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AC/OCT 2009/AUD360/390/394

UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION

COURSE COURSE CODE EXAMINATION TIME

AUDITING AUD360/390/394 OCTOBER 2009 3 HOURS

INSTRUCTIONS TO CANDIDATES This question paper consists of three (3) parts PART A:Section 1 (10 Questions) :Section 2 (10 Questions) PART B (4 Questions) PART C (1 Question)

Answer ALL three (3) parts Answer all PART A, Section 1 in the Objective Answer Sheet. Answer PART A, Section 2 in the True/False Answer Sheet. Answer THREE (3) questions only from PART B in the Answer Booklet. Answer ALL questions from PART C in the Answer Booklet. Start each answer on a new page.

in)

iv)

Do not bring any material into the examination room unless permission is given by the invigilator. Please check to make sure that this examination pack consists of: i) ii) iii) iv) the Question Paper an Answer Booklet - provided by the Faculty a True/False Answer Sheet - provided by the Faculty an Objective Answer Sheet - provided by the Faculty

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

This examination paper consists of 11 printed pages
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CONFIDENTIAL PART A

AC/OCT 2009/AUD360/390/394

SECTION 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.

A typical objective of a test of control is to determine whether A. B. C. D. internal control procedures are adequately reviewed by management. financial information is presented in accordance with the financial reporting standard. financial statements present fairly the results of operations. important procedures are functioning effectively and efficiently.

2.

Evidence is relevant if it A. B. C. D. corroborates with client assertions. can be trusted. relates to the audit objective being tested. is received from an independent third party.

Which of the following best describes why an auditor needs to obtain an understanding of a prospective client's background? A. B. C. D. To To To To serve as a basis for providing business advice. determine the number of hours for the audit. evaluate the risk of material misstatements. evaluate the predecessor auditor's work.

If material, which of the following would constitute a fraud? A. B. C. D. Mistakes in the application of accounting principles. Clerical mistakes in the accounting data underlying the financial statements. Misappropriation of an asset or group of assets. Misinterpretation of facts that existed when the financial statements were prepared.

An auditor would most likely be able to identify slow-moving inventory through A. B. C. D. inquiry of the sales personnel. inquiry of the accountant. review of purchase orders. review of perpetual inventory records. CONFIDENTIAL

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6.

Which of the following audit procedures would most likely assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? A. B. C. D. Reading the minutes of meetings of the shareholders and the board of directors. Comparing the market value of property to amounts owed on the property. Reviewing lease agreements to determine whether leased assets should be capitalised. Inspecting title documents to verify whether any assets are pledged as collateral.

7.

Which of the following audit techniques would provide an auditor with the least assurance on the operating effectiveness of an internal control activity? A. B. C. D. Inquiry of client personnel. Inspection of documents and reports. Observation of client personnel performing his duties. Obtaining confirmation from a third party.

8.

Analytical procedures performed in the final review stage of an audit would generally include A. B. C. D. reassessing the factors that assisted the auditor in deciding on the preliminary materiality level and audit risks. considering the adequacy of the evidence gathered in response to unusual balances identified in planning. summarising uncorrected misstatements specifically identified through test of details of transactions and balances. calculating uncorrected misstatements estimated through audit sampling.

9.

The audit engagement letter would most likely include a statement regarding A. B. C. D. management's responsibility to provide certain written representations to the auditor. conditions under which the auditor may modify the preliminary judgement about materiality. internal control activities that would reduce the auditors' assessment of control risk. materiality matters that could modify the auditor's preliminary assessment of fraud risk.

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Which of the following would an auditor considers in his audit plan when he reviews the client's accounting policies and procedures? A. B. C. D. Method of sampling to be used. Preliminary judgement about materiality levels. Nature of reports to be rendered. Understanding the client's operations and business. (Total: 10 marks)

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SECTION 2 - TRUE OR FALSE QUESTIONS 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 maintain an attitude of professional skepticism throughout the audit, recognising the possibility that a material misstatement could exists due to fraud. Bank reconciliation statement is a form of preventive control measure that may prevent the possibility of overpayment to a supplier. Accepting appointment as auditor to audit the financial statements prepared by the same firm would cause a self-interest threat and might impair the auditor's independence. Management letter is prepared by the management and addressed to the auditor in response to weaknesses highlighted during the audit. One of the inherent limitations of internal controls is that most control procedures tend to be directed at routine transactions rather than non-routine transactions. The primary objective of an operational audit is to deter fraudulent activities within an organization. The auditor should date the audit report as of the cut-off date of the client's financial statements. Sales invoice should be prepared not later than the date of delivery of the goods. An auditor may disclose a client's confidential information in the course of a legal proceeding. Independence in auditing means taking an unbiased view in the performance of audit tests, evaluation of the results and issuance of audit report. (Total: 10 marks)

2.

3.

4.

5.

6.

7.

