The following information are to be taken into
consideration:
1.
The management has not paid the staff salary for the month of October 2012
amounted to RM35,000. The information was made known to you by the
accounts clerk during the interview session with her on 18 November 2012.
According to the clerk, the salaries are to be paid together with the bonus at the
end of the month.
2.
The Board resolution dated 29 October 2012 stated that the company has
agreed to acquire one (1) luxury bus for the purpose of travelling in Malaysia and
neighbouring countries. The cost of acquiring the bus as stated in the resolution
was approximately RM450,000. It was also agreed in the meeting that the bus
will be purchased from Mercedez-Benz Malaysia Sdn Bhd.
Required:
i.
Explain four (4) audit procedures on each situation that will enable the auditor to
understand of the above situations.
(6 marks)
ii.
iii.
Indicate and explain the type of audit report that you would issue for Aropluz
Travel Sdn Bhd.
(4 marks)
In completing the audit, the auditor considers a number of additional audit issues such
as opening balances, comparative figures, accounting estimates and related party
transactions that do not normally pertain to specific business process or financial
statement items.
Required:
i.
Explain what is accounting estimates (with examples) and how it affects the
financial statements.
(4 marks)
ii.
Briefly describe the audit objective and audit procedures for the audit of related
parties transactions.
(6 marks)
Arisa & Co. is the auditor for Warisan Sdn Bhd, a large construction company. During
the audit for the year ended 31 December 2012, you were informed by the managing
director that the company has recently lost a major government contract. You know
that Warisans projections include a fifty percent of cash inflows from this contract. The
company has been experiencing some cash flow difficulties, although this is not
unusual in the industry. Management has recently fully extended their bank credit
facility in order to pay day-to-day expenses. The audit partner is concerned that the
company may be facing going concern problems, but the managing director maintains
that they intend to cut back future capital expenditure to alleviate the going concern
issue.
Required:
C.
i.
State SIX (6) indicators of a financial nature that may raise doubt on an entitys
ability to continue as a going concern.
(3 marks)
ii.
Warna Sdn Bhd a subsidiary of Pelangi Bhd. For the year ended 31 December
2012, Warna has incurred a net loss of RM5 million. The only liability is the
amount due to Pelangi of which the holding company gave assurance that it will
not demand payment within the next 12 months. This matter was adequately
disclosed in the notes to the accounts.
ii.
Ceria Berhad used first-in-first-out method to value its inventory. However, from
financial year 2011 onwards, the company decided to change the valuation of its
inventory to weighted average method. The auditor requested for the
comparative figure for 2010 but management refused to give their cooperation.
iii.
Recently, one of the audit clients, Afizie Sdn Bhd moved to a new office. In the
process, some of the boxes containing the sales journal and customers invoices
were lost. No further supporting documents were kept by the client.
(6 marks)
AZ & Co. is the auditor of Bumi Jaya Sdn Bhd (BJSB) for the year ended 31 October
2013. At the end of the audit, a management representation letter is obtained from
client. The partner plans to sign the audit report on 2 January 2014. Sunrise Bhd, one
of BJSB significant customers is found to have huge debt which is partly collectible as
at 31 October 2013. Subsequently on 20 December 2013, Sunrise Bhd is found
liquidated.
Required:
i.
ii.
iii.
Describe the required accounting treatment and the auditors responsibility for
the subsequent event mentioned in the above case.
(3 marks)
iv.
Explain three (3) audit procedures the auditor should perform to identify the
subsequent events stated above.
(3 marks)
Audit report is the end product of audit, where it communicates the auditors opinion
about the fairness of the financial statements. Audit opinion may be an unmodified
audit opinion and modified audit opinion. Also there are several types of modified audit
opinion.
Required:
Explain under what circumstances the auditor issue an unmodified audit opinion and
modified audit opinion.
(4 marks)
C.
i.
ISA 560 Para 2 stated that the financial statements may be affected by certain
events that occur after the date of the financial statements. The events occur
after the date of financial statement referred to as subsequent events.
