1.

All of the following are components of audit risk except

A. control risk
B. legal risk
C. detection risk
D. inherent risk

2. In the Audit Report the auditor gives their opinion on which of the following:
i) The truth and fairness of the financial statements prepared by management.
ii)The risk management system within the organisation.
iii)The internal controls within the organisation.
iv)Whether the financial statements were prepared in accordance with the appropriate
framework.

A. i) & ii) only.

B. All of the above.
C. None of the above.
D. i) & iv) only.

3. Which of the following are considered an ethical threat?

i) Self Review.
ii)Self Instruction.
iii)Self Interest.
iv)Advocacy.
v)Confidentiality.

A. All of the above

B. i) & iii) only
C. i) and iv) only
D. i), iii) & iv) only

4. Which TWO of the following should be included in an audit engagement letter?

(1) Objective and scope of the audit
(2) Results of previous audits
(3) Managements responsibilities
(4) Need to maintain professional scepticism

A 1 and 2
B 1 and 3
C 2 and 4
D 3 and 4
5. Which TWO of the following substantive procedures provide evidence over the
EXISTENCE of trade receivables?
(1) Agreeing a sample of goods despatched notes to sales invoices and to the sales
ledger
(2) Undertaking a receivables circularisation
(3) Review of post year-end cash receipts, if these relate to year-end receivables follow
through to the sales ledger
(4) Recalculating the allowance for uncollectible accounts

A 1 and 3
B 2 and 4
C 2 and 3
D 1 and 4

6. Which of the following procedures are TESTS OF CONTROL an auditor should perform
in testing the inventory
cycle of their client whilst attending the inventory count?
(1) Observe whether the clients staff are following the inventory count instructions
(2) Review inventory present in the warehouse for evidence of damage or obsolescence
(3) Obtain a sample of the last goods received notes and goods despatched notes and
follow through to ensure
inclusion in the correct accounting period
(4) Inspect and review managements inventory count instructions

A 2 and 3
B 1 and 4
C 1 and 2
D 3 and 4

( Total : 10 Marks)

2. (a) State three functions of Malaysian Institute of Accountants (MIA) under the
Accountants Act 1967?
( 3 Marks)

Under the provision of the Accountants Act 1967, the main functions of MIA include
the following :

To determine the qualifications of persons for admission as member of MIA.

To provide for the training and education of persons practicing or intended
practice the profession of accountancy.
To approve, regulate and supervise the MIA Qualifying Examination
To regulate the practice of the accountancy profession in Malaysia
 To promote the interests of the accountancy profession in Malaysia
To provide financial or other assistance to members or their dependants so
as to protect the welfare of members.

b) Identify and briefly explain the two sets of MASB approved accounting standards
that are operative in Malaysia.
( 3 Marks)

c) Explain why there is a need for two different sets of accounting standards for
Financial Reporting.
( 4 Marks)

a. There are currently two sets of approved accounting standards in Malaysia:

1. The Financial Reporting Standards, or the FRS.
2. The Private Entity Reporting Standards, or the PERS.
The FRS, which are based on the International Financial Reporting Standards (IFRS) are
mandatory for public listed entities, their subsidiaries, associates, and companies jointly
controlled by them. The PERS are for private companies, particularly those small and
medium-sized companies which are owner-managed with no public interest.

b. The use of two different sets of financial reporting standards recognises the fact that smaller
and privately run companies have different information needs; for example, they need not
file financial statements with the securities commission or regulatory organisation for the
purpose of issuing instruments in a public market; and these entities normally do not hold
assets in a fiduciary capacity for a broad group of outsiders unlike companies such as
insurance, securities brokers, pension funds, banks and financial institutions. The allowance
for a simpler set of financial reporting standards also recognises the burden and costs on
the smaller entities for having to comply with a complex set of accounting standards.

3. Auditors are frequently required to provide assurance for a range of non-audit

engagements.
Required: List and explain the elements of an assurance engagement.

An assurance engagement will involve three separate parties; The intended user
who is the person who requires the assurance report.

The responsible party, which is the organisation responsible for preparing the subject
matter to be reviewed.

The practitioner (i.e. an accountant) who is the professional who will review the
subject matter and provide the assurance.
 Another element is a suitable subject matter. The subject matter that the responsible
party has prepared and which requires verification.

Suitable criteria are required in an assurance engagement. The subject matter is

compared to the criteria in order for it to be assessed and an opinion provided.

Appropriate evidence has to be obtained by the practitioner in order to give the

required level of assurance. An assurance report is the opinion that is given by the
practitioner to the intended user and the responsible party.

4. (a) Explain the concept of TRUE and FAIR presentation. (4 marks)

(b) Describe what is meant by an attitude of professional skepticism (6 Marks)

(a) Financial statements are produced by management. They must give a true and
fair view of the entitys results. The auditor in reviewing these financial
statements gives their opinion on the truth and fairness. (1 mark)

True
Information is factual and conforms with reality. (1 mark)
It is assumed that to be true it must comply with accounting standards and any
relevant legislation. (1 mark)

Lastly true includes data being correctly transferred from accounting records to
the financial statements. (1 mark)

Fair
Information is clear, impartial and unbiased. (1 mark) Information reflects plainly
the commercial substance of the transactions of the entity. (1 mark)

(b) An attitude of professional scepticism requires that the auditor objectively

evaluate audit evidence. This means the auditor should constantly maintain a
critical and questioning mind in assessing the validity of audit evidence he
accumulates during the audit process. In the course of the audit, the auditor
does not assume unquestioned honesty on the part of the management but
neither should he assume that management is dishonest.

