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AC/APR 2009/AUD360/390/394

UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION

COURSE COURSE CODE EXAMINATION TIME

AUDITING AUD360/390/394 APRIL 2009 3 HOURS

INSTRUCTIONS TO CANDIDATES 1. This question paper consists of three (3) parts : PART A : Section 1 (10 Questions) : Section 2 (10 Questions) PART B (4 Questions) PART C (1 Question)

Answer ALL three (3) parts : i) ii) iii) iv) v) Answer ALL questions from PART A, Section 1 in the Objective Answer Sheet, Answer ALL questions from PART A, Section 2 in the True/False Answer Sheet, Answer THREE (3) questions only from PART B in the Answer Booklet, Answer ALL questions from PART C in the Answer Booklet, Start each answer on a new page.

Do not bring any material into the examination room unless permission is given by the invigilator. Please check to make sure that this examination pack consists of: i) ii) iii) iv) the Question Paper an Answer Booklet - provided by the Faculty a True/False Answer Sheet - provided by the Faculty an Objective Answer Sheet - provided by the Faculty

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

This examination paper consists of 11 printed pages
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CONFIDENTIAL PART A

AC/APR 2009/AUD360/390/394

SECTION 1 - MULTIPLE CHOICE QUESTIONS This section consists of 10 multiple-choice questions. Choose the most suitable answer and shade the corresponding alphabet representing the answer in the multiple choice answer sheet provided. 1. An auditor's working papers should a. b. c. d. not be permitted to serve as a source of reference for the entity. show that the accounting records agree or reconcile with the financial statements. not contain critical comments concerning management. be the property of the client.

2.

Which of the following is difficult to evaluate objectively? a. b. c. d. Efficiency and effectiveness of operations. Compliance with government regulations. Presentation of financial statements in accordance with approved accounting standards. All of the above are equally difficult.

3.

Under the requirement of Companies Act 1965, the annual audit of a company's financial statements is to be conducted by a. b. c. d. an approved company auditor. the government auditor. the internal auditor. the forensic auditor.

4.

Purchase cut-off procedures should be designed to test whether all inventories a. b. c. d. purchased and received before the end of the year was paid. ordered before the end of the year was received. purchased and received before the end of the year was recorded. owned by the company is in the possession of the company at the end of the year.

5.

Which of the following audit techniques would most likely provide an auditor with the most assurance about the effectiveness of the operation of an internal control? a. b. c. d. Inquiry of client personnel. Re-computation of account balance. Observation of client personnel. Confirmation with outside parties.
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AC/APR 2009/AUD360/390/394

6.

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's a. b. c. d. opinion of any subsequent events occurring since the predecessor's audit report was issued evaluation of all matters of continuing accounting significance awareness of the consistency in the application of approved accounting standards between periods understanding to the reasons for the change of auditors

7.

The date of the auditor's opinion on the financial statement of the client should be the date of the a. b. c. d. closing of the client's books. receipt of the client's representation letter. completion of all important audit procedures. submission of the report to the client.

8.

In assessing whether to accept a client for an audit engagement, an auditor should consider Client Business Risk Yes Yes No No Acceptable Audit Risk Yes No Yes No

a. b. c. d.

9.

An auditor would be most likely to learn of slow-moving inventory through a. b. c. d. inquiry of store personnel. inquiry of sales personnel. physical observation of inventory. review of perpetual inventory master files.

10.

Which of the following is the best evidence of property ownership at the balance sheet date? a. b. c. d. Title insurance policy. Duplicate copy of rental receipt (the property is rented out). Original deed held in the client's safe. Paid property tax bills. (Total: 10 marks)

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AC/APR 2009/AUD360/390/394

SECTION 2 - TRUE AND FALSE QUESTIONS This section consists of 10 TRUE/FALSE questions. Shade T for TRUE and 'F' for FALSE in the answer sheet provided.

1.

The possibility of collusion is an example of a limitation on the internal control system. The auditor should plan and perform the audit to reduce audit risk to an acceptably low level that is consistent with the objective of an audit. When a potential audit client decides to take a particular audit firm to become their auditor, they need to send an engagement letter to the audit firm. After the completion of the audit work, working papers will be retained by the audit client. When an auditor obtains audit evidence from substantive procedures, he or she needs to consider the sufficiency and appropriateness of audit evidence from such procedures and ignore any evidence from test of control to support the financial statement assertions. The 'addressee' element in an audit report is ordinarily either the shareholders or the board of directors of the entity whose financial statements are being audited. A payroll master file is used for recording each payroll transaction for each employee and maintaining total employee wages paid for the year to date. 'Kiting' is a term used to describe the process of covering a cash shortage by applying cash from one customer's accounts receivable against another customer's account receivable. The debits to accumulated depreciation account are normally tested as part of the audit of disposals of assets, whereas the credits are verified as part of the depreciation expense. MIA By-Laws (On Professional Ethics, Conduct and Practice) is a standard governed by the statute. (Total: 10 marks)

2.