Required:
Describe the four (4) audit procedures that the auditor should perform in
identifying these subsequent events.
(6 marks)
ii.
The auditor, Ammar, is about to complete the audit work of a client company,
Ridda Bhd (Ridda) for the year ended 30 November 2014. Before finalizing the
audit opinion, Ammar discovered the following:
a.
b.
One of Ridda customers, ABAC Sdn Bhd (ABAC) was charged by the court
for failing to provide quality products and was facing serious a warranty
claim. On 10 December 2014, ABAC was declared bankrupt and the
amount owing by ABAC RM350,000 would be irrecoverable.
Required:
For each of the independent situations given, identify the type of the subsequent
event and provides reasons for your answer.
(4 marks)
ISA 510 Initial Audit Engagements Opening Balances requires auditor to undertake
additional audit procedures for confirming opening balances for new audit
engagements. In addition, the ISA gives guidance on audit report implications if
auditors are unable to confirm opening balances or if they contain misstatements.
Required:
i.
Describe the procedures that the auditor should undertake to confirm opening
balances for a new audit engagement.
(4 marks)
ii.
Explain the impact on the audit report if the auditor is unable to confirm the
opening balances, or if the opening balances contain misstatements.
(2 marks)
B.
Required:
Describe the auditors responsibility for subsequent events occurring between:
i.
The year-end date and the date the auditors report is signed; and
ii.
The date the auditors report is signed and the date the financial statements are
issued.
(6 marks)
ISA 560 Subsequent Events emphasizes that auditor should consider the effect of
subsequent events on the financial statement.
Required:
i.
Distinguish between the two types of subsequent events and provide two (2)
examples for each type of event.
(6 marks)
ii.
257
[March 2016]
Related Parties
Holding
Company
Subsidiary
Company
Subsidiary
Company
Substantial
Shareholders and
Close Family
Member
Associate
Company
Key
Management and
Close Family
Member
Reporting
Company
258
[March 2016]
Audit Procedures
Evaluate the clients accounting system and internal control for identifying related parties.
Obtain a list of related parties.
Review filings with the Securities Commission.
Review minutes
Review conflict-of-interest statements from management.
Review the extent and nature of business transacted with major customers, suppliers etc.
Review accounting records for large, unusual, or nonrecurring transactions.
Review confirmations of loans receivable and payable for indications of guarantees.
259
[March 2016]
Group
Structure of a Related Company
Holding
Company (H)
Sub-Subsidiary
Company (SSC2)
Hs Financial Statements
Consolidated Financial
Statements
Subsidiary
Company (SC1)
SC1s
Financial
Statements
Subsidiary
Company (SC2)
SSC1s
Financial
Statements
Sub-Subsidiary
Company (SSC2)
SSC2s
Financial
Statements
260
SC2s
Financial
Statements
[March 2016]
261
[March 2016]
262
[March 2016]
[March 2016]
264
[March 2016]
Expert
Engaged/ employed by
o Client
Engaged/ employed by
o Auditor
Expert a person possess special skill, knowledge and experience in a particular field other
than accounting and auditing.
265
AU
UD610 AUDIT AND
A
ASSURANCE SERVICES
[March 2016]
Plannin
ng to use thhe work off expert
o Th
he materiaality of the items in financial
fi
statements, e.g. inventtory, valuaation of pro
operty
Inventoory
Coonstructionn aggregatte sand, gravel,
g
cruushed stonee
Prrecious meetal
Mineral
M
Tiimber
o Th
he risk of m
material misstatemen
m
nt naturee and compplexity
o Reliability
R
oof clients evidence
require exp
Some assertions
a
perts evid
dences
o Allocation/
A
Measurem
ment Cut--off of a prroject, Perccentage off completio
on
o Valuation
V
Quantity of
o inventorry
266
[M
March 2016]
267
[March 2016]
268
[March 2016]
Internal Auditor
As organizations grew in size and complexity and developed geographically dispersed
operations, internal auditing developed to help organizations, as managers in upper level of
authority in the organizational structure, could no longer personally observe all operations.
