CIA 2004

UNIVERSITI MALAYA
UNIVERSITY OF MALAYA

PEPERIKSAAN SARJANA MUDA PERAKAUNAN

EXAMINATION FOR BACHELOR OF ACCOUNTANCY

SESI AKADEMIK 2020/2021 : SEMESTER 1

ACADEMIC SESSION 2020/2021 : SEMESTER 1

CIA 2004 : PRINSIP PENGAUDITAN

CIA 2004 : PRINCIPLES OF AUDITING

Jan 2020 MASA: 3 jam

Jan 2020 TIME: 3 hours
______________________________________________________________

ARAHAN KEPADA CALON:

INSTRUCTIONS TO CANDIDATES:

Kertas ini mempunyai TIGA soalan. Sila jawab SEMUA soalan.

This paper consists of THREE questions. Answer ALL questions.

Agihan markah adalah sepeti berikut:

Distribution of marks for each question is as follows:

Soalan / Question 1 15 markah / marks

Soalan / Question 2 20 markah / marks
Soalan / Question 3 25 markah / marks
60 markah / marks

(Kertas soalan ini mengandungi 3 soalan dalam 6 halaman yang dicetak)

(This question paper consists of 3 questions on 6 printed pages)
 CIA 2004

SOALAN / QUESTION 1

(a) Explain what is meant by reliability of evidence and list the characteristics of evidence
that affects its reliability. The explanations should be provided with examples which
related to manufacturing company.

(5 markah / marks)

Answer :

Reliability of audit evidence refers to the degree to which evidence can be considered
believable or worthy of trust. The characteristics of evidence which affect its reliability
are:
 the source of the evidence - external is more reliable than internal;
 the system of internal control under which the accounting data was produced. A
strong system of internal control will produce more reliable data;
 the method of obtaining evidence. The more direct the source (physical
examination, observation, computation), the more persuasive is the evidence. Written
representation is usually more reliable than oral representation. Original documents
are more reliable than photocopies or telex;
 the qualifications of the individuals providing the information;
 degree of objectivity of the evidence

(b) What factors should be considered when the auditor’s attempts to coordinate his or her
work with the entity’s internal auditors?
(4 markah / marks)

Answer

Under a coordination of work arrangement, the auditors evaluation of the internal

auditor’s work should include testing the work and determining whether the:

 Scope of the work is appropriate to meet the objectives.

 Audit programs are adequate.
 Working papers adequately document work performed, including evidence of
supervision and review.
 Conclusions are appropriate in the circumstances.
 Reports are consistent with the work performed.

(c) When an auditor is designing tests of the operational effectiveness of controls they must
decide their nature, timing and extent. Explain what each of these concepts mean and
why they are important in designing these tests.
(6 markah / marks)

2/6
 CIA 2004

Answer

Nature of tests: auditors need to decide what type of test will be conducted, whether it be enquiring,
observing, inspecting or re-performing. The auditor should select the procedure that will provide the
most reliable evidence about the effectiveness of the control.

Timing: the timing of tests refers to the part of the accounting period to which they relate. As auditors
are making an assessment on the controls for the whole period it is necessary for them to test the
controls as late in the interim period as possible whilst taking into consideration audit efficiency.

Extent: More extensive tests of control provide more evidence of the operating effectiveness of a
control. The extent of tests of control is determined by the auditor’s planned assessed level of control
risk. More extensive testing will be needed for a low assessed level of control risk than for a moderate
level.

[JUMLAH/ TOTAL: 15 markah / marks]

SOALAN / QUESTION 2

You have been asked by your senior, Mr Bryan, to carry out an investigation of a suspected
fraud at one of your client’s company. They suspected, the fraud was conducted by an
accountant. The accountant has left without giving any notice and she is suspected of carrying
out a fraud in the cash receipts and payments systems. The accountant is a professional
accountant and her responsibilities include maintaining the nominal ledger, from which auditors
prepare the annual accounts. Your client company is a Small Median Size (SME) company, and
there have been few controls and checks over’s accountant’s work as she has been employed
by the company for many years.

