Study Guide AA August 2023

Module Study Guide
Taylors University
Undergraduate Business Program
ACC 61304
Audit and Assurance
August Semester 2023
1
HOW TO APPROACH THIS COURSE
• Study the topics in the sequence as outlined in the Table of Contents of this
Study Guide.
• Specifically, note the learning outcome for each of the topic.
• As the Study Guide and lecture slides provide an introduction and overview of
the topic, you should organize your learning around them.
• For each of the topic, read, not only the recommended primary text reference
but also the other text references listed in your Module Information in order to
gain a comprehensive view of the topic prior to the lecture.
• Complete the tutorial questions as set in the Study Guide. Practicing by written
answer is highly recommended. Basically there will be two types of tutorial
questions – Review Questions and Problems and Case Studies.
Review Questions are very straightforward and the answers can generally be
found in the chapter. It is important for you to be able to answer all of the
Review Questions because it ensures that you understand the language being
used, new terminology and basic relationships between concepts.
The Discussion Questions (i.e. problems and case studies) will be the focus of
the tutorials. It will be assumed that you have read the relevant chapter(s),
attended the lecture and attempted to answer the questions before coming to
the tutorial. You may be required to present your answers to class – so come
prepared.
• Finally, refer again to the learning outcomes and check that you have mastered
each learning outcome for the topic.
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LEARNING RESOURCES
1. Course Text
Arens, Elder, Beasley and Hogan, Auditing and Assurance Services – An

Integrated Approach (2023), Global Edition, Eighteen Edition, Pearson, ISBN-
13: 9781292449104
2. Major References
1. Cosserat et al, Modern Auditing, 5th. Edition, Wiley
2. The Audit Process by Iain Gray and Stuart Manson (5th edition), Thomson.
3. Understanding Auditing in Malaysia (2006), Shaari Isa (Pearson, Prentice

Hall)
3. Study Guide
• The weekly program in this Study Guide provides a condensed guide to the
main topics and themes for each week of study.
4. MyTIMeS
• The weekly lecture overhead slides, some selected solutions to the weekly
tutorial exercises and test, additional tutorial exercises, additional notes
and useful articles can be downloaded from this course website.
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Table of Contents
Topic No Topics
1 Introduction – Why Audit is Important, Value of Audit

The audit responsibilities and objectives
2
Audit planning and materiality

3
4 Assessing the risk of material misstatement

Internal control, part 1
5
Assessing control risk and reporting on internal controls, part 2
6
7 Acquisition and payment cycle
8 Sales and receivables cycle
9 Assessing & responding to fraud risks
10 Audit report
11 Auditors’ liability
Professional ethics
12
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TOPIC 1: INTRODUCTION
Learning Outcomes:
This topic provides an initial introduction to the theory surrounding the audit
function. After studying this topic you should, amongst others, be able to:
• Define auditing and understand why audit is needed

• Understand how audit fits within corporate governance framework
• Differentiate the three main types of audits and auditors
• Distinguish between auditing and accounting
• The causes of information risk, and the importance of auditing in reducing
information risk
• Distinguish management’s responsibility for the financial statements and
internal control from the auditor’s responsibility for verifying the financial
statements
Required Reading:
• Auditing and Assurance Services , Arens, Elder, Beasley and Hogan, Chapters
1
Recommended Additional Reading:
• Auditing, Assurance Services & Ethics in Australia, Arens, Best, Fiedler

Chapters 1 & 18
• The Audit Process, Gray & Manson 5th Edition, Chapters 1 and 2
TUTORIAL DISCUSSION QUESTIONS

Review Questions
1. Explain the relationships among audit services, attestation services, and

assurance services and give examples of each.
2. Identify the major causes of information risk and identify the three main ways
information risk can be reduced. What are the advantages and disadvantages
of each?
3. What are the differences and similarities in audits of financial statements,

compliance audits, and operational audits?
4. Explain what is (external) auditing?
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Discussion Questions
5. Busch Corporation has an existing loan in the amount of $6 million with an

annual interest rate of 6.0%. The company provides an internal company-
prepared financial statement to the bank under the loan agreement. Two
competing banks have offered to replace Busch Corporation’s existing loan
agreement with a new one. United National Bank has offered to loan Busch $6
million at a rate of 5.0% but requires Busch to provide financial statements that
have been reviewed by a public accounting firm. First City Bank has offered to
lend Busch $6 million at a rate of 4.0% but requires Busch Corporation to
provide financial statements that have been audited by a public accounting
firm. The Busch Corporation’s financial controller approached a public
accounting firm and was given an estimated cost of $35,000 to perform a
review, and $60,000 to perform an audit.
Required:
• Explain why the interest rate for the loan that requires a review report is
lower than that for the loan that did not require a review. Explain why the
interest rate for the loan that requires an audit report is lower than the
interest rate for the other two loans
• Calculate Busch Corporation’s annual costs under each loan agreement

including interest and costs for the public accounting firm’s services.
Indicate whether Busch should keep its existing loan, accept the offer from
United National Bank or accept the offer from First City Bank
c. Assume that United National Bank has offered the loan at a rate of 4.5%
with a review and the cost of audit has increased to $80,000 due to new
auditing standards requirements. Indicate whether Busch should keep its
existing loan, accept the offer from United National Bank or accept the offer
from First City Bank
d. Discuss why Busch may desire to have an audit, ignoring the potential
reduction in interest costs.
e. Explain how strategic understanding of the client’s business may increase

the value of the audit service.
6. Financial statement audit

Dave Czarnecki is the managing partner of Czarnecki and Hogan, a
medium-sized local CPA firm located outside of Chicago. Over lunch, he is
surprised when his friend Juarez Foley asks him, “Doesn’t it bother that
your client don’t look forward to seeing their auditor each year?” Dave
responds, “Well, auditing is only one of several services we provide. Most
of our work for clients does not involve financial statement audits, and our
audit clients seem to like interacting with us.”
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Required:
a. Identify ways in which a financial statement audit adds value for clients.
b. Lists services other than audits that Czarnecki and Hogan likely provides.
c. Assume Czarnecki and Hogan has hired you as a consultant to identify
ways in which they can expand their practice. Identify at least one additional
service that you believe the firm should provide and explain why you believe
this represents a growth opportunity for CPA firms.
7. WorldCom
Read the following excerpt from the Guardian newspaper and then answer the
questions below:
WorldCom, America’s second largest long distance phone company, went

