CONFIDENTIAL 1 AC/FEB 2021/AUD589

UNIVERSITI TEKNOLOGI MARA

FINAL EXAMINATION
SUGGESTED SOLUTION

COURSE : AUDITING
COURSE CODE : AUD589
EXAMINATION : FEBRUARY 2021

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QUESTION 1

A
a) Explain briefly the inter-relationship amongst the three components of audit
risk.
 There is an inverse relationship between inherent risk or control risk, and
detection risk. For instance, if inherent risk or control risk are assessed as
high, detection risk would be set at a low level.
(3 marks)

b) Explain briefly the steps in applying materiality on an audit.

 Establish a preliminary judgement about materiality
 Allocate the preliminary judgement about materiality to account balances
or classes of transaction
 Estimate likely misstatements and compare total to the preliminary
judgement about materiality
(3 points x 1 mark = 3 marks)

a) Explain THREE (3) reasons why audit evidence is considered to be persuasive

rather than conclusive.

Audit procedures are designed to reduce the risk that the financial statements
contain material misstatements and not to eliminate all possible errors. Therefore
the auditor can only gives an opinion about the financial statements not an
absolute assurance about the financial statements.
 The reason for lack of absolute, definitive certainty is the nature of audit evide
nce which is gathered by human beings in real live organizations. And human
/ people make mistakes (both client and auditor) and thus may never produce
a definite and absolute evidence which are totally free from errors.
 The client’s personnel may not always tell the truth. Besides making mistakes,
people also may not be honest. The information that the auditor gets as audit
evidence may not be correct due to untruthful answers given by client’s
personnel, for various reasons.
 Documents could be forged (increasingly easy with digital technology).
 The auditor gathers evidence on a test basis (the sample may or may not be
representative).
(Any 3 reasons with explanations x 2 marks = 6 marks)

b) Discuss TWO (2) situations which restrict the auditor’s ability to obtain sufficient
appropriate audit evidence, giving TWO (2) examples for each situation.

 Circumstances beyond the control of the entity

Examples:
- The entity’s accounting records have been destroyed.

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- The accounting records of a significant component have been seized

indefinitely by governmental authorities.
 Circumstances relating to the ‘nature or timing of the auditor’s work
Examples:
- The timing of the auditor’s appointment is such that the audit is unable to
observe the counting of the physical inventories.
- The auditor determines that performing substantive procedure alone is not
sufficient, but the entity’s controls are not effective.
- The entity is required to use the equity method of accounting for an
associated entity, and the auditor is unable to obtain sufficient appropriate
audit evidence about the latter’s financial information to evaluate whether
the equity method has been appropriate applied.
 Limitations imposed by management.
Examples:
- Management prevents the auditor from observing the counting of the
physical inventory.
- Management prevents the auditor from requesting external confirmation of
specific account balances.
- Or any correct examples.
(Any 2 situations x 1 mark + 4 examples x 1.5 mark = 8 marks)
(Total: 20 marks)

QUESTION 2
A
a) Which financial statement assertions are fulfilled through following audit procedures?

Procedures Assertion

 Physical inspection of inventory  Existence

 Confirmation from the legal  Completeness, valuation

advisors
 Verification of title deeds of fixed  Rights and obligations
assets.

(3 assertions X 1 mark = 3 marks)

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b) Explain TWO (2) audit assertions about account balances at year end that cannot be
usually addressed by each of the following audit procedures.

I. External confirmation of trade debt

– Cut-off
– Completeness.

II. Physical count of inventory

– Valuation
– Rights and obligations.

III. Verification of title documents of fixed assets

– Existence
– Completeness

(2 assertions and explanations = 3 marks X 3 = 9 marks)

B
a) Discuss FOUR (4) risks that could be the cause for such differences in reporting
repair and maintenance expenses in the statement of profit or loss.
 Overstated expense
 Fictitious expense
 Unmaterialized expense
 Unapproved expense
 Multiple reimbursements
 Split expense
 Duplicate claims & reimbursements
 Unapproved & split expenses analysis

(Any 1 point with explanation = 2 marks x 4 points = 8 marks)

(Total: 20 marks)

QUESTION 3

A. a) ANY TWO (2) types of modified report:

i. Except for: this arise when particular matter ( either relates to
disagreement or limitation in the audit scope) which, while being material to
the true and fair view given by the financial statements, is not pervasive as
to render them totally misleading. The except for opinion tehrefore indicates
that, with the exception of the particular matter, the financial statements do
give a true and fair view. √√√
ii. Disclaimer opinion: this arises when the possible effect of a limitiation of
scope is so material and pervasive that the auditor has not been able to

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obtain sufficient appropriate audit evidence and accordingly is unable to

express opinion on the financial statements. √√√
(6 marks)
b) circumstances that an emphasis of matter is approriate (with explanation)
 additional disclosure with which the auditor concurs and which make the
accounts true and fair.
 A significant uncertainty that adequately disclosed
 The financial statements being reissued due to subsequent events.
(2 marks)
B. Audit report implication if the directors are reluctant to disclose notes to the financial
statements:
 Requirements of MFRS
o Management is required to disclose in the financial statements any
materia; uncertainties which may cast significant doubt on the ability of
the company to continue as a going concern. If the directors refuse to
disclose, then there is a noncompliace of the requirements of MFRS
101, rndering the financial statements to contain material mistatement.
 Modified audit report
o The report should be modified, either a qualified or an adverse
depending on the impact of the non dosclosure
(4 marks)