Your client shared that the accountant is responsible for;

(a) Receiving cash from customers for both credit and cash sales
(b) Making all payments, including purchase ledgers payments and sundry payments
(c) Drawing the cash for wages
(d) Recording all receipts and payments in the cash book and preparing a bank
reconciliation. Only the auditors check the reconciliation, which they do during their
annual visit.

The computerized sales and purchases ledgers are maintained by staff in the sales and
purchases accounting departments who post all transactions to these ledgers. The cashier
sends to the sales ledger clerk a schedule showing the cash he has received. The
remittance advices from customers are attached to this schedule, which shows the invoices
that are being paid.

For cash sales, the sales department raises a sales order, which is sent to the dispatch
department who raises a dispatch note. The first copy of the dispatch note is given to
customer. The second copy is sent to the sales accounting department and the third copy is
retained in the dispatch department. The sales accounting department price the invoice and
the customer pays the cash to the cashier or into company bank’s account, who retains a
copy of the invoice for his records. The accountants then record the sales details in her

3/6
 CIA 2004

analyzed cash book and the month’s cash sales are posted from the total in the cash book
to the nominal ledger.

The purchase ledger controller informs the cahier of the payments he wishes to make, and
the accountant prepares the cheque, which are signed by the chairman. A remittance advice
is attached to the payment, which is sent to the supplier. The accountant has prepared the
purchase and sales ledger control accounts each month and the reconciliations of these
balance to the total balances on the respective ledgers.

The wages are calculated by the wages department. The accountant draws the cheque to
pay the wages and receives the cash. The wages department make up the wage packets
and pay the wages to employees. Any wage packets not given to employees at the pay-out
are retained by the accountant, who either pays the wages to the employees or retains the
unclaimed wage packets. Periodically, the accountant is expected to bank unclaimed wage
packets.

The owner of the business explains that sometimes, he signs blank cheques that are held
by the accountants to make payments when he is away visiting customers or attending to
the other business he owns. While the owner is on holiday, the accountant has been
authorized to sign cheques on the company’s behalf.

Required;

You are required to identify audit objectives and conduct relevant substantive procedures to
determine whether a fraud has been carried out by the accountant. Your answers should
consider of the following items;

(a) The bank reconciliations at the year end at the date of your investigation

(5 markah / marks)
***Cashier is Accountant!

In checking the bank reconciliation, investigations include:

(i) asking for the additions and cross casts in the cash book to be checked for the
past year and correct any errors;
(ii) vouching receipts and payments from the bank statement to the cash book for
the last month (i.e. until 30 November 2006). Uncleared items as shown by the
bank reconciliation at 31 October 2006 are checked to see whether they are
cleared during November;
(iii) noting the uncleared lodgements and unpresented cheques at 30 November
and check they are the same as those on the cashier's bank reconciliation
(iv) checking the date the uncleared lodgements and unpresented cheques are
cleared by the bank. Uncleared lodgements should be cleared very quickly
(probably the day after the cheques are banked) and any significant delay
indicates there is a teeming and lading fraud. Most of the cheques which have
not been paid by the bank should be paid within a week, and almost all of
them should have been paid within three weeks.

4/6
 CIA 2004

Teeming and lading is quite a common type of fraud, and this may have been what the
auditors have found. Apparent delays in the bank clearing iodgements is an indication
of this type of fraud. Another way of confirming this type of fraud is to check the date
stamped by the bank on the copy of the paying in slip; normally this should be the
same day or the day after that recorded in the cash book, and any significant delay
indicates this type of fraud is taking place. Based on the cheque stubs, all cheques are
checked to see whether they have been recorded in the cash book, any unrecorded
items are identified. Any missing cheques in the cheque book should be stopped (i.e.
where there are no details on the cheque stub).

