ACCTING 7009NA AUDIT AND ASSURANCE SERVICES

Student Name: Clarence Chin Kin, TAN

ID : 1213081

Business School
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Name TAN, CHIN KIN CLARENCE Student ID 1213081

Subject name : ACCTING 7009NA AUDITING AND ASSURANCE SERVICES

Lecturer name Mr. Phil Saj Due date 20 July 2010

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I declare that this submission is my own work and does not involve plagiarism or collusion.

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Date Monday, 19 July 2010

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 ACCTING 7009NA AUDIT AND ASSURANCE SERVICES
Student Name: Clarence Chin Kin, TAN
ID : 1213081

Q1 – Textbook Q5.20

(a) Transactions and events / Occurrences

(b) Transactions and events /Cut-off
(c) Transactions and events / Completeness
(d) Account balances at the period end / Valuation and allocation
(e) Account balances at the period end / completeness

Q2 – Textbook Q 5.21

(a) Completeness
(b) Rights and obligations
(c) Valuation and allocation
(d) Rights and obligations

Q3 – Textbook Q 5.34

(a) If the inherent risk is zero is appropriate, the auditor can accept a medium to high level of
detection risk depending on the control risk and still keep the audit risk acceptably low. Such
conclusion of assessing the inherent risk may not be appropriate.
(b) If the assessment of control risk is zero is appropriate, the auditor can accept a medium to
high level of detection risk depending the level of control risk and still keep the audit risk
acceptably low. Such conclusion of assessing the control risk is appropriate.
(c) Such substantive tests seem to assume that there is a high level of control risk as such
extensive tests would reduce the detection risk. Abe should consider the appropriate audit
strategy employed AFTER assessing the inherent and control risk.
(d) It seems that the auditor Susan has incorrectly determined the appropriate level of
detection risk in view of the high turnover of the accounting staff including the financial
controller.

Q4

(a) What is the control Environment?

It sets a tone of an organization in influencing the control consciousness of its people. It
provides discipline and structure by which internal control can be established within the
fabrics of the organization.
(b) Why is it important?
It is important as it provides the governance and top management overall attitude,
awareness and actions regarding internal control. An effective control environment helps
ensure that established policies and procedures are followed.

Q5

• Explain the difference between generalized and application controls in a computerized

system.
o Generalized control relates to the overall environment within which systems are
developed, maintained and operated. Such controls would relate to all aspects of

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 ACCTING 7009NA AUDIT AND ASSURANCE SERVICES
Student Name: Clarence Chin Kin, TAN
ID : 1213081

the organization Information system. Whereas application controls are controls

specific to particular accounting application and separate application controls are
developed for different applications. For example Cash payment application or
purchase application system. Each would require specific control for the particular
type of transaction.
• Examples of General controls would include
o Organization of the MIS department
o Hardware controls
o Access to computer equipment, data files
• Examples of the application controls would include:
o Input controls
o Processing controls
o Master files controls

Q6

(a) Segregation of duties require that different individual be assigned different elements of
related activities particularly those who involves authorization, recordkeeping and
processing. For example, the person who is in charge of the petty cash should not be the
same person who approves the claims.
(b) Performance reviews relate to reviewing the actual and the plan. For example, senior
management should review reports showing financial results to date versus budgeted
figures.
(c) Information processing controls relate to the incorporating some controls function within
the input or processing environment to ensure that no known errors are input or processed.
For example, controls like date format can be programmed to check to ensure that no
unacceptable format should process during the data input.

Q7 Textbook Q 11.28

(a) Initial sample size:

Control Required Tolerable Exp no of Calculation Sample size
CL% error % errors
1 95 7 0 N = 3.00/0.07 43
2 90 8 2 N= 5.33/0.08 67
3 80 7 1 N=3.00/0.07 43
4 85 10 2 N=4.72/0.10 47

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 ACCTING 7009NA AUDIT AND ASSURANCE SERVICES
Student Name: Clarence Chin Kin, TAN
ID : 1213081

(b)
(i) Increasing the required confidence level > The effect would increase the sample size

(ii) Decreasing the tolerable error > The effect would increase the sample size

(iii) Decreasing the number of expected deviation > The effect would increase the
sample size

(iv) Increasing the population size > No change in sample size

(c) –
Control No of Deviations Calculation Deviation rate
found
1 4 4/43 9.3%
2 2 2/67 2.9%
3 6 6/43 13.9%
4 3 3/47 6.3%

Conclusion:

Control 1 (9.3% Vs 7%) and 3 (13.9% Vs 3%) are above the tolerable error rate.

Q8

(a) Basically, two actual results – Inventory turnover (IT) and Times interest earned (TIE) ratios
stand out.
(b)
• Inventory turnover = sales turnover/inventory. The ratio is lower than the budgeted results
and industry average. Lower ratio would imply poor sales and therefore high/excess
inventory. High inventory level would be unhealthy as it indicates zero investment return.

• TIE = EBIT/Interest payable. The ratio of 8.5 is significantly higher than the industry average.
Such high ratio would indicate either the company is using the earning to pay down too
much debts or lack of debts. The first would indicate that the company has no other viable
investment that could give better returns.

(c)
• Firstly, we have to access whether there is indeed a high level of inventory that lead to low
inventory turnover or it could be other reason like manufacturing cost being capitalized.
Secondly, decrease inventory turnover ratio indicates an increased audit risk that the
inventory is either overstated or perhaps due to some other reasons like old stocks. The

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 ACCTING 7009NA AUDIT AND ASSURANCE SERVICES
Student Name: Clarence Chin Kin, TAN
ID : 1213081

audit plan should include inventory valuation and allocation assertion. The analysis of high
inventory turnover is further supported by the current ratio (CA/CL).
• The high interest earned ratio does indicate that there is a reduction in audit risk as to the
company’s ability to pay off the interest payment.

Q9

(a) Ace would need to obtain ethical clearance from current auditor and some of the
information that should be obtained including:-
• Previous auditor report that express an opinion of the previous period to the financial report.
• Any business and inherent risks of the company
• Any disclosure from the management during their regular interview or conversation
• Management response to the media allegation of the large spill in the nearby river and all
other investigation from Agency and possible legal action from the Eco society

(b) In view of the media allegation and ongoing investigation from Environment agency and
possible legal action, Ace should further investigate the allegations from all the parties
including conducting interviewing with the key management staff. Such pre-acceptance
investigation would allow the auditor to form an opinion regarding the overall business &
inherent risk of the company. It would also allow us to determine whether there is a lack of
management integrity regarding the current situation that the company is facing.

(c) Firstly, the audit risk would significantly increase with the ongoing allegation, investigation
and possible legal action. Secondly, the reason why Pine management would like to appoint
Ace as auditor is for Ace to provide management advisory services which the management
said the current auditor cannot provide. Ace independence would be compromised if Ace
will to provide management advisory services and at the same time being appointed as
Pine’s auditor. Thirdly, the discovery that another of Ace partner’s spouse owns substantial
shares in Pine Ltd can also compromised Ace independence.
If the report from the internal investigation and information given by the previous auditor
does provide clearance to accept the engagement, some of the further actions that the audit
partner should take would include:
o Specifically stating in the engagement letter to Pine about the conflict of interest
regarding not engaging Ace in any advisory services if Ace is appointed as the
company auditor.
o Disclosure of the substantial shares in Pines from another Ace partner’s spouse and
undertake to ensure that the related Ace partner would not be assigned or
appointed in any of Pine’s audit work.

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