Expanded Audit Report

Rounding Off and Opening for

Techniche Berhad

Under the guidance of Dr Adwa binti Sulaiman

Prepared by
Cheok Wei Ann CEA 140017
Hilal Halm CEA 140044
Irma Noor Mayzura CEA 140047
Kon Hua En CEA 150044
Tharsshini A/P Gunasekaran CEA 150146
Contents

1. Introduction ....................................................................................................................................... - 2 -
2. International Standard on Auditing (ISA) 700 & 701 ....................................................................... - 3 -
3. Advantages & Disadvantages of Expanded Audit Report ................................................................ - 5 -
4. Independent auditor’s report to the members of the Techniche Bhd ................................................ - 6 -
5. Reference ........................................................................................................................................ - 14 -

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1. Introduction

In this report, we will discuss about Key Audit Matters and expanded audit report by using the
case of Techniche Computer Berhad. Techniche Computer Berhad was a company that engaged
in computer equipment rental, computer hardware, customized application software solutions,
customer service and service maintenance. Their customers are mainly from “banking and
financing’, logistic and stockbroking industry. Techniche has been loss-making since its
financial year ended 31 of Dec 2012 until it was delisted in 2015.

Since Techniche is a loss-making company, the case has mentioned about several management
conducts that are inconsistent with statutory laws (such as Company Act) and governance ethics.
We have identified those issues and categorised them as Key Audit Matters audit report to be
included into extended audit report. Expended audit reports is a newly adopted report format that
one of the requirement is must disclose “Key Audit Matters” which previously confined to
communication between the auditors, management and those charged with governance.

Besides, the enhance audit report also required the “opinion section” to be presented first,
followed by the Basis of Opinion Section. The report also has included responsibility of auditors,
key features and scope of audit.

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2. International Standard on Auditing (ISA) 700 & 701

ISA 700 discussed for the auditors to form and opinion and reporting on financial statements. As
the expended report is being introduced recently, this ISA acts for the auditors’ guidance to make
evaluation of the conclusions and express on the opinion based on the audit evidence gathered.
ISA 700 revised focused on four standards that would provide enhancements to the auditors’
report namely ISA 701 (Key Audit Matters), ISA 705 (Modifications to Auditors Opinion), ISA
570 (Enhanced Auditor Reporting Related to Going Concern) and ISA 720 (New Other
Information Section).

(i) Forming an Opinion on the Financial Statements

The auditor shall be able to conclude if they have obtained reasonable assurance pertaining to the
financial statement is free from the material misstatement due to fraud or error. The auditor shall
evaluate the material aspect that would give any impact to the financial statement subsequently
audit opinion. If any framework do not achieve the fair presentation, the auditor shall discuss
matter with the management and modify the opinion in the auditors; report if necessary
according with ISA 705.

ISA 701 Key Audit Matters

ISA 701 defined key audit maters (KAM) as those matters treated in the auditors’ professional
judgment that were most significant in the financial statements. KAM are selected from the
matters communicated with those charged with governance. ISA 701 includes a judgement-based
decision-making framework to help the auditor decide which issues from the audit would
consider as KAM.

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 (i) Decide on the KAM

The auditor will narrow the matters communicated with those charged with governance that has
drawn auditors’ attention. In doing so, the auditor will consider

- Areas of higher risk of financial statements material misstatement

- Significant auditor judgments relating to areas in the financial statements that involved
significant management judgment, including accounting estimates that have been
identified as having high estimation uncertainty
- The effect on the audit of significant events or transactions that occurred during the
period.

Description of each KAM will include why the matter was considered to be one of the most
significance in the audit, how the matter was addressed in the audit and references to the related
disclosure (s).