A further bank reconciliation will be prepared up to the date the cashier left, and this
will be checked in a similar way to that described above. If there is any delay in the
bank crediting lodgements, the unbanked receipts from customers are checked for
their existence. If the bank is prepared to supply the paying in slips, the details of the
cheques recorded on the back of the paying in slip agree are checked against those
recorded in the cash book and the paying in slip counterfoils.

The paid cheques are obtained from bank and are checked to see that any that are
made out to cash or the cashier, or have been negotiated. The name of the payee and
amount on the cheque are sample checked to see whether they agree with the details
in the cash book. More detailed checks are performed on cheques that are issued
when the chairman is on holiday and the cashier has been the authorised signatory.

From these investigations, the sum that may have been misappropriated by the
cashier is quantified. The amount misappropriated may be quite clear from some of
the investigations (e.g. the amount perpetrated by a teeming and lading fraud), but
for other items there may be insufficient information to decide whether the
transaction is part of the fraud. It may be necessary to carry out bank reconciliations
at earlier dates to determine how the fraud developed.

(b) Cash receipts from the sales ledger and cash sales
(8 markah / marks)

(i) check that the opening balance at 1 November agrees with the closing balance on
the previous month's schedule at 31 October
(ii) check that the value of invoices and credits posted in November agrees with the
sales day book. Any unusual or large credit notes will be investigated
(iii) check that the value of cash and discounts in November agrees with the cash book.
The value of discounts should be reasonable, and any large discounts will be
checked to supporting documentation (e.g. the remittance from the customer)
(iv) check that any adjustments, including write off of bad debts, are reasonable. Any
cases where there have been sales to a customer after the bad debt has been
written off will be investigated

5/6
 CIA 2004

(v) check the reconciliation of the sales ledger control account balance to the total of
the balances on the sales ledger. Any unreasonable differences will be investigated
(vi) check the additions on the sales ledger control account schedule. The sales ledger
controller will be asked if there have been any disputes with customers where the
customer says he has paid Lee Sai Tee Trading Berhad (Client), but no cash has
been received. Also, the reasonableness of the following transactions on the sales
ledger is checked to ensure they are not due to cash which the cashier may have
misappropriated: (i) write off of bad debts (ii) large credit notes issued by Lee Sai
Tee Trading Berhad (iii) any significant adjustments posted to the sales ledger

The system for receiving cash from cash sales appears to be very weak, as the cashier both receives
the cash and records it. Every dispatch note raised by the dispatch department will be checked to
ensure a sales invoice has been raised and that cash has been recorded as being received in the cash
book. Cases where no cash is received will be investigated. As these sales are for cash, the entry in
the cash book should be on the same day as the sale takes place. The sequence of dispatch notes
and cash sales invoices is checked and any missing items are investigated. Also, any credit notes
raised for cash sales are checked. For the period covered by the investigation, the value of sales for
which no cash has been received can be quantified.

(c) Cash payments for (i) Purchase ledgers payments (ii) payment of wages and unclaimed
wages and (iii) other payments.
(12 markah / marks)

[JUMLAH/ TOTAL: 25 markah / marks]

For purchase ledger payments, the movement on the purchase ledger control account is checked. The
control account balance is reconciled to the total of the balances on the purchase ledger in a similar
manner to that described for the sales ledger. The purchase ledger controller will be asked for details of
any payments for which there is no purchase invoice (this should result in a debit balance on the
purchase ledger), or where handwritten invoices have been raised inside the company (particularly by
the cashier). The purchaser ledger controller will also be asked if there are any disputes with suppliers,
where Lee Sai Tee Trading says it has paid the supplier, but the supplier says he has not received the
cash. Balances with creditors where there are old debts on the purchase ledger will be investigated. The
reconciliation of suppliers' statements to the balances on the purchase ledger will be test checked, and
any differences will be investigated, particularly those where the cash payment is recorded on the
client's purchase ledger but not on the supplier's statement.

