CONFIDENTIAL AC/APR 2003/AUD360/390/394

UNIVERSITI TEKNOLOGI MARA

FINAL EXAMINATION

COURSE AUDITING
COURSE CODE AUD360/390/394
DATE 26 APRIL 2003
TIME 3 HOURS (2.15 p.m - 5.15 p.m)

FACULTY Accountancy
SEMESTER December 2002 - May 2003
PROGRAMME/CODE Diploma in Accountancy/ AC110

INSTRUCTIONS TO CANDIDATES DOCUMENT ID: 0

I0
000 30291 1.

2. SECTION A - Answer ALL questions.

SECTION B - Answer THREE (3) questions only.
SECTION C - Answer the compulsory question.

3. Start each answer on a new page.

4. Do not bring any material into the examination room unless permission is given by the
invigilator.

5. Please check to make sure that this examination pack consists of:
i) the Question Paper
ii) an Answer Booklet - provided by the Faculty
iii) a True/False Answer Sheet
iv) an Objective Answer Sheet

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

This examination paper consists of 10 printed pages
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SECTION A

Part 1- Multiple choice questions.

This section consists of 10 multiple-choice questions. Choose the most suitable

answer and shade the corresponding alphabet representing the answer in the multiple
choice answer sheet provided.

1. Which of the following best describes the reason why an independent auditor reports
on the Financial Statement.

a. A misappropriation of the assets may exist, and it is more likely to be detected

by independent auditors.
b. Different interests may exist between the company preparing the statements
and the persons using the statements.
c. A misstatement of account balances may exist and is generally corrected as
the result of the independent auditors work.
d. Poorly designed internal controls may be in existence.

2. The primary responsibility for the adequacy of disclosure in the Financial Statement
and notes to the accounts rests with the

a. Partner assigned to the engagement.

b. Auditor in charge of fieldwork.
c. Client
d. Staff member who draft the statement.

3. Audit evidence comes with different degrees of persuasiveness. Which of the

following is the least persuasive type of evidence.

a. Supplier's invoices.
b. Bank statement obtained from client.
c. Computation made by the auditor.
d. Prenumbered client sales invoices.

4. An advantage of statistical sampling over non-statistical sampling is that statistical

sampling helps an auditor to:

a. Measure the sufficiency of audit evidence obtained.

b. Eliminate the risk of non-sampling errors.
c. Reduce audit risk and materiality to a relatively low level,
d. Minimize the failure to detect errors and fraud.

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5. Analytical procedures used in overall review stage on audit generally include:

a. Considering unusual or unexpected amount balances that were not previously

identified,
b. Testing transactions to corroborate management Financial Statement
assertions,
c. Gathering evidence concerning account balances that have not changed from
the prior year,
d. Retesting control procedures that appeared to be ineffective during the
assessment of control risk.

6. The By-Laws are enforceable by:

a. MIA and MICPA.

b. The Malaysian Institution of Accountants.
c. The Registration of Companies.
d. The Securities Commission.

7. All of the following are substantive tests except:

a. Test of details of account balances,

b. Test of details of classes of transaction,
c. Test of control,
d. Analytical Procedures.

8. Which of the following is not a part of general controls in Electronic Data Processing
(EDP)?

a. The plan of organization and operation of computer activity,

b. Hardware controls.
c. Control over access to equipment, processes and data files,
d. Processing controls.

9. Before accepted an audit engagement, the successor auditor should inquire of the
predecessor auditor regarding all of the following except:

a. The integrity of management.

b. Any disagreements with management about accounting or auditing matters.
c. The reason for the change of auditor.
d. The reliability of the entities internal control structure.

10. To audit the inventory existence assertion, auditors use:

a. Computation,
b. Observation,
c. Analysis,
d. Inquiry.

(Total: 10 marks)

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PART 2

This section consists of 10 TRUE/FALSE questions. Shade T for TRUE and 'F' for
FALSE in the answer sheet provided.

1. The auditor should design the audit to provide full assurance of detecting illegal act.

2. Current audit working paper files contain documents, schedules and other data that
will be continuing significant to several audits.

3. There is no potential conflict between those who prepare information and those who
use information.

4. The risk of uncollectable receivables and obsolete inventories is generally lower

during economic expansions than during an economic recession.

5. Internal auditing includes both compliance and operational auditing.

6. According to Section 9 of Companies Act 1965, an auditor may resign during the
term of his office if he is the sole auditor of the company.

7. Limited evidence gathered within an effective internal control structure is more

competent or reliable than extensive evidence gathered within an ineffective internal
control structure.

8. In auditing cash, the auditor is more interested in changes during the year than the
ending balance.

9. An auditor needs to only obtain evidence that is persuasive rather than convincing.

10. The complexity of the computerized system is one factor that determines the extent
of understanding that auditors need about computer control procedures.

(Total: 10 marks)

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SECTION B

Answer three (3) questions only from this section.

Question 1

a) Auditing is the accumulation and evaluation of evidence about information to

determine and report on the degree of correspondence between the information and
established criteria. Auditing should be done by a competent independent person.

i) What is the main reason why an audit is considered necessary?

(3 marks)
ii) Why do auditors need to be independent?
(3 marks)

b) The scope paragraph in the audit report state that audit is designed to obtain
reasonable assurance about whether the Financial Statements are free of material
misstatement.

i) Explain why the audit can only be persuaded with a reasonable level of
assurance, rather than that the Financial Statements are correct.

