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AUD589 (2021 FEB)
Auditing (AUD339)
Universiti Teknologi MARA
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UNIVERSITI TEKNOLOGI MARA
FINAL EXAMINATION
SUGGESTED SOLUTION
COURSE : AUDITING
COURSE CODE : AUD 589
EXAMINATION : FEBRUARY 202 1
QUESTION 1
A
a) Explain briefly the inter-relationship amongst the three components of audit risk. - There is an inverse relationship between inherent risk or control risk, and detection risk. For instance, if inherent risk or control risk are assessed as high, detection risk would be set at a low level. (3 marks) b) Explain briefly the steps in applying materiality on an audit. - Establish a preliminary judgement about materiality - Allocate the preliminary judgement about materiality to account balances or classes of transaction - Estimate likely misstatements and compare total to the preliminary judgement about materiality (3 points x 1 mark = 3 marks) B a) Explain THREE (3) reasons why audit evidence is considered to be persuasive rather than conclusive. Audit procedures are designed to reduce the risk that the financial statements contain material misstatements and not to eliminate all possible errors. Therefore the auditor can only gives an opinion about the financial statements not an absolute assurance about the financial statements.
- The reason for lack of absolute, definitive certainty is the nature of audit evide nce which is gathered by human beings in real live organizations. And human / people make mistakes (both client and auditor) and thus may never produce a definite and absolute evidence which are totally free from errors.
- The client’s personnel may not always tell the truth. Besides making mistakes, people also may not be honest. The information that the auditor gets as audit evidence may not be correct due to untruthful answers given by client’s personnel, for various reasons.
- Documents could be forged (increasingly easy with digital technology).
- The auditor gathers evidence on a test basis (the sample may or may not be representative). (Any 3 reasons with explanations x 2 marks = 6 marks) b) Discuss TWO (2) situations which restrict the auditor’s ability to obtain sufficient appropriate audit evidence, giving TWO (2) examples for each situation.
- Circumstances beyond the control of the entity Examples:
- The entity’s accounting records have been destroyed.
b) Explain TWO (2) audit assertions about account balances at year end that cannot be usually addressed by each of the following audit procedures. I. External confirmation of trade debt
- Cut-off
- Completeness. II. Physical count of inventory
- Valuation
- Rights and obligations. III. Verification of title documents of fixed assets
- Existence
- Completeness (1. 33 mark each assertion & explanation X 6 = 7 = 8 marks) B a) Discuss FOUR (4) risks that could be the cause for such differences in reporting repair and maintenance expenses in the statement of profit or loss.
- Overstated expense
- Fictitious expense
- Unmaterialized expense
- Unapproved expense
- Multiple reimbursements
- Split expense
- Duplicate claims & reimbursements
- Unapproved & split expenses analysis (Any 1 point with explanation = 2 marks x 4 points = 8 marks) (Total: 20 marks) QUESTION 3 A. a) ANY TWO (2) types of modified report: i. Except for: this arise when particular matter ( either relates to disagreement or limitation in the audit scope) which, while being material to the true and fair view given by the financial statements, is not pervasive as to render them totally misleading. The except for opinion tehrefore indicates that, with the exception of the particular matter, the financial statements do give a true and fair view. √√√ ii. Disclaimer opinion: this arises when the possible effect of a limitiation of scope is so material and pervasive that the auditor has not been able to
obtain sufficient appropriate audit evidence and accordingly is unable to express opinion on the financial statements. √√√ (6 marks) b) circumstances that an emphasis of matter is approriate (with explanation)
- additional disclosure with which the auditor concurs and which make the accounts true and fair.
- A significant uncertainty that adequately disclosed
- The financial statements being reissued due to subsequent events. ( 2 marks) B. Audit report implication if the directors are reluctant to disclose notes to the financial statements:
- Requirements of MFRS o Management is required to disclose in the financial statements any material; uncertainties which may cast significant doubt on the ability of the company to continue as a going concern. If the directors refuse to disclose, then there is a non-compliace of the requirements of MFRS 101, rendering the financial statements to contain material mistatement.
- Modified audit report o The report should be modified, either a qualified or an adverse depending on the impact of the non dosclosure (4 marks) C. Auditor’s opinion Reasons i Unqualified report with ‘Emphasis of Matter’ paragraph √ Empower Bhd has a significant uncertainty of continuing business however the matter has been adequately disclosed in the notes to the account. √ ii Qualified report with Except for√ The client has restricted the scope of the audit and the auditor was not able to satisfy him or herself by alternative procedures. Because it was a client restriction rather than a condition beyond the client’s control causing the limitation, and if the limitation is considered highly material, a disclaimer is appropriate. If the limitation considered material but not pervasive, except for opinion is appropriate. √ iii Qualified report with Disclaimer opinion√ The client refused to allow the auditor to access to the minutes of board of directors meeting on significant item on tangible assets and loan. This has been scope limitation and the amount is material and pervasive. √ iv Qualified report with Adverse opinion. √ The company’s financial statements are not in accordance with generally accepted accounting principles (GAAP) and disclosure of information. The misstatement is material and pervasive. √
B. 5 deficiencies found in the purchase system i. Lack in the segregation of duties – the production manager and the book keeper are responsible for an important number of activities in the purchase system. ii. Only hand written purchase orders are made to the buying manager from the other department. iii. There was no checking made over the book keeper posting invoices and cash to the purchase ledger. iv. The production manager could make fraudulent/fictitious payment to supplier. As he can order goods and he also approve posting of the invoices to the ledger. v. Some purchase orders are not raised for all goods purchased by the company. vi. The goods received department does not have copies of purchase orders and it should refuse receipts of goods where there are no purchase orders. (or any other acceptable answer) (10 marks) C. 3 improvements to the system i. There should be a system whereby pre – numbered purchase requisitions are raised and signed by the department manager before sending it to buying manager. ii. The buying manager should obtain the best quotation to choose from the aspect of quality, price and delivery date. iii. The company must produce pre – numbered/sequentially purchase orders. iv. GRN should be sequentially pre – numbered and signed by the store keeper. (or any other acceptable answer) (6 marks) D. 4 substantive procedures to verify the purchase and trade payable balances. i. Comparison of monthly purchases with the corresponding months in the previous year to evaluate the reasonableness of recorded purchases. ii. Perform cut – off test as of SOFP date by agreeing GRN a few days before and after to obtain assurance that the transactions are recorded in the appropriate accounting period iii. Cast the list of invoices in the payable ledger for any month to ensure that the total purchase for the months is accurate. iv. Examine the key financial ratios in relation to the purchase and trade payables transactions to ensure its reasonableness. (any other acceptable answer) (8 marks) (Total: 3 0 marks) END OF SUGGESTED SOLUTION
AUD589 (2021 FEB)
Course: Auditing (AUD339)
University: Universiti Teknologi MARA
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