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3. Advantages & Disadvantages of Expanded Audit Report

Item Advantage Disadvantage

Additional discussion and The external users of the This additional information
analysis by the auditor audit report will be benefited might be useless for the users
with the additional that don’t have much
information rather than only knowledge regarding
relying on the one page audit accounting. This will cause
report to help them to know additional hardship for the
more about the state of the users to make any decision
entity. Which will also regarding the company.
enhance the value to the
users.
The use of emphasized The paragraphs can provide The paragraphs can reduce
paragraphs in the audit report an enhanced information the comparability among
beyond the management’s companies due to inconsistent
disclosure in their financial application.
statement.
Assurance on the information The enhanced assurance will The information needed
beyond the financial improve the engagement might be hard to be audited
statements between the shareholders by the auditors as they might
with the board and the audit not have the expertise to
committees. provide the required
assurance.
The establishment of Key Increase the attention of the Harder to set more meeting
Audit Matters (KAM) management to the KAM between the auditors and the
given the enhanced public audit committee as the KAM
disclosure. are selected from matters that
are discussed with the audit
committee.
Table 1.0 Advantage and Disadvantages of Expanded Audit Report

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4. Independent auditor’s report to the members of the Techniche Bhd

Opinion on financial statements of Techniche Bhd

In our opinion, the financial statements give a true and fair view of the state of the company as at
year end. The company’s financial statements have been properly prepared in accordance with
Malaysian Financial Reporting Standards (MFRSs) and in accordance with the requirements of
the Companies Act 2016. The financial statements that we have audited comprise the company’s
income statement, statement of comprehensive income, balance sheets, statements of changes in
equity, cash flow statement and notes.

Summary of our audit approach

Key risks

We have identified a few key risks that had great impact on our audit scope which are:

 Irregularities Software development Valuation

 Impairment of Trade Receivables
 Techniche Berhad Payment Fraud
 Management Override of Control

Going concern

We are in dispute with the Directors’ adoption of the going concern basis of accounting and we
identified that there are such material uncertainties. This is because the company has been loss
making since its financial year ended Dec 31, 2012 (Appendix 4.1). However, because not all
future events or conditions can be predicted, this statement is not a guarantee as to the Group’s
ability to continue as a going concern.

Independence

We are required to confirm that we are independent of the company and we have fulfilled our
other ethical responsibilities in accordance with those standards. We confirm that we are
independent of the company and we have fulfilled our other ethical responsibilities in accordance
with those standards. We also confirm we have not provided any of the prohibited non-audit
services referred to in those standards.

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Key audit matters

The assessed risks of material misstatement described in this report are those that had the
greatest effect on our audit strategy, the allocation of resources in the audit and directing the
efforts of the engagement team. The description of the risks below should be read in conjunction
with the significant matters considered by our Audit Committee.

Risk description

Irregularities Software Development Valuation

The Group is a company that develops computer related product and also provides customized
application hardware solution for its clients. It is discovered that there are several irregularities in
The Group’s software development costs as both software development costs and in-house
developed software (IDS) intellectual property rights were vague and incomplete. These
deficiencies could have an adverse impact on the Group’s controls and financial reporting
systems.

How the scope of our audit responded to the risk

We obtained a detailed understanding and evaluated the design and implementation of controls
that the Group has established in relation to software development valuation.

We obtained assurance over the appropriateness of management’s assumptions applied in

calculating the value of the software development by:

 Critically assessing the Group’s software development valuation policy, with specific
consideration given to software development costs and in-house development software
(IDS) intellectual property rights;
 Verifying the value of a sample of software development to confirm whether it is held at
the lower of cost and net realizable value, through comparison to vendor invoices and
sales prices;
 Within the IT business, using data analytics to identify unusual software development
usage characteristics, completing assumption tolerance testing and recalculating the value
in totality based on the Group’s policy; and

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  Reviewing historical accuracy of software development with reference to any write-offs
during the year in relation to loss or other adjustments.

Key Observations

We concur that there is an irregularities in The Group’s software development costs. However,
the management has taken up corrective action as accordance to the accounting standards and
has reflected in financial statement. Hence, we are satisfied that the Group has appropriately
accounted for the cost of software development and the in-house developed software (IDS)
intellectual property rights.

Risk Description

Impairment of Trade Receivables

A full review of Techniche Berhad was performed. The results show that we need to consider the
risk of impairment on Techniche Berhad and trades receivable which resulted RM 9.215m where
impairment test was conducted.