bankrupt in 2002 after being hit by accounting scandals. It was alleged that
$3.8 billion in expenses were recorded as capital investments. The Guardian
newspaper reported the following:
“WorldCom’s chief executive, John Sidgmore, blamed the company’s former

chief financial officer, Scott Sullivan, and the former controller, David Myers.
The two were fired for claiming $3.8 billion in regular expenses as capital
investment in 2001. The pair were arrested in New York, handcuffed and
paraded in front of TV cameras as part of the Bush’s administration crackdown
on corporate crime. Charged with securities fraud, conspiracy and other
charges they face 65 years in prison. WorldCom’s founder and former chief
executive, Bernie Ebbers, say he was unaware of the accounting problems,
and has not been charged.” WorldCom’s external auditors at the time were
Arthur Andersen who did not report on the irregularity. The deputy US attorney
general, Larry Thompson said, “We have to ask where the professionals were,
the auditors and the lawyers”
Required
a. What are the accounting rules for deciding if an item is an asset or

expenditure? (5 marks)
b. What would be the effect on the financial statements of recording £3.8 billion
expenses as capital investments? (3 marks)
c. What is an external financial statement audit? (7 marks)
d. Why are external financial statement audits needed? (5 marks)
e. In your opinion were the auditors negligent in not reporting the irregularity?
(5 marks)
TOPIC 2: THEORETICAL FRAMEWORK – THE AUDIT PROCESS
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Learning Outcomes:
This topic deals with the understanding of the overall objectives of the audit and
the auditor’s responsibilities in conducting the audit which are essential on how
to conduct an audit. After completing this topic you should be able to understand;
• the distinction between external and internal auditors

• the contents of the Auditors report
• about audit risk and the importance of gathering evidence in the audit process
• the financial management assertions and
• Gain an overview of the audit process
Required Reading:
• Auditing & Assurance Services, Arens, Elder, Beasley and Hogan Chapters 5

Chapter 5
• The Audit Process, Gray & Manson 5th Edition, Chapters 2,5 & 6

Review Questions
1. State the four major types of services CPA’s (public accountants) perform, and
explain each.
2. Distinguish between auditing standards and generally accepted accounting

principles and give two examples of each.
3. Distinguish between management’s and the auditor’s responsibility for the

financial statements being audited.
Describe the audit responsibility to consider compliance with laws and

regulations. Explain how does this affect the audit procedures regarding laws
and regulations that have a direct effect on the financial statements compared
to other laws and regulations that do not have a direct effect?
4. Describe the cycle approach to segmenting an audit. Explain how the auditor
conducts financial statement audits using the cycle approach.
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5. You are part of the audit team for PJ Transporters Sdn. Bhd., a company
specializing in the transport of perishable foods around Malaysia. The company
has a fleet of 300 trucks on its fixed asset register. Your audit manager is very
busy and has asked you to “audit the trucks”.
You do not wish to be embarrassed by questioning your superior so you agree

to carry out the task. What do you think the audit manager is asking you to do?
(Hint: Using the management assertions and audit objectives identify what you
think would be the important issues to address if you had to audit the trucks –
for example, how would you check to see whether the trucks exist so you could
ensure that no fictitious trucks have been recorded in the financial reports?
How could you ensure that the trucks are properly valued, and properly
presented and disclosed in the financial statements etc?)
6. The following are specific transaction-related audit objectives

applied to the audit of cash disbursement transactions (a. through f.),
management assertions about classes of transactions and events and related
disclosures (1 through 6), and general transaction-related audit objectives (7
through 13).
Specific Transaction-Related Audit Objective

a. Existing cash disbursement transactions are recorded.
b. Recorded cash disbursement transactions are for the amount of goods or
services
received and are correctly recorded.
c. Cash disbursement transactions are properly included in the accounts
payable master file and are correctly summarized.
d. Recorded cash disbursements are for goods and services actually received.
e. Cash disbursement transactions are properly classified.
f. Cash disbursement transactions are recorded on the correct dates.
Management Assertion About General Transaction-Related Audit

Classes of Transactions Objective
1.Occurrence 7. Occurrence
2. Completeness 8. Completeness
3. Accuracy 9. Accuracy
4. Classification 10. Posting and summarization
5. Cutoff 11. Classification
6. Presentation 12. Timing
13. Presentation
a. Explain the differences among management assertions about classes of

transactions and events and related disclosures, general transaction-related audit
objectives, and specific transaction-related audit objectives and their relationships
to each other.
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b. For each specific transaction-related audit objective, identify the appropriate
management assertion.
c. For each specific transaction-related audit objective, identify the appropriate

general transaction-related audit objective.
TOPIC 3: THE AUDIT APPROACH – PLANNING USING THE

RISK APPROACH
Learning Outcomes:
This topic will largely cover the importance of audit planning and the concept of
the ‘risk-based’ approach and by the end of the lesson you should be able to:
• understand why audit planning is essential

• identify the purpose and the audit planning methodology
• make client acceptance decisions and how to perform initial audit planning
• obtain knowledge of client’s industry and business
• to assess client’s business risk
• perform preliminary analytical procedures
• define audit risk and the components of audit risk
• planning the audit using the Audit Risk Model
Required Reading:
&8