Traditional
Modern
Effectiveness:
Risk management
Control
Governance process
Distinctive discipline/ profession
Ally
269
[March 2016]
Compliance audit
Information technology audit
Financial audit
270
[March 2016]
271
[March 2016]
holds
more
o The internal auditor adds value through the objective analyses and recommendation for
improvement
assurance and consulting activity
o Activity a specified pursuit;
Function = f (specific occupation, assigned duty)
The term activity allows for internal audit services to be provided by individuals not
employed by the organization. In doing so, the term activity acknowledges that
outsourcing has become a viable alternative for organizations seeking quality internal audit
services.
o The goal of assurance service is to improve information so that decision makers can make
more informed, and presumably better decisions. Assurance services provide opinions that
reduce the information risk (risk that comes from incorrect information).
272
[March 2016]
o Explicit recognition of the consulting role of internal auditing means that the full range of
services being provided by the majority of internal audit function is acknowledged.
add value and improve
o Adding value and improving emphasizes the profession commitment to serving the needs
of the organization.
o Assurance and consulting services provide value by improving opportunities to achieve
organizational objectives, identifying operational improvement, and/or reducing risk
exposure
systematic, disciplined approach
o Systematic carried on using step-by-step procedures
o Discipline knowledgeable; well-trained
effectiveness of risk management, control, and governance process
o Risk The possibility of suffering harm or loss
o Risk management the identification, assessment, and prioritization of risks (the effect of
uncertainty on objectives)
o Control Prevent and detect misstatements (resulting from fraud and error)
o Governance Law and regulation
Faculty of Accountancy, UiTMKampusPuncakAlam
273
[March 2016]
External Auditors
To the company (shareholders,
collectively)
CA 1965, Opinion True and fair view
CA 1965, S. 174
Independent
Financial statements
Incidental
Accountancy
274
[March 2016]
Board of Directors
Oversight of
financial reporting and disclosure
Internal Auditors
Assurance and Consulting
External Auditors
Senior Management/
Executive Management/
Management Team
Independent
of mind and in appearance
275
[March 2016]
Boards of Directors
Audit Committee
Shareholders
Management
Internal Audit
External Auditor
Regulators
276
[March 2016]
To consider the appointment of independent advisers for corporate proposals involving related
parties.
Review the internal audit program.
To establish the following with the internal audit function:
o review the adequacy of the scope, functions and resources of the internal audit function
and that it has the necessary authority to carry out its work
o ensure co-ordination of external audit with internal audit
o consider the major findings of internal audit reviews/investigations and managements
response, and
o ensure that appropriate actions are taken on the recommendations of the internal audit
function
To assess the quality and effectiveness of the system of internal control and efficiency of
operations, and to review the risk policy and implementation of the risk management
framework.
To review any appraisal or assessment of the performance of the members of the internal audit
function, approve any appointment or termination of senior staff members of the internal audit
function and be informed of any resignation of internal audit staff members and reasons thereof.
To perform any other such function as may be agreed to by the Audit Committee and the Board.
277
[March 2016]
278
[March 2016]
279
[March 2016]
280
[March 2016]
Non-Assurance
Services
Attestation
Services
Accounting and
Bookkeeping
Audits
(high assurance)
Reviews
(limited assurance)
Management
Consulting
the primary goal,
to improve the
quality of
information for
decision makers.
Tax
Services
Management Consulting
to generate recommendations
Forensic Accounting/
Fraud Examination
Financial
Forecasts
ISO
Certification
281
[March 2016]
Assurance Services
Independent Add Credibility Quality Information Confident Decision Making
Types of Assurance Services
Reasonable Assurance
e.g. Audit of Financial Statements(AUD610)
Reduce Risk to an acceptable level
VL, L, M
Limited Assurance
e.g. Review of Financial Statements
Reduce risk to an acceptable level
VL, L, M. BUT, the risk surrounding the
financial statement is HIGHER.