C.
Auditor’s opinion
i Unqualified report with
‘Emphasis of Matter’
paragraph √
Reasons
Empower Bhd has a significant uncertainty of
continuing business however the matter has
been adequately disclosed in the notes to the
account. √

ii Qualified report with Except The client has restricted the scope of the audit
for√ and the auditor was not able to satisfy him or
herself by alternative procedures. Because it
was a client restriction rather than a condition
beyond the client’s control causing the
limitation, and if the limitation is considered
highly material, a disclaimer is appropriate. If
the limitation considered material but not
pervasive, except for opinion is appropriate. √

iii Qualified report with
Disclaimer opinion√
The client refused to allow the auditor to access
to the minutes of board of directors meeting on
significant item on tangible assets and loan.
This has been scope limitation and the amount
is material and pervasive. √

iv Qualified report with Adverse The company’s financial statements are not in
opinion. √ accordance with generally accepted
accounting principles (GAAP) and disclosure of
information. The misstatement is material and
pervasive. √

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(8 √x 1 mark = 8 marks)

QUESTION 4
A. 3 ways auditor can apply professional scepticism
i. When evaluating evidence – the auditor should critically assess audit evidence
and be alert for contradictory evidence that may undermine the sufficiency and
appropriateness of evidence obtained.
ii. When assessing engagement acceptance – at this stage the auditor should
consider whether the management of the intended audit client acts with
integrity and whether there are any matters that may impact on the auditor
being able to act with professional scepticism if they accept the engagement,
such as ethical threats to objectivity.
iii. When performing risk assessment procedures – an auditor should be sceptical
when performing risk assessment procedures at the planning stage of the audit.
For example, when discussing the results of analytical procedures with
management, the auditor should not accept management’s explanations at
face value, and should obtain corroboratory evidence for the explanations
offered.
(6 marks)
B. Professional judgment: Professional judgment is the application of your knowledge,
skills and experience regarding auditing and accounting to make informed decisions
and deciding how to respond to particular situations during the audit. √√

Example:
 the auditor applies professional judgment in deciding materiality and risk of
audit item. √
 the auditor must use professional judgment in deciding the extent, timing, and
nature of audit procedures √
 the auditor applies the professional judgement in deciding whether the audit
evidence obtained is sufficient and appropriate for the audit. If not, the auditor can
further evaluate new audit procedures or course of action by applying professional
judgment.
(4 marks)
(Total: 10 marks)

QUESTION 5

A. THREE (3) substantive procedures that auditor can perform to verify the sales revenue
and trade receivables balances
i. Comparisons of monthly sales with the corresponding months in the previous
year to evaluate the reasonableness of recorded sales, monthly performance
and to provide explanation for any fluctuation.
ii. Perform sales cut-off test as of SOFP date by agreeing the delivery orders a
few days before and after with respective invoices to obtain reasonable
assurance that sales are recorded in the appropriate accounting period.
iii. Examine the credit to remittance advices and sales adjustment authorization to
provide evidence relevant to the completeness assertions for accounts
receivable that reduction in customer balances is true.
(6 marks)
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B. 5 deficiencies found in the purchase system

i. Lack in the segregation of duties – the production manager and the book
keeper are responsible for an important number of activities in the purchase
system.
ii. Only hand written purchase orders are made to the buying manager from the
other department.
iii. There was no checking made over the book keeper posting invoices and cash
to the purchase ledger.
iv. The production manager could make fraudulent/fictitious payment to supplier.
As he can order goods and he also approve posting of the invoices to the
ledger.
v. Some purchase orders are not raised for all goods purchased by the company.
vi. The goods received department does not have copies of purchase orders and
it should refuse receipts of goods where there are no purchase orders.
(or any other acceptable answer)
(10 marks)

C. 3 improvements to the system

i. There should be a system whereby pre – numbered purchase requisitions are
raised and signed by the department manager before sending it to buying
manager.
ii. The buying manager should obtain the best quotation to choose from the
aspect of quality, price and delivery date.
iii. The company must produce pre – numbered/sequentially purchase orders.
iv. GRN should be sequentially pre – numbered and signed by the store keeper.
(or any other acceptable answer)
(6 marks)

D. 4 substantive procedures to verify the purchase and trade payable balances.

i. Comparison of monthly purchases with the corresponding months in the
previous year to evaluate the reasonableness of recorded purchases.
ii. Perform cut – off test as of SOFP date by agreeing GRN a few days before and
after to obtain assurance that the transactions are recorded in the appropriate
accounting period
iii. Cast the list of invoices in the payable ledger for any month to ensure that the
total purchase for the months is accurate.
iv. Examine the key financial ratios in relation to the purchase and trade payables
transactions to ensure its reasonableness.
(any other acceptable answer)
(8 marks)

(Total: 30 marks)

END OF SUGGESTED SOLUTION

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