The allowance for impairment of trade receivables is considered to be a matter of most

significance as it is highly subjective, due to the level of judgement applied by management in
determining the adequate impairment allowance.

How the scope of our audit responded to the risk

Audit procedures are conducted to assess the representation and enactment of key controls
around the impairment assessment process. We also assess the felicity of the methodology relate
by the Directors in calculating the impairment charges. Data analytics was used to apprehend the
completeness of the impairment indicator assessment.

Our audit procedures include understanding and testing of the design and operating effectiveness
of the key controls. We have assessed the review completed by the Group by:

 Determining the methodology practiced to assess the value in use by complying with the
requirements of IAS 39 Financial Instruments: Recognition and Measurement and
examining the fairness of the Impairment model employed by the Company.

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  the data interface between systems from the approval to recording and monitoring of
impairment model and model output to the general ledger
 the identification and timeliness of identifying impairment allowances
 the governance process of trades receivables downgrading including the continuous re-
assessment of the appropriateness of assumptions used in the impairment models

The operation and test of the design of the controls provides a basis for us to proceed with the
planned timing, nature and extent of our detailed audit procedures. It allows us to valuate
management’s provision for specific allowance.

Our procedures require the assessments of management provision for specific allowances, in
response to the risk specific included the following:

 We obtained an understanding of the Company’s Credit Policy and analyses the

processes for identifying impairment indicators.
 We acquired an understanding of the management assumption used in the impairment
model
 We gauged the Company’s credit review process on the credit worthiness of selected
customers. This is conducted by selecting a sample of debtors and estimate
management’s forecast of recoverable cash flows, calculations of collaterals, computing
of recovery on default and other sources of repayment. We worked out the management’s
calculation on specific allowances to inspect the accuracy of data processed in the
accounting records.

In addition to the above, we also evaluate the reasonableness of the impairment disclosure that
are related to trade receivables and investment on their impairment valuation. We also consider
the appropriateness of the methodology used was independently appraised by reference to the
IFRS and market practices.

Key Observation

We assessed the impairment level recorded by the management and concluded that the
assumptions in the impairment models were not within an acceptable range. An agreement was
made that disclosure of the net impairment loss and the allowance of impairment to be stated.

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Risk Description

Techniche Berhad Payment Fraud

During the sales transaction review, Techniche’s sales subjects to fictitious transaction that
relates to Banking Acceptance financing.

The Group’s policy is to get approval by at least of two directors. There is a risk that the Group’s
director did not discharge its duties that have resulted on the massive amounts of sales invoices
that were genuine and were not taken up as sales in the financial reports.

How the scope of our audit responded to the risk

We have completed the range of audit procedures pertaining to the risk associated:-

 Understand the cause of the issue, reviewing the management report and discussed
with the management on the findings
 Understand the discussions with the authorities and regulators for the sales
transaction involved with Banking Acceptance financing
 Assessing the fraud losses and treatments of associated recoveries from merchants;
and
 Assessing whether the Group has appropriately identified and accounted for any other
sales transactions involved with Banking Acceptance financing that would need two
directors approval.

Key Observation

We conclude that there are the sales transactions that are not genuine and has suggested to the
management to make necessary adjustment and the Group has appropriately accounted for the
liabilities associated with the incident.

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Risk Description

Management Override of Controls

There are several areas within the Group financial statements which form sales transaction and
the risk for the management to commit fraud. The reliant on IT systems has led to an increased
risk of management override of controls.

Specifically, this risk lies in those areas with high levels of sales entries and issuance of invoice.