WHY? Reduced and limited evidence:
o Inspection
o Documentation
o Inquiry Client
o Computation Analytical Review
Audit Evidence:
o Inspection
o Documentation
o Inquiry
o Computation
282
[March 2016]
283
[March 2016]
284
[March 2016]
(p.734)
No
Assurance
Compilation &
Agreed Upon Procedures
Limited
Assurance
Reasonable
Assurance
Absolute
Assurance
Review
Audit
Impossible
Non-Assurance Engagement
No assurance is expressed
Users draw their own conclusion and derive their own level of assurance from the report of
factual findings
285
[March 2016]
Agreed-Upon Procedures
ISRS 4400 the principles and essential procedures
Report of actual findings based on specific procedures performed on financial or other
information
Financial information = An item in financial statements; A component of financial
statements; A complete set of financial statements
Specific procedures
o Evidence are basically of an audit nature
Inspection
Documentation
Inquiry
Computation
o The accountant and the client understood and agreed to the procedures
o Wide ranging and no standards procedures
o Client has a say in the scope of work and nature of procedures
o AUP engagement letter (p.735, Table 21.3)
Report
o No opinion, No assurance
o Describes the findings
o Contents (p.736)
286
[March 2016]
Compilation
ISRS 4410 the principles and essential procedures
Nature of client partnership, sole proprietorship; not mandatory for annual audit
E.g. preparation of
o Accounts and financial statements
o Tax returns
o Other financial documents
Do not give technical advice
Do not assess or verify the reliability and completeness of the information
Inquire and request for additional information, if aware that information supplied by
management is incorrect or incomplete.
Procedures = Collecting Classifying Summarizing
Accounting policies need to be applied accordingly and ensure free from obvious error, e.g.
mathematical or clerical mistakes
287
[March 2016]
288
[March 2016]
The International Standards on Auditing (ISA) 600 applies to group audits and deals
with special considerations that apply to group audits, in particular those that involve
component auditors. The group engagement partner (principal auditor) decides
whether the group engagement team or a component auditor performs the work on the
financial information of a component.
Required:
i.
Describe any four (4) factors to be considered by the group engagement partner
(principal auditor) when planning to rely on the work of component auditor.
(6 marks)
ii.
In evaluating the work of the component auditors, the group engagement partner
(principal auditor) would advise the component auditors on certain issues.
Required:
Briefly describe three (3) of the issues addressed by the group engagement
partner (principal auditor) to the components auditors.
(6 marks)
Providing assurance services other than statutory audit is no longer new to most audit
firms. These services are intended to enhance the degree of confidence of the
intended users about certain subject matter.
Required:
Discuss the differences between review of financial information and agreed-upon
procedures. (Your discussion should cover the definition, comparative level of
assurance and the report to be provided by each of the services).
(6 marks)
Internal auditors' roles include monitoring, assessing, and analyzing organizational risk
and controls; and reviewing and confirming information and compliance with policies,
procedures, and laws. Thus, the work of internal auditor complements the work of the
external auditor.
Required:
Explain any FOUR (4) factors that might be considered by the external auditor in
accepting the work of the internal auditor.
(6 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)
ISA 600 deals with Audit of Group Financial Statements. A component auditor may be
required by statute, regulation or for another reason, to express an audit opinion on the
financial statements of a component. The group engagement team may decide to use
the audit evidence on which the audit opinion on the financial statements of the
component is based to provide audit evidence for the group audit. The group
engagement partner is not only responsible for the direction, supervision and
performance of the group audit engagement but may also consider whether the group
engagement team may be required to be involved in the work of the component
auditor
Required:
Explain the three (3) factors that may affect the group engagement teams involvement
in the work of the component auditor.
(6 marks)
C.
The International Standard on Assurance Engagements 3000 (ISAE 3000) deals with
assurance engagements other than audits or reviews of historical financial information.
Required:
Explain the objectives of Assurance Engagement as stated in ISAE 3000.
(4 marks)
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.
ii.
Discuss the challenges for the group engagement partner in planning and
performing the group audit.