3.

4.

5.

6.

7.

8.

9.

10.

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CONFIDENTIAL PARTB

AC/APR 2009/AUD360/390/394

Answer THREE (3) questions only from this section. QUESTION 1 A. You are the auditor of Perkasa Jaya Sdn Bhd. During the current year's audit, you encountered the following circumstances: i. The company did not invite you to attend an extraordinary general meeting (EGM) which will be held next month. The secretary explained that the agenda of the EGM does not require the presence of the auditor. The company did not allow you to examine the minutes of the Board of Directors meeting as these documents are classified as "private & confidential."

ii.

Required: In relation to the auditor rights under the Companies Act 1965, explain how you would deal with each of the above circumstances. (8 marks)

B.

Jamila and Faisol (JF) are partners of a small-sized accounting firm in Tongkang Pechah, Batu Pahat. The partners are currently in a dilemma on how to deal with the following issues: i. Buloh Kasap Sdn Bhd, which contributes 35% - 40% to the firm's annual income, is a major client of the firm since five years ago. During the current year under audit, major discrepancies were noted relating to material overstatement of the company's revenues as well as non-disclosure of a contingent liability. The management refused to adhere to the standard reporting requirements and threaten to change the auditor if JF qualify the audit report. JF was invited to be the auditor for Durian Tunggal Sdn Bhd. The management of Durian Tunggal Sdn Bhd requested JF not to have any communication with the existing auditor in order to simplify and expedite the appointment process. JF was also offered to be the auditor of Batu Berendam Sdn Bhd. Jamila is however reluctant to accept the offer as his younger brother is working as a Sales Executive with the company. JF plans to accept Madia as a new partner of the firm. Madia is a fresh graduate with a first class Bachelor of Accounting (hons) degree. Madia plans to apply for the MIA membership after she obtains the necessary working experience.

ii.

iii.

iv.

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CONFIDENTIAL v.

AC/APR 2009/AUD360/390/394

Accounting students from UiTM Pulau Pinang had recently conducted an academic visit to the firm. The students requested to review some of the audit working paper files maintained by the firm so as to obtain a clear understanding of the Auditing course taught in UiTM.

Required: i. Define the term "Independence of mind" as explained in the MIA By-Laws (On Professional Ethics, Conduct and Practice) (2 marks) Each of the above situations, explain the appropriate course of actions that should be taken in pursuant to the MIA By-laws (On Professional Ethics, Conduct and Practice). (10 marks) (Total: 20 marks)

ii.

QUESTION 2 A. You are one of the senior auditors working with Aman, Andrew & Co. You have been asked to audit the financial statements of Berjaya Bhd., a manufacturing company, for the first time. All preliminary verbal discussions and inquiries with the auditors, company, predecessor auditor, and other necessary parties have been completed. Your assistant has drafted the following engagement letter.

Aman, Andrew & Co. Public Accountants B-4-12, Level 5 Wisma Perdana, Kuala Lumpur Dear Sirs, Appointment of Auditors You have requested that we audit the balance sheet of Berjaya Berhad as of 31 December 2008, and related statements of income and cash flows for the year ending. We are please to confirm our acceptance and our understanding of this engagement by means of this letter. We look forward to full co-operation with your staff and we trust that they will make available to us whatever records, documentation and other information requested in connection with our audit. This letter will be effective for future years unless it is terminated, amended or suspended.

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AC/APR 2009/AUD360/390/394

Please sign and return the attached copy of this letter to indicate that it is in accordance with your understanding of the arrangements for our audit of the financial statements. Yours faithfully

Aman Bin Muhammad Aman, Andrew & Co. Partner Acknowledged and agreed on behalf of the Board of Directors for Berjaya Berhad

Required: i) Identify and discuss the deficiencies in the above draft engagement letter prepared by Aman, Andrew & Co. (12 marks) Identify any two (2) matters that the auditor should consider when determining the need to use the work of an expert? (2 marks)

ii)

B.

When Aman, Andrew & Co. has accepted an engagement, it is customary for the auditor to tour the client's plant facilities. i) Explain the benefits that can be derived from the auditor's observation during the course of the plant tour in planning and conducting the audit. (4 marks) Identify two (2) other methods in which an auditor can obtain knowledge of a client's business. (2 marks) (Total: 20 marks)

ii)

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CONFIDENTIAL QUESTION 3 A.

AC/APR 2009/AUD360/390/394

There are different types of evidence with different degree of reliability. The following are two (2) statements that compare the various types of evidence. (i) An auditor's recalculation of depreciation versus examination of raw material requisitions. A bank confirmation versus observation of the segregation of duties between cash receipts and recording payment in the accounts receivable subsidiary ledger.