An attitude of professional scepticism is necessary for the auditor to identify

circumstances that increase the risk of a material misstatement resulting from
fraud or error, and suspicious circumstances that indicate that the financial
statements are materially misstated. If the auditor suspected that there might be
a material misstatement due to fraud or error, the auditor would be more
sensitive to the selection and type of evidence examined.
5. ISA 210 Terms of Audit Engagements explains the content and use of
engagement letters.
Required: State Five items that could be included in an engagement letter.

(10 Marks)

Answer

Objective of the audit of the financial statements

The scope of the audit with reference to appropriate legislation
The form of any reports or other communication of the results of The
management.
The auditor may not discover all material errors
Provision of access to the auditor of all relevant books and records
Arrangements for planning the audit
Agreement of management to provide a representation letter
Request that the client confirms in writing the terms of engagement
Description of any letters or reports to be issued to the client
Basis of fee calculation and billing arrangements.

6. Nitrogen Kimia Sdn Bhd (NKSB) provides scientific services to a wide range of clients.
Typical assignments range from testing food for illegal additives to providing forensic
analysis on items used to commit crimes to assist law enforcement officers.

The annual audit is nearly complete. As audit senior you have reported to the
engagement partner that NKSB is having some financial difficulties. Income has
fallen due to the adverse effect of two high-profile court cases, where NKSB services
to assist the prosecution were found to be in error.

Not only did this provide adverse publicity for NKSB, but a number of clients
withdrew their contracts. A senior employee then left NKSB, stating lack of
investment in new analysis machines was increasing the risk of incorrect information
being provided by the company.

A cash flow forecast prepared internally shows NKSB requiring significant additional
cash within the next 12 months to maintain even the current level of services.
NKSBs auditors have been asked to provide a negative assurance report on this
forecast.
 Required:

(a) Define going concern (5 Marks)

(b) Discuss the auditors responsibilities in respect of going concern. (5 marks)

(10 Marks)

Going concern
(a) Going concern means that the enterprise will continue in operational existence
for the foreseeable future without the intention or necessity of liquidation or
otherwise ceasing trade. It is one of the fundamental accounting concepts used
by auditors and stated in IAS 1 Presentation of Financial Statements.

The auditors responsibility in respect of going concern is explained in ISA 570

Going Concern. The ISA states when planning and performing audit procedures and
in evaluating the results thereof, the auditor should consider the appropriateness of
managements use of the going concern assumption in the preparation of the
financial statements.

(b) The auditors responsibility therefore falls into three areas:

(i) To carry out appropriate audit procedures that will identify whether or not an
organisation can continue as a going concern.

(ii) To ensure that the organisations management have been realistic in their use of
the going concern assumption when preparing the financial statements.

(iii) To report to the members where they consider that the going concern
assumption has been used inappropriately, for example, when the financial
statements indicate that the organisation is a going concern, but audit procedures
indicate this may not be the case.

6. (a) ISA 300 Planning an Audit of Financial Statements provides guidance to

auditors. Planning an audit involves establishing the overall audit strategy for the
engagement and developing an audit plan. Adequate planning benefits the audit
of financial statements in several ways.
 Required:
Explain the importance of audit planning. (5 marks)

(b) You are the audit senior in charge of the audit of Swandive Co (Swandive),
and have been informed by your audit manager that during the year a fraud
occurred at the client. A payroll clerk set up fictitious employees and the wages
were paid into the clerks own bank account. This clerk has subsequently left the
company, but the audit manager is concerned that additional frauds have taken
place in the wages department.

Required:
Describe procedures which should be undertaken during the audit of wages as a
result of the managers assessment of the increased risk of fraud. (5 marks)

(10 marks)

(a) Importance of audit planning

It helps the auditor to devote appropriate attention to important areas of the audit.
It helps the auditor to identify and resolve potential problems on a timely basis.
It helps the auditor to properly organise and manage the audit engagement so that it is
performed in an effective and efficient manner.
It assists in the selection of engagement team members with appropriate levels of
capabilities and competence to respond to anticipated risks and the proper assignment
of work to them.
It facilitates the direction and supervision of engagement team members and the
review of their work.
It assists, where applicable, in the coordination of work done by experts.

(b) Procedures due to increased risk of fraud

The audit senior should consider undertaking the following procedures as a result of the
increased risk of the payroll fraud.
Discuss with management and those charged with governance as to whether they are
aware of any other payroll frauds
or potential frauds.
Review board minutes for evidence of management discussion of the materiality of the
payroll fraud and to the existence
of any additional frauds or suspected frauds.
Discuss with the payroll manager the nature of the payroll fraud, how it occurred and
the financial impact of amounts
incorrectly paid into the payroll clerks bank account.
Review the supporting documentation to confirm the total of the fraudulent payments
made and assess the materiality
of this misstatement.
Review and test the internal controls surrounding setting up of and payments to new
joiners to assess whether further
frauds may have occurred.
 Consider whether other information obtained by the audit team indicates risks of
additional material misstatements with
regards to payroll fraud.
Obtain a written representation from management acknowledging that they have
disclosed to the auditors all knowledge
of actual and suspected payroll frauds.