(6 marks)
DISCUSSIONTOPICS
Consultation
Secretarial
services
Taxation
Due
diligence
Forensic
Auditing
Other
Services:
289
Other
Services:
Forensic
Auditing
Accounting
[March 2016]
Oftenconductedtoobtainordevelop
informationaslegalevidenceorforuse
byexpertwitnessesinthecourtoflaw
Requirestheuseofcriticalanalysesand
investigativeskills,integratedwithaccounting
knowledgeandbusinessexperience
Requiredtoreporttothecompanythathas
appointedhim/herinthecaseofaregulatory
body(e.g.BursaMalaysiaorMinistry)tothe
committeesetupforthatpurpose
Requiredpersonnelwhoaretrainedin
detecting,investigatinganddeterring
fraudandwhitecollarcrime
290
[March 2016]
DEFINITION
Other
Services:
Example:
EXAMPLES
Forensic
Auditing
Businessoremployeefraud
Criminalinvestigations
Shareholderandpartnershipdispute
Businesseconomiclosses
Prospectusreports
Purchaseofsharesinaprivatecompanyor
partnership
Requestforloan
Investigationsunderstatutes
291
[March 2016]
Other
Services:
1.Instruction
fromclient
STAGEOFAUDIT
2.Communicate
withtheauditors
6.Fact
gathering
3.Assessingtheaims
andprobablescopeof
theinvestigations
5.Decidingthe
outlineofthe
auditreport
4.Obtaining
background
information
8.Clearingthedraftreport
withthecompanybeing
investigated
7.Drafting
theaudit
report
Forensic
Auditing
292
[March 2016]
Other
Services:
1.
Instruction
fromclient
STAGEOFAUDIT
2.
Communicate
withthe
auditors
293
Other
Services:
3.
Assessingthe
aimsand
probablescope
ofthe
investigations
4.
Obtaining
background
information
Forensic
Auditing
[March 2016]
STAGEOFAUDIT
Forensic
Auditing
294
[March 2016]
Other
Services:
STAGEOFAUDIT
Forensic
Auditing
5.
Deciding
the
outlineof
theaudit
report
6.
Fact
gathering
295
Other
Services:
7.
Drafting
the
audit
report
[March 2016]
STAGEOFAUDIT
Forensic
Auditing
8.
Clearingthe
draftreport
withthe
company
being
investigated
296
[March 2016]
Other
Services:
Duediligenceauditisaprocessof
enquiryandinvestigationmadeonbehalf
ofaprospectivebuyeronapossible
businessmergeroracquisition
ThescopeofduediligencerequirestheChartered
Accountantstoverifythestateofaffairofthe
targetedbusiness.Itrequirescomprehensivereview
andenquiry.Itisconductedinprudenceandin
accordancewithgenerallyacceptedpractices
Due
diligence
Theauditorisrequiredtounderstandthe
clientsneed,toavoidwrongaudit
proceduresbeingcarriedout.Therefore,
letterofengagementisnecessaryforthe
auditclienttoagreeonthescopeofaudit
297
[March 2016]
AUDITPROCEDURES
Inthemostcases,willbesimilartostatutoryauditprocedures:
Reviewtheworkingpapersofpreviousauditors
Evaluatethevaluationoftheassetsofthecompany
ReviewIncomeStatementtodetermineaccuracyofprofits
Carryoutanalyticalreviewanddiscussunusualitems
Reviewinterimfigurestoevaluateaccuracyandpossibleachievementof
theforecastfigures
Useinterimandmanagementaccountingrecordstoassessbusinesstrends
Verifyallmaterialitemsinthebalancesheet
Reviewandreportthemanagementstructureandcorporatestructure
Reviewlitigationissues,contingentliabilities,commitments
Enquireifthecompanyfacinganyproblemrelatingtoitproductetc
Reviewstatutoryrecords
DueDAjuma TilesSdn Bhd (Page3)
298
[March 2016]
Management
Consultationtoclient
verballyorinwriting:
Consultancyinpublicofferingofstock
Acquisitionofacompany
Ventureintonewbusiness
Developmentofnewproduct
Studyfornewlocationforbusiness
(restaurant)
Developingtheinternalcontrol
proceduresfortheclients
Operationalimprovement,cost