(4 marks)

c) Management assertions are expressed or implied representations by management

that is reflected in the Financial Statement components.

List the 5 categories of management assertions.

(5 marks)

d) Do you agree to the following statements? Why or why not?

i) An auditor's job is to ensure the correctness of the accounting records of the

company,
ii) A financial Statement that is true and fair is free from errors and biases.

(5 marks)
(Total: 20 marks)

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Question 2

The purpose of ISA 530 is to provide guidance on the use of audit sampling procedures and
other means of selecting items for testing to gather audit evidence.

a) Define audit sampling. Why do auditors sample instead of examine every

transaction?
(3 marks)

b) List the three (3) types of statistical sampling technique used by the auditors?

(3 marks)

c) State three (3) differences between statistical and non-statistical sampling.

(6 marks)

d) In obtaining information about client's legal obligations, there are three (3) related
types of legal documents and records should be examined early in the engagement.
Those are, Memorandum and article of Association, Minutes of Board of Directors
and Shareholders meetings and Contracts

Identify four (4) types of information in client's minutes of Board of Directors' meeting
that are likely to be relevant to the auditor
(4 marks)

e) Reliability of evidence refers to whether a particular type of evidence can be relied

upon to signal the true state of an assertion or audit objective.

List four (4) general factors that determine the reliability of audit evidence.

(4 marks)
{Total: 20 marks)

Question 3

The audit report should contain a clear written expression of opinion from auditor on the
financial information being audited.

a) Describe the condition that requires auditor to issue a qualified opinion in auditor's
report.
(6 marks)

b) List the basic elements in a standard auditor's report on financial statement.

(6 marks)

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c) For each of the following circumstances, specify the type of audit report (unqualified
or qualified report) and auditor's opinion (qualified, adverse or disclaimer opinion)
should be issued by auditors.

i) The effect of a disagreement is so material and pervasive to the financial

statements and the financial statement do not give a true and fair view in
accordance with approved accounting standards.
ii) The effect of any disagreement or scope of limitation is not
so material and pervasive. This means that the auditor is of
the opinion that the overall financial statements present a
true and fair view.

iii) The possible effect of a scope limitation is so material and

pervasive. Auditor has not been able to obtain sufficient evidence to form an
opinion on overall financial statements.
(6 marks)

Your answer must be in the following manner;

Audit report Auditor's opinion

d) The phrase of "true and fair view" is very important in auditing. What is meant by
"true"?

(2 marks)
(Total: 20 marks)

Question 4

A. An auditor has a right to access at all reasonable times to the company's accounting
record and other records and he is entitled to enquire such information from client or
from third party for the purpose of his audit.

Required:

i) Describe two (2) types of confirmation letters that normally are issued by
auditor.
(4 marks)

ii) Why is it important to obtain confirmation letter from the debtors and
creditors?
(2 marks)

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iii) To be considered as reliable evidence, the letter should be prepared properly.

Describe the steps to be taken in preparing the letter.
(4 marks)

B. The auditor's attendance at physical count of inventory is required by ISA 501, "Audit
Evidence - Additional Considerations for Specific Items".

Required:

i) During the observation of the physical inventory count, what should auditor do
to ensure the inventory count is conducted properly?

(6 marks)

ii) Auditor's attendance and his observation during physical inventory count are
very important. Why?
(4 marks)
(Total: 20 marks)

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SECTION C - COMPULSORY QUESTION

Question 1

CB Wee & Co has been engaged to audit the Financial Statements of Kiddy Garment Sdn
Bhd, a company that sells and distributes children's clothing. A brief description of cash
collection procedures implemented by the company is as follows.

The method of cash collection comes in three ways that is from cash sales, cash collected
on delivery of goods to customers and cheques received through post from credit customers.

The company has two sets of invoice which are used for cash sales and credit sales
respectively. When payment is received for cash sales by cashier, a copy of invoice is
stamped as paid and filed alphabetically by him. The duplicate copy of the invoice is given to
the customer.

With regards to credit sales, the invoice is sent to customers and when payment is received
the copy of invoice is stamped as paid and filed alphabetically with the cash sales invoices.

Mail is opened by the secretary to the credit controller and she passes any remittances to
the credit controller for his review, without recording the amounts received. The credit
controller gives the remittances to the cashier by depositing them in a tray in the cashier's
desk. The cashier then makes a listing of the remittances which is used by the credit
controller for posting to the sales ledger.

The cheques from credit customers and cash sales receipts are banked-in daily by the
cashier. The credit controller posts remittances to the sales ledger by means of a
microcomputer accounting system and verifies the cash discount allowable.

The credit controller obtains approval from the manager to write off bad debts and any
remittances received in respect of these amounts are credited to bad debt recovered
account, if they are received after the debt has been written off.

You are asked to review the system of control over the cash collection and remittances of
the company.

Required:

a) Identify five (5) weaknesses in the present system for cash collection above and
describe the potential irregularities, which could occur due to the weaknesses
mentioned.

(10 marks)

b) Suggest five (5) improvements in the system of internal control, which could prevent
any potential irregularities.
(5 marks)

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c) One of the elements of internal control is segregation of duties. Why is it important

to maintain proper segregation of duties among the authorization of transactions, the
recording transactions and the custody of assets?

(2 marks)

d) List three (3) benefits of preparing monthly bank reconciliation.

(3 marks)
(Total: 20 marks)

END OF QUESTION PAPER

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