Chapters 7 & 8
• The Audit Process, Gray & Manson 5th Edition, Chapter 5
Review Questions
1. What are the benefits derived from planning audits?
2. Describe the eight major steps in planning audits.
3. Define client business risk and describe several sources of client business
risk. What is the auditor’s primary concern when evaluating client business
risk?
4. Explain the term audit risk and describe the three components of audit risk?
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5. Explain why the auditor needs to consider risk when conducting an audit
6. In your audit of Canyon Outdoor Provision Company’s financial statements, the

following transactions came to your attention:
i)Canyon Outdoor’s operating lease for its main store is with MTS Properties,
which is a real estate investment firm owned by Andrei Mikhailov. Mr. Mikhailov
is a member of Canyon Outdoor’s board of directors.
ii). One of Canyon Outdoor’s main suppliers for kayaks is Hessel Boating
Company. Canyon Outdoor has purchased kayaks and canoes from Hessel for
the last 25 years under a long-term contract arrangement.
iii). Short-term financing lines of credit are provided by Cameron Bank and Trust.
Suzanne Strayhorn is the lending officer assigned to the Canyon Outdoor
account. Suzanne is the wife of the largest investor of Canyon Outdoor.
iv)Hillsborough Travel partners with Canyon Outdoor to provide hiking and rafting
adventure vacations. The owner of Hillsborough Travel lives in the same
neighborhood as the CEO of Canyon Outdoor. They are acquaintances, but not
close friends.
v)The board of directors consists of several individuals who own stock in Canyon
Outdoor. At a recent board meeting, the board approved its annual dividend
payable to shareholders effective June 1.
a. Define what constitutes a “related party.”

b. Which of the preceding transactions would most likely be considered a related
party transaction?
c. What financial statement implications, if any, would each of the above
transactions have for Canyon Outdoor?
d. What procedures might auditors consider to help them identify potential related
party transactions for clients like Canyon Outdoor?
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TOPIC 4: THE AUDIT APPROACH – THE IMPORTANCE OF
OBTAINING EVIDENCE; MATERIALITY
Learning Outcomes:
This topic deals with the decisions auditors have to make on the types of audit to
obtain, the evidence available, the use of evidence in performing audits and the
concepts of materiality. At the completion of your study of this topic, you should
be able to:
• explain what does sufficient appropriate evidence mean

• describe the types of audit evidence
• identify the methods for gathering audit evidence – audit procedures
• explain and apply the concepts of materiality to the audit
• discuss how materiality and risks are related and integrated into the audit
process
Required Reading:
• Auditing & Assurance Services, Arens, Elder, Beasley and Hogan Chapters 6,
7&8

Chapters 6 & 8
• The Audit Process, Gray & Manson 5th Edition, Chapters 6 & 11
Review Questions
Evidence
1. List the four main evidence decisions that must be made on every audit.
2. List the eight types of audit evidence and give two examples of each.
3. When carrying out audit work and deciding if sufficient evidence has been
gathered, the auditors should always apply a degree of professional
scepticism. In this context, explain what is meant by professional scepticism
4. Explain the meaning and concept of materiality in relation to misstatements or

omissions in financial statements.
5. Explain the role of materiality within the audit.
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Materiality
6. Discuss the effect of each of the matters below on the financial statements
and consider its materiality. The year-end in each case is 30 April 2015.
a) MKZ Berhad purchased a RM45,000 non-current assets which was

installed and brought into use in April 2015. The invoice was dated and
received on 8 May 2015 and has not been accounted for.
Profit before tax for the year was RM135,000 and gross assets at the
year end were RM1,830,000, including NCA of RM980,000.
b) A customer of Alam Berhad went into liquidation on 11 May 2015. The

unpaid sales ledger balance at 30 April 2015 was RM45,000, against
which no provision has been made.
Profit before tax for the year was RM37,000 on turnover of RM6 million.
c) During March 2015, Metro Berhad vacated its factory, which it had leased
under an operating lease, and relocated to new premises. The lease on
the old factory continues until April 2018 and cannot be cancelled. The
likelihood that it can be re-let to another user is remote. The annual rental
isRM500,000. No provision has been made for this onerous contract.
Profit before tax for the year was RM10 million.
7. Listed below are various risks identified during audit planning that you have
been asked to evaluate to assess whether they are significant risk.
• Fernandez Wholesalers sells energy drinks to various distributors.
As they have expanded sales to additional customers, there has
been some increase in the age of accounts receivable, which could
require an increase in the allowance for doubtful accounts.
• Sansome Construction builds light commercial real estate
properties. This year they started a new project that is three times
large than previous projects completed by the company, and is the
first one that will take more than one year to complete. The company
has limited experience with percentage of completion contract
account, and the project is running significantly behind schedule.
• Horton Sports produces high-end sporting gear. Sales and
receivables have increased significantly in the fourth quarter over
the previous year, and the company has pressured customers in the
past to purchase more product than they need, resulting in
significant returns.
• Alset Motors is a start-up focused on self-driving vehicles. Their
technology has shown significant promise in selected test markets,
but there are several competitors also in the market, including major
auto manufacturer and technology firms.
a. Describe what is means by a significant risk. How is it different
13
than an inherent risk or a business risk?
b. For each of the four risks described above should be considered
a significant risk?
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TOPIC 5: CONSIDERING INTERNAL CONTROL, PART 1
Learning Outcomes:
This topic will introduce you to the idea of systems of internal control and after the
lecture and tutorials, you should be able to namely:
• Describe the three primary objectives of effective internal control.