reduction,processflowimprovementetc
299
[March 2016]
SecretarialServices
Providesecretarialservicestoclients
Incorporationofnewcompany
Deregistrationofcompany
Windingupofcompany
Maintenanceofstatutorybooksandregisters
FillingstatutoryformsandreturntoCCMandother
regulatoryauthorities
Attendingmeetingandpreparationofminutes
Advicetheclientonthematterpertainingtothesecretarial
300
[March 2016]
TAXATION
Compilationofreturn(onbehalfofclient):
CP204
FormCandtaxcomputation
FormR(Informationaboutsection108taxbalance)
FormEandEA(foremployerandemployee)
Taxplanning
Adviseclientonnewchanges(rate)andnewincentives
301
[March 2016]
Providingaccountingjobtoclienton:
Monthlybasisoryearlybasisor
quarterlybasis
ACCOUNTING
Analyzethefinancialinformationand
comparingtobudget,previousyearand
forunfavorabledifferences,provide
explanationformanagementdecision
Assistinpreparingpayrollcalculation
andetc
302
[March 2016]
303
[March 2016]
304
[March 2016]
305
[March 2016]
Audit in Al Quran
Numerous Quranic verses and Hadiths indicating audit process:
Then as for he who is given his record in his right hand, He will be judged with an easy account,
And return to his people in happiness.
(Surah al-Insyiqaq: Verses 6-9)
And indeed, [appointed] over you are keepers, Noble and recording; They know whatever you
do.
(Surah Al-Infithar: Verses 10-12)
And he took attendance of the birds and said, "Why do I not see the hoopoe or is he among
the absent? I will surelypunish him with a severe punishment or slaughter him unless he brings
me clear authorization.
(Surah al-Naml: Verses 20-21)
306
[March 2016]
307
[March 2016]
308
[March 2016]
REFERENCES:
Bank Negara Malaysia (BNM).(2010). Shariah Governance Framework. Malaysia
Chik, Nazri, (2011) Shariah Division BIMB.
N. Kasim, S.H. Ibrahim, and M. Sulaiman, Shariah auditing in IFIs: Exploring the gap between the
desired and the actual, Global Economy & Finance Journal, vol. 2, no. 2, pp. 127-137, 2009
N. Kassim and Z.M Sanusi Emerging Issues for Auditing in Islamic Financial Institutions: Empirical
Evidence from Malaysia, Journal of Business and Management Vol 8, Issue 5, pp10-17, Mar-Apr
2013
309
[March 2016]
310
[March 2016]
311
[March 2016]
312
[March 2016]
An auditor has statutory responsibilities under Section 174 Companies Act 1965.
Required:
State three (3) duties of the auditor as stated in the Act.
(3 marks)
B.
C.
Required:
Explain what is self-interest threat and give two (2) examples of circumstances that
create self-interest threat for a professional accountant in public practice.
(3 marks)
Required:
Briefly explain any two (2) Fundamental Principles of the MIA By-Laws (on
Professional Ethics, Conduct and Practice).
(3 marks)
B.
C.
Required:
What do you understand by the term Practice Review and Peer Review?
(4 marks)
Required:
Explain any FOUR (4) fundamental principles contained in the MIA By-Laws (On
Professional Ethics, Conduct and Practice).
(4 marks)
B.
Required:
Explain the following terms:
i.
ii.
iii.
Due diligence
Expectation Gap
Forensic Audit
(6 marks)
i.
Required:
List two (2) non-assurance services that may impair independence of an auditor.
(2 marks)
ii.
Advocacy threat
Self-review threat
(4 marks)
B.
Required:
Differentiate the following terms:
i.
ii.
As an auditor, there are times for certain assertions require an expert opinion and
involvement.
Required:
i.
ii.
