FAR 360 – INTEGRATED ACCOUNTING STUDY

AUDIT OF FINANCIAL STATEMENTS

TUTORIAL

QUESTION 1

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

approved company auditor

Required:

I. State the Companies Act 1965 requirements on the disqualification of auditor.

(3 marks)

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

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

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

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

Required:
I. From the case described above, explain two (2) situations which are in line with
the MIA By-Law or Companies Act 1965. State and explain the related By-
law or Companies Act 1965 which is being followed by the firm.

Present your answer in the following format.

Situations according to the By- The MIA By-Law/Companies Act
Law/Companies Act 1965 1965 followed.

(6 marks)

II. From the case described above, explain three (3) situations which are violate
the MIA By-Law or Companies Act 1965. State and explain the related By-
law or Companies Act 1965 which is being violated.
 FAR 360 – INTEGRATED ACCOUNTING STUDY
AUDIT OF FINANCIAL STATEMENTS
TUTORIAL

Present your answer in the following format.

Situations violated the By- The MIA By-Law/Companies Act
Law/Companies Act 1965 1965 violated.

(9 marks)

QUESTION 2

A. An internal control system should be designed and operated to provide reasonable

assurance that an entity’s objectives are being achieved.

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

II. Explain the procedures to be performed by the auditors in order to ascertain or

understand client’s internal control system.
(6 marks)

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

Required:
I. Explain the factors that an auditor should consider before accepting
appointment of a new client?
(4 marks)

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

QUESTION 3

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

II. For each of the following audit procedures, indicate type of evidence is being
gathered: (1) physical examination, (2) computation, (3) inspection of
documentation, (4) confirmation, (5) analytical procedures, (6) inquires from client
personnel, or (7) observation.
 FAR 360 – INTEGRATED ACCOUNTING STUDY
AUDIT OF FINANCIAL STATEMENTS
TUTORIAL

a. Examining a new factory equipment to ensure that the major acquisition was
received.
b. Comparing the current year gross profit percentage with the gross profit
percentage for the last four years.
c. Obtaining a letter from the client’s solicitor indicating that there were no
lawsuits in progress against the client.
d. Performing test counts of the warehouse personnel’s count of the raw
material.
e. Send confirmation letter to representative sample of debtors to ascertain the
debtors’ amount
f. Carry out the subsequent clearance test on the bank reconciliation
statement of the client
(6 marks)

QUESTION 4

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

Required:

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

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

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

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

(9 marks)
 FAR 360 – INTEGRATED ACCOUNTING STUDY
AUDIT OF FINANCIAL STATEMENTS
TUTORIAL

B. Analytical procedures are an important type of procedures on an audit. They

consist of evaluations of financial information made by a study of comparisons and
relationships among both financial and non-financial data.

Required:

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

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

QUESTION 5

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

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

(10 marks)

QUESTION 6

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

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

(10 marks)
 FAR 360 – INTEGRATED ACCOUNTING STUDY
AUDIT OF FINANCIAL STATEMENTS
TUTORIAL

QUESTION 7

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

a) Permanent Files
b) Current Files
(6 marks)

QUESTION 8

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

QUESTION 9

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

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

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

QUESTION 10

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

Samad is the clerk in the Purchasing Department. Upon receiving the purchase requisition,
(from any department) he will select an appropriate vendor by searching through the vendor
catalogues that registered with the company. He then will call the selected vendor and
request a price quotation from the vendor. After negotiating the price and getting a verbal
confirmation from the vendor, he then issued four copies of pre-numbered purchasing order
and sends them to following departments; a copy each to the requisition department head,
receiving department, accounts department and one copy will be kept in his own file.
 FAR 360 – INTEGRATED ACCOUNTING STUDY
AUDIT OF FINANCIAL STATEMENTS
TUTORIAL

Taufiq who is in-charged in receiving department, upon receiving the pre-numbered

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

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

Required:

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

b. Segregation of duties is an important element in Internal Control. Briefly describe

why it is important to maintain a proper segregation of duties.
(3 marks)

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

GOOD LUCK