For the payment of wages, the cash drawn for wages as recorded in the cash book is checked to see
whether it equals the net wages as shown on the payroll, and any differences will be investigated. The
system for unclaimed wages appears to be very weak, and there is a high risk that the cashier will be
able to perpetrate a fraud. It will be difficult to quantify the fraud if the records are poor. However,
assuming the records are complete, details of the wage packets sent by the wages department to the
cashier will be checked. Then the signatures of employees claiming these wages will be checked against
the records in the personnel (or wages) department, and the wages that are still unclaimed will be
listed. These wage packets are checked to see they are either banked, by checking the entry in the cash
book, or are in the cashier's safe. Any missing wage packets could be part of the fraud. As stated above,

6/6
 CIA 2004

it is probable that the records of unclaimed wages will be incomplete and it could be impossible to
quantify the fraud the cashier is carrying out in this area.

The following checks on other payments in the cash book are performed: - payments to petty cash will
be checked to the petty cash book - payment of bank overdraft interest and charges will be checked to
the bank statement - other payments will be checked to supporting documentation. If they look
suspicious, the paid cheques will be examined to see they are not for cash, or made payable to the
cashier or negotiated.

Dikehendaki / Required:

[JUMLAH/ TOTAL: 25 markah / marks]

SOALAN / QUESTION 3

You are an external auditor of a large private company, BunnyCute. BunnyCute manufactures a high
volume of reasonably priced pants and shirts for young people. The BunnyCute do not consider that
using the same managers and staff, and the same controls, is necessarily the best method of managing
the receivables ledger. BunnyCute has suffered an increasing level of bad debts and slow payers in
recent years, mostly as a result of small shoe shops becoming insolvent. The company has also lost
several overseas accounts because of a requirement for them to pay in advance. Management wishes to
expand the overseas market and has decided that overseas customers will in future be allowed credit
terms.

The company has a trade receivables ledger that is material to the financial statements containing four
different categories of account. The categories of account, and the risks associated with them, are as
follows:
(i) Small retail pants and shirt shops. These accounts represent nearly two thirds of the
accounts on the ledger by number, and one third of the receivables by value. Some of these
customers pay promptly, others are very slow;
(ii) Mail order companies who sell the company’s pants and shirts. There have been a number
of large new accounts in this category, although there is no history of bad debts in this
category. Receivables listed under (ii) to (iv) are roughly evenly split by both value and
number. All receivables are dealt with by the same managers and staff and the same
internal controls are applied to each category of receivables.
(iii) Chains of discount pants and shirt shops that buy their inventory centrally. These accounts
are mostly well-established ‘high street’ chains. Again, some of these accounts are large and
overdue; and
(iv) Large retail pants & shirts shops (including a number of overseas accounts) that sell a wide
range of shoes. Some of these accounts are large and overdue;

Your supervisor has asked you to classify the risks associated with the receivables ledger in order to
manage trade receivables account as a whole more efficiently. You have been asked to help classify
accounts as high, medium or low risk.

Dikehendaki / Required:

7/6
 CIA 2004

(a) Explain how the classification of risks into categories such as ‘high’, ‘medium’ or ‘low’, helps
entities manage their businesses.
(4 markah / marks)

(i) Risk classification is part of the overall risk management process that can be
applied to individual account areas as well as to the financial statements and to
the business as a whole.
(ii) Risk classification is part of risk assessment, which in turn is part of the overall risk
management process whereby the risks to the business of not achieving its
objectives are analysed, and split down into risks associated with the various
business or operational units according to the way the business is managed.
(iii) The classification of risk as high, medium or low, together with classification as to
whether a risk is, for example, ‘probable’, ‘possible’ or ‘remote’ (or high, medium
or low likelihood) permits the entity to allocate its resources to optimum effect.
(iv) Risks, once properly understood, can then be managed by means of, for example,
reduction, transference or acceptance. For example, a high risk of non-payment in
a receivables ledger can be reduced by implementing controls that reduce the risk
(such as performing credit checks and by regularly chasing overdue debts). The risk
might instead be transferred by factoring the debt. For low risks (such as the risk of
non-payment by a long-standing customer who always pays promptly) the risks
may be accepted.