Provide two (2) examples of experts that may assist the auditor.
(2 marks)
2
B.
Required:
Explain the meaning of Shariah Audit.
(3 marks)
C.
Required:
Explain the following fundamental principles:
i.
ii.
Professional Behavior
Objectivity
(4 marks)
B.
C.
The BNMs Shariah Governance Framework (SGF) introduced Shariah Audit in 2011.
Required:
State three (3) reasons the needs of Shariah Audit.
(3 marks)
B.
C.
Auditors do provide other services to their client. Among the services include
accounting, taxation, forensic and due diligence. Define and provide two (2) examples
for the followings:
i.
ii.
Forensic Audit
Due diligence
(4 marks)
Explain two (2) audit procedures that you would conduct to confirm the problems
mentioned by TBSB management.
(2 marks)
b.
From the above case, explain the situations which violated the MIAs By-Laws.
(Indicate the MIAs By-Laws that have been violated)
(6 marks)
c.
d.
e.
Expenses for the Board of Directors family such as entertainment, hotel charges
and cleaning services have been charged to the companys expenses account.
2.
There are overdue account receivables from a few companies but no further
actions have been taken by the management. These companies have been
sponsoring many events organized by the company.
3.
It has been the companys policy that any withdrawals, regardless of the amount,
to be signed by the Finance Manager, who has been employed since the first
day of the companys establishment. Nobody in the company has ever
questioned his integrity as he is seen to be a workaholic and seldom takes his
annual leave.
4.
Most of the junior employees in the accounting department lack experience and
are not aware of GCBs accounting principles and procedures.
Issue 4
The external auditor who performed the audit for the financial year ended 31 March
2013 has raised his concern over the insufficient allowance for doubtful debts.
Discussion with the CEO revealed that he is aware of the issue, but is reluctant to
increase the allowance because of the adverse effect towards the companys profit.
The CEO is willing to take full responsibility of any misstatements and insisted that the
auditor ignore the issue. The external auditor agreed to the management request and
is aware of the risk associated with issuing an unqualified opinion on misstated
financial statements.
The decision was partly influenced by the fact that GCB is one of the auditors main
clients, whose audit fee contributes to more than 20% of the auditors annual earnings.
The CEO had once threatened to replace the existing auditor if the issue is highlighted
in the auditors report.
Required:
a.
b.
The fraud diamond approach has been used in many fraudulent financial reporting
cases.
Required
Explain, with example, the fraud diamond.
(6 marks)
c.
Identify and describe six (6) indicators of fraudulent activities that have been
highlighted in the issues raised by Zubair. Explain the possible implications if the
fraudulent activities are not addressed by the management.
(12 marks)
d.
Comment on the ethical issues that concern the external auditors. Support your
answer with the relevant MIA By-Laws (On Professional Ethics, Conduct and Practice).
(4 marks)
e.
Discuss the appropriate actions that should be taken by Zubair, as the companys
internal auditor, in dealing with the above issues.
(6 marks)
b.
c.
Describe the test of control Azam & Co would perform to overcome those identified risks.
(8 marks)
d.
Pearls CEO has expressed an interest in Azam & Co performing other review
engagements as been advised by his finance manager. The CEO wants the audit
manager of Azam & Co to explain to him what is review engagement and he is also
unsure how much assurance would be gained via these engagements and how this
differs to the assurance provided by an external audit.
Required:
i.
ii.
Identify and explain the level of assurance provided by an external audit and
other review engagements.
(6 marks)
b.
Identify and discuss the risk of material misstatement (RMM) that should be addressed
by the Kamal Hussein & Co. in the audit of Rampai Terus Sdn Bhd.
(12 marks)
c.
Recommend the procedures that auditor will perform to confirm the going concern
problems faced by Rampai Terus Sdn Bhd.
(6 marks)
d.
AEM Bank has filed a petition to prosecute the auditor for preparing the auditors report
negligently.
Required:
Being a plaintiff, discuss the elements that he must prove to ensure that defendant is
liable to third party due to negligence and fraud. (Indicate a law case if necessary).
