UTM

Fafculti Pengwusan

UNiVERSin TEKNOLOGI MALAYSIA

PEPERIKSAAN AKHIR SEMESTER II

SESI2016/2017
(FINAL EXAMINATION SEMESTER II
2016/2017 SESSION)

KOD KURSUS : SHAC 2083

(COURSE CODE)

NAMA KURSUS : AUDIT I

(COURSE) (AUDIT I)

PROGRAM : SARJANA MUDA

(PROGRAMME) (BACHELOR DEGREE)

MASA : 3 JAM
(DURATION) (3 HOURS)

TARIKH : JUN 2017

(DATE) (JUNE 2017)

MARKAH : 100 (MENYUMBANG 50 PERATUS KEPADA

(MARKS) MARKAH KESELURUHAN)
(CONTRIBUTING 50 PERCENT TO THE
OVERALL MARKS)

ARAHAN KEPADA CALON:

(INSTRUCTION TO CANDIDATES)

Jawab SEMUA soalan.

(Answer ALL questions)

KERTAS PEPERIKSAAN INI TERDIRIDARIPADA 6 MUKA SURAT SAHAJA

(TERMASUK MUKA SURAT INI).
THIS EXAMINATION PAPER CONSISTS OF 6 PAGES ONLY (INCLUDING THIS PAGE).
The audit of cash balances is important and inclusive because the evidence accumulated
for cash balances is included in several other audit cycles. Importantly, verification of the
client’s bank reconciliation with the balances in the general ledger is made to ensure it
reflects all cash transactions occurred during the period.

Required:
(a) Provide three types of misstatement which are normally discovered during the
audit of bank reconciliation.
(6 marks)
(b) Discuss why there is higher focus on fraud detection in test of details of cash
balances compared to other accounts in the balance sheet. Provide an example of a
procedure of fraud detection.
(4 marks)
(c) Explain the meaning of a cut-off bank statement and state its purpose.
(5 marks)

(a) The purpose of the audit of payroll and personnel cycle is to assess whether the
account balances are fairly stated in accordance to the generally accepted
accounting principles. The following audit procedures are commonly found in
auditing the payroll and personnel cycle:

(i) Examine evidence of double-checking payroll wage rates and calculations by an

independent person.
(ii) Obtain a schedule of all payroll liabilities and trace to the general ledger.
(iii) Select sample of 20 cancelled payroll checks and account for the numerical
sequence.
(iv) Foot and cross-foot the payroll journal for two periods and trace totals to the
general ledger.
(v) For payroll liabilities, examine subsequent cash disbursements and supporting
documents such as payroll tax returns, depository receipts and tax receipts.
(vi) Compute direct labour, indirect labour, and commissions as a percentage of net
sales and compare with prior years.
 Required:
Determine type of test for each audit procedures above, whether it is test of control,
substantive test of transactions, analystical procedures or test of details balances.
(6 marks)

(b) Among typical questions that might appear on an internal control questionnaire for
payroll activities includes whether there is adequate separation of duties between
employees who maintain human resources records and employees who approve
payroll disbursements, and between personnel who maintain timekeeping or
attendance records for employees and employees who distribute payroll cheques.
Discuss the purpose of each of the above controls.
(6 marks)

3. In audit of inventory and warehousing, the analytical procedures are as important as in any other
cycle. Physical observation test of inventory is also required due to its high exposure to fraud.
Following are audit procedures commonly performed in the inventory and warehousing cycle of a
manufacturing company.

(i) Compare the client’s count of physical inventory at an interim date with the
perpetual inventory master file.
(ii) Trace the auditor’s test counts recorded in the audit files to the final inventory
compilation and compare the tag number, description and quantity.
(iii) Compare the unit price on the final inventory summary with vendor’s invoice.
(iv) Read the client’s physical inventory instructions and observe whether they are
being followed by those responsible for counting the inventory.
(v) Account for a sequence of raw material requisitions and examine each requisition
for an authorized approval.
(vi) Trace the recorded additions on the finished goods perpetual inventory master
file to the records for completed production.
 Required:
(a) Identify whether each of the procedure is primarily a test of control or a substantive
test and state the purpose of each procedure.
(12 marks)
(b) Discuss three reasons why inventory is often the most risky, time consuming and
complex part of many audit engagements.
(6 marks)

4. Section 169 of the Companies Act 1965 requires the directors of every company, in its
annual general meeting, to present an audited financial statement that shows the true and
fair view of the financial position of the company. While, section 174 governs the
requirement of the auditor’s duties to report their opinion on the financial statements.

Required:
(a) International Standards of Auditing (ISA) provide uniform wording for the
auditor’s report. Explain why an auditor’s reports are important to users of financial
statements and why it is desirable to have standard wording.
(5 marks)
(b) Describe the five conditions required for the issuance of a standard
unqualified report.
(10 marks)

5. Heraklion Co is a manufacturer of footballs and is a new audit client for your firm. You are
an audit supervisor of Spinalonga & Co and are currently preparing for the forthcoming
interim and final audit for the year ending 31 October 20X6. You are required to document
and assess the sales system, recommend control improvements to deal with a specific fraud
issue as well as undertake substantive testing of revenue.

Sales ordering, goods despatched and invoicing

Heraklion Co sells footballs to a range of large and small sports equipment retailers in
several countries. Sales are made through a network of sales staff employed by Heraklion
Co, but new customer leads are generated through a third party company. Sales staffs are
responsible for assessing new customers’ creditworthiness and proposing a credit limit
which is then authorised by the sales director. The sales staffs have monthly sales targets
and are able to use their discretion in granting sales discounts up to a maximum of 10%.
They then record any discount granted in the customer master data file. The sales staff visit
customer sites personally and orders are completed using a two-part pre-printed order form.
One copy is left with the customer and the other copy is retained by the sales person. The
sales order number is based on the sales person’s own identification (ID) number.

The company markets itself on being able to despatch all orders within three working days.
Once the order is taken, the sales person emails the finance department and warehouse
despatch team with the customer ID and the sales order details and from this a pick list is
generated. Sequentially numbered goods despatched notes are completed and filed in the
warehouse. Sequentially numbered invoices are generated using the pick lists for quantities
and the customer master data file for prices. Standard credit terms for customers are 30
days and on a monthly basis sales invoices which are over 90 days outstanding are notified
to the relevant sales person to chase payment directly with the customer.

Payroll fraud
The finance director, Montse Mirabelle, has informed you that a significant fraud took
place during the year in the payroll department. A number of fictitious employees were set
up on the payroll and wages were paid into one bank account. This bank account belonged
to two supervisors, who were married, and were employed by Heraklion Co. One had sole
responsibility for setting up new joiners in the payroll system and the other processed and
authorised bank transfer requests for wages and supplier payments. These employees no
longer work for the company and Montse has asked the audit firm for recommendations on
how to improve controls in this area to prevent this type of fraud occurring again. Heraklion
Co. operates a Human Resources department.
(Source adapted and modified: Audit and Assurance, ACC A September 2016)
Required:
(a) Describe two methods for documenting the sales system, and for each explain one
advantage and one disadvantage of using this method.
(8 marks)
(b) Identify and explain seven deficiencies in the sales system of Heraklion
Co and provide a recommendation to address each of these deficiencies. Prepare
your answer using two columns headed ‘Control deficiency’ and ‘Control
recommendation’ respectively.
(21 marks)
(c) In relation to the payroll fraud, identify and explain three controls Heraklion Co
should implement to reduce the risk of this type of fraud occurring again.
(6 marks)
(d) Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate audit evidence in relation to Heraklion Co’s revenue.
(5 marks)