(b) Classify the risks relating to the four categories of trade receivables as high, medium or low
and explain your classification.
(8 markah / marks)

(i) Small retail shirt and pants shops: Despite the fact that individual accounts in this
category have small balances, the category as a whole is significant to BunnyCute
because of the total amounts owed (one third of total receivables), the rising level
of bad debts and the adverse effect of slow payers on cash flow. It is likely that
most of these accounts individually are low risk because customers pay promptly
and the amounts are small. Accounts that are significantly overdue may be
classified as medium risk, but probably only if they are substantial accounts
because all entities must expect to experience a small number of small bad debts.
If however, a large number of accounts are significantly overdue, they may be
classified as high risk.
(ii) Large retail Pants and Shirts shops: Some of these accounts are large and overdue
and may therefore be classified as medium or high risk. However, as the total
value of such accounts is around 22% of total receivables and the total value of the
overdue accounts may be small in relation to total receivables, the classification
should probably only be medium risk. The classification for accounts that are not
overdue may be low risk. Overseas accounts. Whilst these might at first appear to
be at risk because the accounts are being lost, they represent a small proportion of

8/6
 CIA 2004

accounts by both number and value (customers currently pay in advance). This
means that they may be viewed as low risk.
(iii) Chains of pants and shirt shops: As with the large shops, large and overdue
accounts might be classified as medium or high risk. However, ‘high street’ chains
of well-established shops are less likely to become insolvent than less well-
established entities and therefore represent a lower risk. This means that the
classification may be low risk, even for accounts that are large and overdue.
(iv) Mail order companies: New accounts generally represent an increased risk of bad debts
and a large number of new accounts increases this risk. However, there is no history of
bad debts in this category at all so the new accounts may therefore be classified as
medium risk. Existing accounts within this category may be classified as low risk because
there is no history of bad debts

(c) Describe the internal controls that you would recommend to BunnyCute to manage the risks
associated with the receivables ledger under the headings:
- all customers
- slow paying customers,
- larger accounts
- International customers.

(Note: Please relate to the case study when explaining your answers)

(8 markah / marks)
All customers: I would recommend that:
 credit checks be performed when new customers seek credit, and that cash in
advance or on delivery is required where large orders are placed by new customers;
 credit limits be set for all customers based on the length of the relationship with the
customer, the volume of sales and their payment history;
 payment terms be set (say, 30 days for local customers, 45 days for overseas
customers);
 insurance be taken out against the risk of bad debts. These controls will help ensure
that accounts do not become overdue, damaging the company’s cash flow and
increasing the risk of bad debts.

Slow paying customers I would recommend that:

 dedicated staff are assigned to chase slow payers regularly for outstanding amounts
and to ensure that a ‘stop’ is put on accounts that are significantly overdue;
 legal action is taken against those customers owing large amounts for long periods for
which there are no good reasons.
Larger accounts
 large shops, chains of shops and mail order companies
 I would recommend that dedicated staff are assigned to manage the relationship with
larger customers, particularly the mail order companies.

Overseas customers I would recommend that:

9/6
 CIA 2004

 overseas customers be allowed a credit period of say, 45 days in order to permit the
required bank transfers to take place;
 overseas customers be required to pay in the currency used by BunnyCute (except
perhaps for large orders which may be backed by government guarantees) or in a
stable currency which does not fluctuate significantly against the currency used by
BunnyCute

[JUMLAH / TOTAL: 20 MARKAH / MARKS]

TAMAT
END

10/6