• Contrast management’s responsibilities for maintaining internal control with
the auditor’s responsibilities for evaluating and reporting on internal control
Required Reading:
• Auditing & Assurance Services, Arens, Elder, Beasley and Hogan Chapters
10, 11 & 12

Chapters 9 & 15
• The Audit Process, Gray & Manson 5th Edition, Chapters 7, 8 & 11

Review Questions
1. Describe which of the three categories of broad objectives for internal controls
are considered by the auditor in an audit of both the financial statements and
internal control over financial reporting.
2. What is the auditor’s responsibility for obtaining an understanding of internal

control?
3. Can a system walkthrough alone provide sufficient evidence that a control is

operating effectively? If not, state the factors affecting the amount of
additional evidence that may be required.
4. The following are independent internal control commonly found in the

acquisition and payment cycle. Each control is to be considered
independently.
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1. Before a cheque is prepared to pay for acquisition by the account payable
department, the related purchase order and receiving report are attached
to the vendor’s invoice being paid. A clerk compares the quantity on the
invoice with the receiving report and purchase order, compares the price
with the purchase order, recomputes the extensions, re-add the total, and
examines the account number indicated on the invoice to determine
whether it is correctly classified. He indicates his performance of these
procedures by initiating the invoice.
2. Before a cheque is approved by the treasurer for issuance, she examines
the supporting documentation accompanying the cheque. At that time,
she initials each vendor’s invoice to indicate her approval.
3. After the controller signs the cheques, her secretary writes the cheque
number and the date the cheque was issued on the supporting documents
to prevent their reuse.
4. At month end, an accounting clerk accounts for all prenumbered receiving
reports (documents evidencing the receipt of goods) issued during the
month and traces each one to the related vendor’s invoice and
acquisitions journal entry. The clerk’s tests do not include testing the
quantity or description of the merchandise received.
5. The cash disbursement clerk is prohibited from handling cash. The bank
account is reconciled by another person even though the clerk has
sufficient expertise and time to do it.
Required:
For each of the internal control, describe the transaction-related audit
objective(s) the control is meant to fulfill.
For each control, describe one test of control the auditor could perform to
test the effectiveness of the control.
For each control, describe one substantive test the auditor could perform
to determine whether financial misstatements are actually taking place.
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TOPIC 6: ASSESSING CONTROL RISK AND REPORTING ON
INTERNAL CONTROLS
Learning Outcomes:
This topic will further introduce you to the idea of systems of internal control and
after the lecture, you should be able to amongst others:
• Obtain and document an understanding of internal control.

• Assess control risk by linking key controls and control
• Deficiencies to transaction-related audit objectives.
• Describe the process of designing and performing tests of controls.
• Understand how control risk impacts detection risk and the design of
substantive tests.
• Understand requirements for auditor reporting on internal control.
• Describe the differences in evaluating, reporting, and testing.
• Internal control for nonpublic and smaller companies.
Required Reading:
• Auditing & Assurance Services, Arens, Elder, Beasley and Hogan Chapters
14,16 &18

Chapters 13 & 14
• The Audit Process, Gray & Manson 5th Edition, Chapter 12 & 13
• Modern Auditing, 5th Edition, Cosserat, Chapter 12 & 13
Review Questions
1. The audit of income and expense accounts is significantly related to the audit
of a number of balance sheet accounts such as:
• Inventory
• Account receivable
• Property, plant and equipment
• Long term investments
• Notes and bonds payable
Required:
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a) Identify the income statement accounts associated with each of the balance
sheet accounts listed above.
b) Describe the substantive analytical procedures used to audit each of the
income statement accounts identified in a).
c) For the substantive analytical procedures listed in your answer to part b),
explain the possible misstatements each procedure is designed to discover.
2. Describe the internal control objectives for the purchase of goods and
services.
3. The following are various audit procedures performed in the audit of the
acquisition and payment cycle and accounts payable:
1. Foot the acquisition journal for the month of August and trace posting to
general ledger and accounts payable master file.
2. Determine that the amount of purchases from major customers is properly
disclosed in the financial statements.
3. Calculate the percentage change in expense accounts compared to the
prior year for each division.
4. Vouch recorded purchases to vendor invoice and related receiving report.
5. Determine whether amounts due to related parties on the listing of
accounts payable are reported separately in the financial statements.
6. Obtain vendors’ statements directly from vendors and reconcile them to
the listing of account payable.
7. Examine supporting documents for cash disbursements after year end to
determine whether they should be included in the year-end list of account
payable.
8. For a sample of acquisitions, verify that the purchase order was properly
approved.
9. For a sample of disbursements, verify that payment was authorized by the
appropriate individual.
10. For a sample of acquisitions, agree quantities on vendor invoice with
quantities on related receiving report and purchase order.
a) For each procedure, indicate whether it is a test of control, substantive test
of transactions, substantive analytical procedure or test of details of
balances.
b) For each test of control or substantive tests of transactions, identify the
transaction-related audit objective(s) being met.
c) For each substantive analytical procedures or test of details of balances,
identify the balance-related audit objective(s) being met.
TOPIC 7: AUDIT OF THE ACQUISITION AND PAYMENT CYCLE:

TESTS OF CONTROLS, SUBSTANTIVE TESTS OF
TRANSACTIONS, AND ACCOUNTS PAYABLE
Learning Outcomes:
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This topic will examine the audit procedure of acquisition and payment cycle of
assets and business expenditure. After studying this topic you should be able to,
amongst others:
• Identify the accounts and the classes of transactions in the acquisition and
payment cycle.
• Describe the business functions and the related documents and records in
the acquisition and payment cycle.
• Understand internal control, and design and perform tests of controls and
substantive tests of transactions for the acquisition and payment cycle.
• Describe the methodology for designing tests of details of balances for
accounts payable using the audit risk model
• Design and perform substantive analytical procedures for accounts payable.
• Design and perform tests of details of balances for accounts payable,
including out-of-period liability tests.
• Distinguish the reliability of vendors’ invoices, vendors’ statements, and
confirmations of accounts payable as audit evidence.
Required Reading:
• Auditing & Assurance Services, Arens, Elder, Beasley and Hogan Chapter 10
& 17.
• Modern Auditing, 5th Edition, Cosserat, Chapter 13
TUTORIAL QUESTIONS
Review Questions
2 : Acquisition and payment cycle and accounts payable
The following are various audit procedures performed in the audit of the
acquisition and payment cycle and accounts payable:
11. Foot the acquisition journal for the month of August and trace posting to
general ledger and accounts payable master file.
12. Determine that the amount of purchases from major customers is properly
disclosed in the financial statements.
13. Calculate the percentage change in expense accounts compared to the
prior year for each division.
14. Vouch recorded purchases to vendor invoice and related receiving report.
15. Determine whether amounts due to related parties on the listing of
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accounts payable are reported separately in the financial statements.
16. Obtain vendors’ statements directly from vendors and reconcile them to
the listing of account payable.
17. Examine supporting documents for cash disbursements after year end to
determine whether they should be included in the year-end list of account
payable.
18. For a sample of acquisitions, verify that the purchase order was properly
approved.
19. For a sample of disbursements, verify that payment was authorized by the
appropriate individual.
20. For a sample of acquisitions, agree quantities on vendor invoice with
quantities on related receiving report and purchase order.
d) For each procedure, indicate whether it is a test of control, substantive test
of transactions, substantive analytical procedure or test of details of
balances.
e) For each test of control or substantive tests of transactions, identify the
transaction-related audit objective(s) being met.
f) For each substantive analytical procedures or test of details of balances,
identify the balance-related audit objective(s) being met.
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TOPIC 8: AUDIT OF THE SALES AND COLLECTION CYCLE:
TESTS OF CONTROLS AND SUBSTANTIVE TESTS OF
TRANSACTIONS
Learning Outcomes:
This topic examines audit issues related to the sales and collection cycle. After
studying this topic you should be able to:
• Identify the accounts and the classes of transactions in the sales and
collection cycle.
• Describe the business functions and the related documents and records in
the sales and collection cycle.
substantive tests of transactions for sales.
• Apply the methodology for controls over sales transactions to controls over
sales returns and allowances.
substantive tests of transactions for cash receipts.
• Apply the methodology for controls over the sales and collection cycle to
controls related to uncollectible accounts receivable.
• Understand the effect of tests of controls and substantive tests of
transactions on substantive tests of details of balances
Required Reading:
& 15
1. List the types of specific control activities and provide one specific
illustration of a control in the sales area for each control activity.
2. State the objectives of internal controls that should be exercised over a

sales and receivable system.
3. The following is a list of possible errors or fraud involving sales cycle.

1. Invoices are sent for shipped goods and are recorded in the sales
journal, but are not posted to any customer accounts.
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2. Invoices for goods sold are posted to incorrect customer accounts.
3. Invalid transactions granting credit for sales returns are recorded.
4. Goods are removed from inventory for unauthorized orders.
5. Credit sales are made to customers with unsatisfactory credit ratings.
6. Invoices are sent to co-participants in a fraudulent scheme, and sales
are recorded for fictitious transactions.
7. Good shipped to customers do not agree with goods ordered by
customers.
8. Invoices are sent for shipped goods, but are not recorded in the sales
journal.
Required:
For each error or fraud, describe one internal control that, if properly
designed and implemented, most likely would be effective in preventing
or detecting the errors and fraud.
4.
YourTeam.com is an online retailer of college and professional sports team
memorabilia, such as hats, shirts, pennants and other sports logo products.
Consumer selects the college or professional team from a pull-down menu on
the company’s website. For each listed item, the website provides a product
description, picture and price for all products sold online. Customers click on the
product number of the items they wish to purchase. The following are internal
controls YourTeam.com has established for its online sales:
1. Only products shown on the website can be purchased online. Other
company products not shown on the website listing are unavailable for online
sale.
2. The online sale system is linked to the perpetual inventory system, which
verifies quantities on hand before procession sale.
3. Before the sale is authorized, YourTeam.com obtains credit card
authorization codes electronically from the credit card agency.
4. Online sales are rejected if the customer’s shipping address does not match
the credit card billing address.
5. Before sales is finalized, the online screen shows the product number,
description, unit price, and total sales price for the online transaction.
Customer must click on the Accept or Reject sales button to indicate approval
or rejection of the online sale.
6. Once customer approve the online sale, the online system generates a
Pending Sales files, which is online data file that is used by warehouse
personnel to process shipments. Online sales are not recorded in the sales
journal until warehouse personnel enter the bill of lading number and date of
shipment into the Pending Sales data file.
Required:
a) For each control, identify the transaction-related audit objective(S) being
fulfilled if each control is in effect.
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b) For each control, describe the potential financial misstatements that could
occur if the control was not present.
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TOPIC 9: ASSESSING AND RESPONDING TO FRAUD RISKS
Learning Outcomes:
This topic assess fraud and misappropriation of assets as well as appropriate

responses as related to financial statement. – where auditor needs to be careful
and thorough review of the audit that was carried out. After studying this topic you
should be able to:
• Define fraud and distinguish between fraudulent financial reporting and

misappropriation of assets.
• Describe the fraud triangle and identify conditions for fraud.
• Understand the auditor’s responsibility for assessing the risk of fraud and
detecting material misstatements due to fraud.
• Identify corporate governance and other control environment factors that
reduce fraud risks.
• Develop responses to identified fraud risk.
• Recognize specific fraud risk areas and develop procedures to detect fraud.
• Understand interview techniques and other activities after fraud is suspected.
• Describe information about the fraud risk assessment that must be
documented in the working papers.
Required Reading:
&9

Chapter 18

Analytical Procedures
1. Explain what is meant by the term analytical procedures and the different
types of analytical procedures that are available to the auditor.
2. Describe the role of analytical procedures within the audit process.
3. What are the strengths and weakness of the analytical procedures.
24
Fraud
4.
Appliances Repair and Service Company bills all customers rather than
collecting in cash when services are provided. All mail is opened by Tom Gyders,
treasurer. Gyders, a CPA, is the most qualified person in the company who is in
the office daily. Therefore, he can solve problems and respond to customers’
needs quickly. Upon receipt of cash, he immediately prepares a listing of the
cash and a duplicate deposit slip. Cash is deposited daily. Gyder uses the listing
to enter the financial transactions in the computerized accounting records. He
also contacts customers about uncollected account receivable. Because he is so
knowledgeable about the business and each customer, the grant credit,
authorizes all sales allowances, and charges off uncollectible accounts. The
owner is extremely pleased with the efficiency of the company. He can run the
business without spending time there because of Gyders’s efficiency.
Imagine the owner’s surprise when he discovers that Gyder has committed a
major theft of the company’s cash receipts. He did so by not recording sales,
recording improper credits to recorded account receivables, and overstating
receivables.
a. What weaknesses in the company’s processes might have permitted the