How the scope of our audit responded to the risk

In order to address this risk, in addition to the procedures set out in the sales entries and invoice
authorizations, we have completed audit procedures including:

 Obtaining an understanding of the work of internal audit to assist us in directing our

audit effort and obtaining greater understanding of the controls in place across the
Group
 Auditing key areas of management estimate and judgement, including consideration
of exceptional items disclosed by the Group and the existence of any further potential
exceptional items included within the Group’s underlying profit measures
 Assessing the design and implementation of controls which address the risk of
management override, such as the ‘entity level’ controls which underpin the overall
control environment for the Group
 Using data analytics, testing journal entries for fraud characteristics by testing the
completeness of the journal population reviewed and risk profiling the population to
focus our work on journals of interest and
 Assessing transactions completed outside of the normal course of business

Key Observation:

We conclude that the management has the tendency to override its power. However, the
management has taken up the necessary adjustment that would reflect to the financial statement.
Hence we are satisfied that the Group has appropriately accounted sales transactions.

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An overview of the scope of our audit

Our audit’s scope covered an understanding of the company and its environment, including
company’s internal controls, and the risks of material misstatement at the company level. Based
on our assessment of the Group, we focused our Group audit scope primarily on the audit work
on the company’s operations.

We had a meeting on 8th April 2017 with our Audit Partner. The purpose of this meeting was to
carry out a discussion of the significant risks and issues arising from the audit of the company.
The issue and risks has been discussed in this report in more detail.

Adequacy of explanations received and accounting records

Under the Companies Act 2016 we are required to report to you if, in our opinion:

 we have not received all the information and explanations we need for our audit; or
 adequate accounting records have not been kept by the Company, or
 returns adequate for our audit have not been received from branches not visited by us; or
 The company financial statements are not in agreement with the accounting records and
returns.
In our opinion, there are several issues to disclose on these matters. We did not receive enough
evidence to support certain issues arose during our audit work such as evidence for authorization
for in-house development software (IDS). Certain accounting records kept by the company also
did not match with the records. Further details have been discussed earlier in this report.

Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial
statements sufficient to give reasonable assurance that the financial statements are free from
material misstatement, whether caused by fraud or error. This includes an assessment of whether
the accounting policies are appropriate to the company’s circumstances and have been
consistently applied and adequately disclosed the reasonableness of significant accounting
estimates made by the directors, and the overall presentation of the financial statements.

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In addition, we read all the financial and non-financial information in the annual report to
identify material inconsistencies with the audited financial statements and to identify any
information that is apparently materially incorrect based on, or materially inconsistent with, the
knowledge acquired by us in the course of performing the audit. If we become aware of any
apparent material misstatements or inconsistencies we consider the implications for our report.

Conclusion
Key Audit Matters provides an enhance disclosures, provided in auditor’s reports of listed
entities. Through better communications of key issues relevant to the audit process will there be
an enhance disclosure on the value of the auditor’s report which is the overall objective.

We learnt that Auditor’s judgement is necessary to decide what to report, by what means to
communicate and noting that other auditor’s report are practical than other. Regulatory bodies
will also come into an agreement that supplementary disclosures add values to the Annual Report
prepared by those auditors who have been appointed.

We also have to anticipate the time involved as the reports goes through multiple iterations and
review those factors into the audit planning. Furthermore, when writing the Audit Report, we
have to keep the audience in mind, we will address various issues that are understandable to all
stakeholders and consider their expertise levels and backgrounds in regards to financial matters.

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5. Reference

1. Independent Audit Report Muscat Finance SAOG 2016. Retrieved from

https://www.mfcoman.com/uploads/9153110-Audit-Report-Dec-2016.pdf
2. Auditor Reporting. Retrieved from http://www.accaglobal.com/my/en/student/exam-
support-resources/professional-exams-study-resources/p7/technical-articles/auditor-
reporting.html
3. Delivering the value of audit – New insightful audit reports January 2015. Retrieved from
https://www.pwc.com/gx/en/audit-services/publications/assets/pwc-auditing-report-new-
insightful.pdf
4. ACCA. (n.d.). Revised ISA 700: 'The auditor's report on financial statements'. Retrieved
April 15, 2018, from
http://www.accaglobal.com/my/en/technical-activities/technical-resources-
search/2013/january/revised-isa-700.html
5. ACCA. (n.d.). Auditor reporting. Retrieved April 15, 2018, from
http://www.accaglobal.com/my/en/student/exam-support-resources/professional-exams-
study-resources/p7/technical-articles/auditor-reporting.html
6.

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