(6 marks)
e.
From the point of view of the auditor of Rampai Terus Sdn Bhd, describe the suitable
type of independent auditors report that should be issued. (Indicate the reasons for
issuing such report).
(3 marks)
Impian has a small internal audit department and in previous years the evidence obtained by
Seedah & Co as part of the external audit has indicated that the control environment of the
company is generally good. The audit opinion on the financial statements for the year ended
31 March 2011 was unmodified.
Required:
a.
Discuss the ethical and professional issues raised in respect of the request by Impian
for Seedah & Co to investigate the alleged fraudulent activity.
(8 marks)
b.
The fraud diamond approach has been used in many fraudulent activities.
Required:
Discuss the elements of fraud diamond.
(6 marks)
c.
Explain the matters that should be discussed in the meeting with Zikri in respect of
planning the investigation into the alleged fraudulent activity.
(6 marks)
d.
e.
Explain four (4) audit procedures in identifying the fraudulent activities committed by
the member of sales team.
(4 marks)
The directors have produced a cash flow forecast which shows a significantly worsening
position over the coming 12 months. They are confident with the new developed products,
and in light of their trading history of significant growth, they believe that there is no need to
make any disclosures in the financial statements regarding going concern.
At the year end, CCB received notification from one of its customers that the hardware
installed by CCB for the customers online ordering system has not been operating correctly.
As a result, the customer has lost significant revenue and has informed CCB that they intend
to take legal action against them for loss of earnings. CCB has investigated the problem post
year end and has discovered that other work-in-progress is similarly affected and inventory
should be written down. The finance director believes that as this misstatement is identified
after the year end, it can be amended in the 2016 financial statements.
Required:
a.
Explain six (6) potential indicators that CCB is facing a going concern problem (the
indicators must be in relation to the case above).
(9 marks)
b.
Describe four (4) audit procedures which you should perform in assessing whether or
not CCB is a going concern.
(6 marks)
c.
d.
Describe the procedures that the auditors of CCB should undertake in relation to the
uncorrected inventory misstatement identified in the case above.
(6 marks)
e.
The auditors are informed that CCBs bankers will not make a decision on the overdraft
facility until after the audit report is completed. The directors have now agreed to
include some going concern disclosures.
Required:
Describe the impact on the audit report of CCB.
(4 marks)
directors that help the company to secure government contract. Seventy percent of the
companys construction contracts are government contracts, with the remaining contracts
being small shopping centers and business centers.
Mr Naga has informed Zahidi the following facts:
1.
During the year the company won a major contract to construct a number of buildings
on a university campus. The project is particularly interesting as all the facilities must
be capable of transmitting and receiving video conference broadcasts. Nagasari Bhd
has not been involved in this type of work before but believes that it will lead to a lot
of similar work in the private sector.
2.
3.
Nagasari Bhd keeps a small store of building materials in its main warehouse. The
warehouse manager is responsible for ordering goods, receipting goods and paying
creditors.
4.
A bonus incentive scheme was introduced for the supervisors at the construction
sites to ensure that building would be completed on time.
On behalf of the firm, Zahidi agreed to be appointed as auditor for Nagasari Bhd. He did that
without considering the fact that the firm did not have sufficient staffs and none of the
partners in the firm have experience in dealing with the audit of a construction company.
Meanwhile, Nagasari Bhd engaged an expert in the valuation of the life of assets used for
the purpose of construction. Nagasari Bhd also would like the auditor to check on the new
computerized accounting system for his company.
Required:
a.
Discuss the ethical and professional issues raised by referring to the MIA By-Laws on
Professional Ethics.
(7 marks)
b.
Discuss the six (6) inherent risks found in the above case.
(12 marks)
c.
Discuss four (4) factors the auditor needs to consider before relying on the work of an
expert.
(6 marks)
d.
e.
Explain the approach the auditor will take to check on the new computerized
accounting system for Nagasari Bhd.
(3 marks)
10