fraud?
b. What suggestion do you have for changing the process to reduce the future
potential for fraud?
5. With regards to the prevention and detection of fraud, describe the

responsibility of:
a) the management and those charged with governance and
b) the auditor
6.Discuss why it might be argued that auditors can never hope to guarantee the
detection of all frauds and errors.
Discussion Question
7. A case study on Analytical Procedures.
The principal activity of Bath Specialist Berhad - the company in which you are
planning the audit of for the year ended 31 December 2016 - is the
manufacture, distribution and retail of luxury bathroom toiletries. Whilst the
image of the range is that of luxury, the goods sell for a wide range of prices.
In the past most of the company's sales were made through its own retail
outlets. However, the company's strategy is to slowly reduce the number of its
own retail outlets and increase the availability of its branded products within
25
other stores. During the year ended 31 December 2017, the company secured
substantial contracts to supply its products to several national retail chains.
In previous years the company relied heavily on temporary production workers

for the build up of inventory in preparation for the periods of high demand such
as Christmas and Mother’s Day. In order to minimise the reliance on temporary
workers in a difficult labour market, permanent workers were recruited and the
company radically changed the phasing of its production to even out the
seasonal fluctuations in output.
During the year the company introduced a policy of promoting the following
offer: "spend RM30 get a free RM10 voucher". The aim is to encourage early
sales before the busy Christmas and Mother’s Day periods.
You are preparing for your planning meeting with the finance director and have
obtained, in advance of the meeting, a copy of the draft accounts for the year
ended 31 December 2015. Following your preliminary review of the financial
statements, you have identified the following extracts from the financial
statements as matters of significance to discuss with the finance director.
Income Statement (extract) Years ended 31 December

Draft Actual
2017 2016
RM RM
Revenue 79,129 75,218
Cost of sales 35,608 32,491
Gross profit 43,521 42,727
Operating expenses 32,695 33,848
Profit from operations 10,826 8,879
Balance sheet (extract)
Current assets
Inventories 13,365 12,729
Trade receivables 11,056 8,655
Required
Conduct analytical procedures taking into account all of the above

information and prepare a list of matters that you will wish to discuss with
management, in order to confirm or contradict your interpretation of the
information you have available.
Calculations must be fully displayed within this list of matters.
26
TOPIC 10: AUDIT REPORT
Learning Outcomes:
In this topic we will be focusing on the final step of the audit process – the audit
report and issues concerning the public’s expectations of audit. After studying this
topic you should be able to:
• Describe the parts of the standard unmodified opinion audit report for
nonpublic entities under AICPA auditing standards.
• Specify the conditions required to issue the standard unmodified opinion
audit report.
• Understand reporting on financial statements and internal control under
PCAOB auditing standards.
• Describe the five circumstances when an emphasis-of-matter explanatory
paragraph or nonstandard wording is appropriate to include in an
unmodified opinion audit report.
• Identify the types of audit reports that can be issued when an unmodified
opinion is not justified.
• Explain how materiality affects audit reporting decisions.
• Draft appropriately modified opinion audit reports under a variety of
circumstances.
• Determine the appropriate audit report for a given audit situation.
• Understand use of international accounting and auditing standards by U.S.
companies.
Required Reading:
& 24

Chapter 2

Audit Expectations Gap
1. Explain what is meant by the audit expectations gap?
2. Describe the steps that can be taken to reduce ‘the gap’.
27
3. Discuss why “an expectations gap may well be an inevitable feature of auditing”
and may never disappear.
Reporting the Audit Opinion
4. Generally what are the types of opinions that may be expressed in an auditors’
report and under what circumstances are they to be rendered?
Question 5. Described below are independent situations for which you will
recommend an appropriate audit report:
1. Subsequent to the date of the financial statements as part of his

post-balance sheet date audit procedures, a CPA learned that a recent fire
caused by heavy damage to one of a client’s two plants; the loss will not be
reimbursed by insurance. The newspapers described the event in detail. The
financial statements and footnotes as prepared by the client did not disclose
the loss caused by the fire.
2. During the course of his audit of the financial statements of a

corporation for the purpose of expressing an opinion on the statements, a
CPA is refused permission to inspect the minutes of board of directors’
meeting that document significant decisions of the board. The corporation
secretary instead offers to give the CPA a certified copy of all resolutions
and actions involving accounting matters.
3. A CPA is engaged in the audit of the financial statements of a large

manufacturing company with branch offices in many widely separated cities.
The CPA was not able to count the substantial undeposited cash receipts at
the close of business on the last day of the fiscal year at all branch offices.
As an alternative to this auditing procedure used to verify the accurate cutoff
of cash receipts, the CPA observed that deposits in transits as shown on
the year-end bank reconciliation appeared as credits on the bank statement
on the first business day of the new year. He was satisfied as to the cutoff of
cash receipts by the use of the alternative procedure.
4. On January 2, 2020, The Retail Auto Parts Company received a

notice from its primary supplier that effective immediately, all wholesale
prices will be increased by 10 percent. On the basis of the notice, Retail
Auto Parts revalued its December 31, 2019 inventory to reflect the higher
costs. The inventory constituted a material proportion of total assets;
however, the effect of the revaluation was material to current assets but not
to total assets or net income. The increase in valuation is adequately
disclosed in the footnotes.
5. A CPA has completed her audit of the financial statements of a bus

company for the year ended December 31, 2019, the company depreciated
its buses over a 10-year period. During 2019, the company determined that
28
a more realistic estimated life for its buses was 12 years and computed the
2019 depreciation on the basis of the revised estimate. The CPA has
satisfied herself that the 12-year life is reasonable. The company has
adequately disclosed the changed in estimated useful lives of its buses and
the effect of the change on 2019 income in a note to the financial
statements.
6. E-lotions.com, Inc., is an online retailer of body lotions and other