(ii)

Required: For each situation, indicate and explain whether the first or second type of evidence or audit procedure is more reliable. (6 marks) B. During your audit on a company's non-current asset, the auditor realized that there are additional motor vehicles and office equipment amounting to RM 150,000. The transactions have been properly accounted for in the company's non-current asset register. What would be the specific audit procedures to satisfy the assertion of existence and ownership of these non-current assets? (4 marks) Inspection of records and documents relates to the auditor's examination of the entity accounting data and corroborating audit evidence. One issue that affects the reliability of documentary evidence is whether the documents are internal or external. Following are examples of documentary evidence: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Goods Received Notes Suppliers' invoices Material requisition forms Duplicate copies of sales invoices Purchase orders Bank Statements Shipping documents Term-loan agreements Suppliers' statements Bank Reconciliation Statement.

C.

Required: (i) (ii) Classify each document as internal or external evidence. State for each document its reliability level (high, moderate or low). (10 marks) (Total: 20 marks)

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CONFIDENTIAL QUESTION 4 A.

AC/APR 2009/AUD360/390/394

The audit of inventory, especially tests of the year-end inventory balance is often the most complex and time-consuming part of the audit. It is often difficult to establish the existence and appropriate valuation of inventories and detecting misstatements in inventory accounts can be very challenging. i) Identify any two (2) functions in the inventory cycle that need to be segregated. What error or fraud can occur if such segregation of duties is not present?

Note: Present your answer in the following format: Function to be segregated Possible errors or fraud resulting from conflicts of duties (6 marks) ii) Identify any three (3) analytical procedures commonly used in auditing inventory. (3 marks) Match the following audit objectives shown in the following table below with the test of details of balances for physical inventory observation: Audit objective 1. existence 2.completeness 3. accuracy 4. cut-off Inventory Observation procedures Account for all used and unused tags to make sure none are loss or intentionally omitted. Inquire about consignment or customer inventory included on client's premises. Record in the audit files for subsequent follow-up the last shipping document number used at year-end. Select a random sample of tag numbers and identify the tag with that number attached to the actual inventory Recount client's counts to make sure the recorded counts are accurate on the tags (also check descriptions and unit of count) (5 marks)

iii)

a. b. c. d.

5. Rights

e.

B.

There are two general types of audit test namely compliance test and substantive test. Explain each test and provide examples. (6 marks) (Total: 20 marks)

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CONFIDENTIAL PART C - COMPULSORY QUESTION QUESTION 1

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AC/APR 2009/AUD360/390/394

Kak Ras operates a 20-hour Indonesian food business under the name of Rasa-rasa Ras Restaurant since two years ago. The restaurant is located in the town of Alor Gajah. The restaurant workers work on a 10-hour shift. Workers during every shift consist of 4 chefs, 6 waiters and 1 cashier. Kak Ras has recently consulted you to overcome some of the major problems in her business. From your discussion with Kak Ras, the following issues were noted: Kak Ras is currently dealing with poor attendance of the waiters. In trying to overcome the problem, Kak Ras has required each worker to record the time when they arrive and leave the restaurant in an attendance register. Kak Ras also complained that the amount of cash collection is always not satisfactory although the number of customers is on the increasing trend. She suspected that one of the cashiers might have misappropriated the collection from customers but did not find any evidence to substantiate the claim. According to Kak Ras, customer order will be recorded by any of the waiters on a customer order form, which is then handed over to the chefs at the kitchen. After the meals were delivered, any three (3) of the experienced waiters will determine and write the meal price on a bill that is given to the customer. The other waiters are not allowed to determine meal price. When making payment over the counter, the customer is required to present the bill to the cashier. The cashier is required to immediately record the collection from every customer in a cash receipt register. In cases where the bill is misplaced by the customer, the Cashier would issue a new bill based on confirmation with the customer. At the end of every shift, the cashier would count the physical cash collected and compare the amount with the recorded collection. The physical cash would then be handed over to Kak Ras. Kak Ras is comfortable with the system because no shortage was noted so far. Kak Ras also suspected that the chefs might have stolen some of the inventory items such as chicken, prawns and fish. These items were normally delivered directly by the appointed suppliers to any of the chefs at the kitchen. Required: i. Identify five (5) major weaknesses in the internal control system of Rasa-rasa Ras Restaurant, indicating the possible effect for each of the weaknesses identified; and recommend five (5) control procedures that should be implemented to overcome each of the weaknesses. (15 marks) Briefly explain the importance of designing an effective internal control system to the management of an entity. (3 marks)

ii.

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11

AC/APR 2009/AUD360/390/394

State two (2) constraints when implementing internal control system in a small business entity. (2 marks) (Total: 20 marks)

END OF QUESTION PAPER

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