bath and body supplies. The company records revenues at the time
customer orders are placed on the website, rather than when the goods are
shipped, which is usually two days after the order is placed. The auditor
determined that the amount of orders placed but not shipped as of the
balance sheet date is not material.
For each situation,

a) Identify which of the conditions requiring a deviation from a standard
modified opinion audit report is applicable, if any.
b) State the level of materiality as immaterial, material, or highly material.
If you cannot decide the level of materiality, state the additional
information needed to make a decision.
c) Given your answers in part a),b)., state the appropriate audit report.
TOPIC 11: AUDITORS LIABILITY
Learning Outcomes:
This topic will highlight the litigious environment in which the auditors operate and
the auditor’s legal liability to clients and third parties. After studying this topic you
should be able to amongst others:
• identify the parties that the auditor maintains a professional relationship

• identify the duties of an Independent auditor
• identify as to how the auditor can be held liable
• describe auditors' liability and related defenses
Required Reading:

Chapter 3
29
Review Questions
1. Explain the difference between a breach of auditor’s statutory duties and a

breach of their common law duties.
2. What three facts must a plaintiff prove before a court will award damages
against auditors for negligence?
3. A common type of lawsuit against CPAs (auditors) is for the failure to detect a
fraud. State the auditor’s responsibility for such discovery. Give authoritative
support for your answer.
4. Smith is the auditor for Juniper Manufacturing Corporation Ltd, a closely held
company that has a 30 June balance date. Juniper arranged for a substantial
bank loan that depends on the bank receiving, by 30 September, audited
financial statements that show a current ratio of at least 2 to 1. The loan to the
bank is identified in the engagement letter as the reason for the audit. On 25
September, just before the audit report was to be issued, Smith received an
anonymous letter on Juniper’s stationery indicating that a five-year lease was,
in fact, a capital (financial) lease. The letter stated that there was a secret
agreement with the lessor modifying the lease and creating a capital lease.
Smith confronted the managing director of Juniper, who admitted that a secret
agreement existed but said it was necessary to treat the lease as an operating
lease in order to meet the current ratio requirement of the pending loan and
that no one would ever discover the secret agreement with the lessor. The
managing director said that, if Smith didn’t issue his report by 30 September,
Juniper would sue Smith for substantial damages that would result from not
getting the loan. Under this pressure, and because the working papers
contained a copy of the five-year lease agreement that supported the operating
lease treatment, Smith issued his report with an unqualified opinion on 29
September.
In spite of the fact that the loan was received, Juniper went bankrupt within two
years. The bank is suing Smith to recover its losses on the loan, and the lessor
is suing Smith to recover uncollected rents.
REQUIRED:
Answer the following questions, setting forth reasons for any conclusions
stated.
30
a. Is Smith liable to the bank?
b. Is Smith liable to the lessor?
c. Is there potential for criminal action against Smith?
5. National Fertiliser Distributors Ltd is a broad-based chemical warehousing

and wholesaling company. It is reported to be carrying a very high level of
inventory in its audited balance sheet at the time a successful takeover offer is
made by Cornerd Holdings Ltd. Two months after the takeover, it is discovered
that those inventories National Fertiliser hold are considerably overvalued, and
that they don’t in fact possess the quantity of inventory claimed at the time of
the audit. In the court action subsequently file by Cornerd against National’s
auditors, the following matters are established in evidence.
The auditors didn’t attend all stocktakes at year-end. They were present at
those for Sydney-based operations of the company only. However, 50% of the
company’s inventory is purportedly held at its new Bathurst facility, and it is this
inventory that doesn’t in fact exist. The Sydney-based inventory is determined
to have been overvalued by approximately 35%. Although the auditors correctly
verified the quantity of Sydney stock, they accepted management’s valuation,
which didn’t take into account of considerable obsolescence. It is also raided
in the evidence that the auditors were subjected to considerable pressure by
National Fertiliser’s management to complete the audit within one month of the
balance date. The auditor had held this audit for the past six years and there
was no evidence of any previous misstatements of the value of inventory.
Cornerd asserted that they had relied on the audited financial statements, as
supplied to them by National Fertiliser, in making their takeover offer. There is
no evidence that the auditors were aware of this intended use of the accounts.
REQUIRED
Answer the following questions, providing your reasons for any conclusions
stated.
a. What is the probable extent of the auditors’ liability in this case ?
b. What possible defence(s) might the auditors employ?
31
TOPIC 12: PROFESSIONAL ETHICS
Learning Outcomes:
This topic will examine in detail the meaning and importance of auditor
independence. After studying this topic you should be able to:
• Distinguish ethical from unethical behavior in personal and professional

contexts.
• Resolve ethical dilemmas using an ethical framework.
• Explain the importance of ethical conduct for the accounting profession.
• Describe the purpose and content of the AICPA Code of Professional Conduct
• Apply the AICPA Code rules and interpretations on independence and explain
their importance.
• Understand Sarbanes-Oxley Act and other SEC and PCAOB independence
requirements and additional factors that influence auditor independence.
• Understand the requirements of other rules under the AICPA Code.
• Describe the enforcement mechanisms for CPA conduct
Required Reading:

• APB Ethical Standard 1-5
Auditor Independence
1. Why is it important that auditors are independent of the client they are auditing?
2. Identify the six (6) ‘threats’ to auditor independence as per the Ethical
Standards (ES1) and explain what each threat means and give example of
each.
3. What are the safeguards within Ethical Standards (ES2) to prevent auditors’
independence being compromised as a result of becoming financially involved
with an audit client?
4. Under ES2 is it possible for an audit partner to resign his position and accept
a salaried position at an audit client? If the partner accepts a role as a senior
executive or director what must the audit firm do?
32
5. What policies and procedures must audit firms establish under ES3 regarding
key audit partners and/or staff in senior positions that have a long association
with an audit client?
6. Under ES4 when is an audit firm regarded as being economically dependent

on an audit client? Why might this act as a threat to independence?
7. “The possible impairment of auditors’ objectivity and/or independence through

the provision of non-audit services to audit clients has been a highly
contentious issue for many years.” (Porter et al)
Comment on this statement using the provisions of ES5 to explain your answer.
Case Study
8. Discuss the possibility that in each of the cases described below, the audit firm
had impaired their independence or otherwise acted unprofessionally.
Case 1
Alpha Traders Berhad, a public listed company has been a client of your audit
firm for seven years. The audit senior and the audit partner remained
unchanged for the last six years and seven years respectively.
Case 2
Your audit firm discovered just before starting the audit of a public listed
company that a junior officer on the audit team inherited a substantial number
of shares in that company. As the number of shares held by the junior officer,
although considered substantial to the staff, was insignificant compared to the
company, your audit firm has decided not to take any action. At the same time
the audit partner knows very well that in view of the company’s excellent
results, the share price would rise when the company’s results were announced
and think it was not fair to ask the staff to now dispose of the shares.
Case 3
Your audit firm has been asked to continue to prepare the financial statements
as in previous years of one of its client, which is a public listed company.
Case 4
33
Your audit firm in its management letter to its client had advised them of the
very poor controls in their current computer system. Consequently, the
company has decided to appoint your audit firm’s IT consultancy department
to design a totally new computer system to be installed in the company.
Case 5
One of your audit firm’s clients plans to hold an evening reception at a hotel
where they will present their listing arrangements to banks and existing major
shareholders. The client has asked the audit senior and the audit partner to
attend this meeting to represent your audit firm.
Case 6
A public listed company that was in dispute with its existing auditors who were
proposing to issue a qualified auditors’ report because of disagreement over
stock valuation, has requested your audit firm for a second opinion on the
issue. Based on the evidence provided by the company, your firm’s technical
partner informed the company that its accounting treatment was correct.
Shortly afterwards the company decided to terminate its existing auditors and
in its place has invited your audit firm to accept nomination as auditors. In the
meantime the reply from the existing auditor to your firm’s letter of enquiry on
the valuation issue made it clear that the stock valuation dispute was not as
straightforward as the company had made it out to be.
Case 7
Due to a serious health problem the Chief Accountant of a public listed

company was unable to work for eight months. The company has requested
your audit firm to allow your senior audit manager who was at that time in
charge of the audit team for the prior year’s audit and was about to finalise the
audit, to take over the position of the Chief Accountant for a period of about six
months. As she was very familiar with the company’s management accounting
system, your audit firm acceded to the request.
END OF STUDY GUIDE
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Module Study Guide

Undergraduate Business Program

Audit and Assurance

August Semester 2023

• Specifically, note the learning outcome for each of the topic.

Arens, Elder, Beasley and Hogan, Auditing and Assurance Services – An

1. Cosserat et al, Modern Auditing, 5th. Edition, Wiley

3. Understanding Auditing in Malaysia (2006), Shaari Isa (Pearson, Prentice

1 Introduction – Why Audit is Important, Value of Audit

Audit planning and materiality

4 Assessing the risk of material misstatement

7 Acquisition and payment cycle

8 Sales and receivables cycle

9 Assessing & responding to fraud risks

• Define auditing and understand why audit is needed

Recommended Additional Reading:

• Auditing, Assurance Services & Ethics in Australia, Arens, Best, Fiedler

TUTORIAL DISCUSSION QUESTIONS

1. Explain the relationships among audit services, attestation services, and

3. What are the differences and similarities in audits of financial statements,

4. Explain what is (external) auditing?

5. Busch Corporation has an existing loan in the amount of $6 million with an

• Calculate Busch Corporation’s annual costs under each loan agreement

e. Explain how strategic understanding of the client’s business may increase

6. Financial statement audit

WorldCom, America’s second largest long distance phone company, went

“WorldCom’s chief executive, John Sidgmore, blamed the company’s former

a. What are the accounting rules for deciding if an item is an asset or

c. What is an external financial statement audit? (7 marks)

d. Why are external financial statement audits needed? (5 marks)

TOPIC 2: THEORETICAL FRAMEWORK – THE AUDIT PROCESS

• the distinction between external and internal auditors

Recommended Additional Reading:

• Auditing, Assurance Services & Ethics in Australia, Arens, Best, Fiedler

TUTORIAL DISCUSSION QUESTIONS

2. Distinguish between auditing standards and generally accepted accounting

3. Distinguish between management’s and the auditor’s responsibility for the

Describe the audit responsibility to consider compliance with laws and

You do not wish to be embarrassed by questioning your superior so you agree

6. The following are specific transaction-related audit objectives

Specific Transaction-Related Audit Objective

Management Assertion About General Transaction-Related Audit

a. Explain the differences among management assertions about classes of

c. For each specific transaction-related audit objective, identify the appropriate

TOPIC 3: THE AUDIT APPROACH – PLANNING USING THE

• understand why audit planning is essential

Recommended Additional Reading:

• Auditing, Assurance Services & Ethics in Australia, Arens, Best, Fiedler

TUTORIAL DISCUSSION QUESTIONS

1. What are the benefits derived from planning audits?

2. Describe the eight major steps in planning audits.

6. In your audit of Canyon Outdoor Provision Company’s financial statements, the

a. Define what constitutes a “related party.”

• explain what does sufficient appropriate evidence mean

Recommended Additional Reading:

• Auditing, Assurance Services & Ethics in Australia, Arens, Best, Fiedler

TUTORIAL DISCUSSION QUESTIONS

4. Explain the meaning and concept of materiality in relation to misstatements or

5. Explain the role of materiality within the audit.

a) MKZ Berhad purchased a RM45,000 non-current assets which was

b) A customer of Alam Berhad went into liquidation on 11 May 2015. The

Profit before tax for the year was RM10 million.