8. 9.

10.

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CONFIDENTIAL PARTB

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Answer only THREE (3) questions from this part. QUESTION 1 A. Section 166A Companies Act 1965 states that a company should prepare its financial statements in accordance with the relevant accounting standards. Section 169 of the same act also requires financial statements be duly audited before being presented at the annual general meeting. Required: i. Explain the benefits of an audit performed by an approved company's auditor? (3 marks) An auditor can only provide reasonable assurance on the truth and fairness of the financial statements. Explain the term 'reasonable assurance'? (3 marks) Explain the significance of auditing standards to an auditor in performing his duties. (3 marks)

ii.

iii.

B.

Auditor needs to seek audit evidence regarding each of the financial statement assertions expressed by the management. Required: i. For each of the following transaction-related audit objectives, state the appropriate management assertion being tested: a. Business transaction is recorded on the date the transaction takes place. All transactions that should be recorded in the journals have actually been included. Recorded transactions are stated in the enterprise's books at the correct amount. Recorded transactions are properly included in the master files and are summarized correctly. (4 marks)

b.

c.

d.

ii.

Suggest the appropriate course of action that the auditor should take if he discovers misappropriation of asset by the client's staff. (2 marks)

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C.

State the type of audit opinion in each of the following extracts taken from the auditor's report. You are NOT required to give reasons for the opinion chosen. i. Without qualifying our opinion, we draw attention to Note X to the financial statements. The company incurred a net loss of RMXXX during the year ended 31 December 20XX and, as of that the company's current liabilities exceeded its total assets by RMXXX. In our opinion, except for the effects on the financial statements of the matter referred to in the preceding paragraph, the financial statements Because of the significance of the matters discussed in the preceding paragraph, we do not express an opinion on the financial statements. In our opinion, because of the effects of the matters discussed in the preceding paragraph, the financial statements do not give a true and fair view of the financial position In our opinion, the financial statements which have been prepared under the historical cost convention are properly drawn up in accordance with the provisions of the Companies Act, 1965 and applicable approved accounting standards so as to give a true and fair view of (5 marks) (Total: 20 marks)

ii.

iii.

iv.

v.

QUESTION 2 A. Maloo Sdn Bhd (Maloo) started business in January 2008 and planned to close its accounts at the end of the year. Knowing that Maloo was looking for an auditor, Arip, a Chartered Accountant approached Ifran (director of the company) to seek an appointment as the auditor for the company. Arip was directly involved in the design and implementation of Maloo's internal control system and was responsible for the maintenance of Maloo's accounting records during the first year of the company's operations. He was however, not involved in the preparation of the financial reports. Arip explained to Ifran that his firm might give substantial discounts on the fee for the first year of the audit because he was familiar with Maloo's accounting records and as such, many of the ordinary audit procedures were deemed unnecessary. Arip was later appointed as the first auditor of the company and a letter of engagement was issued prior to the audit. During the audit, Arip had assigned Sallimah, a vacation trainee from UiTM, to carry out most of the audit procedures based on a pre-prepared audit programme. Arip was impressed with Sallimah's ability in completing the assignment ahead of the deadline. Ifran was satisfied with the unqualified report issued upon completion of the audit and introduced Arip to another company, Looma Sdn Bhd (Looma). Arip paid 15 percent of the audit fees earned from Looma to Ifran for the referral.

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Required: (i) Identify any four (4) circumstances where Arip may violate the MIA By-laws (On Professional Ethics, Conduct and Practice). For each circumstance, state the By-laws violated and justify the reasons for the violation. Present your answer using the following format: Circumstances (ii) | By-laws violated Reasons for violation (12 marks)

Explain the circumstances when an auditor may be appointed based on the provisions of Section 172 Companies Act 1965? (4 marks)

B.

It is important for an auditor to prepare an audit programme as part of the audit planning. Required: What is an audit programme and state two (2) disadvantages of using a preprepared audit programme? (4 marks) (Total: 20 marks)

QUESTION 3 A. ISA 315 "Understanding the entity and its environment and assessing the risk of material misstatement" requires the auditor to obtain an understanding of the entity and its environment, including its internal control, sufficient to identify and assess the risks of material misstatement of the financial statements whether due to fraud or error, and sufficient to design and perform further audit procedures. Required: (i) Define inherent risk and control risk. Provide an example for each type of risks. (4 marks) Explain with examples, any three (3) audit techniques and its procedures that an auditor should perform to obtain an understanding of the entity including its internal control. (6 marks) What are the effects if an audit is not properly planned? (2 marks)

(ii)

(iii)

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B.

ISA 520 "Analytical Procedures" states that the auditor should apply analytical procedures at the planning and overall review stages of the audit. Required: i. Define analytical procedures. (2 marks) ii. How should the auditor respond to the findings from analytical procedures? (2 marks) State two (2) examples of analytical procedures that may be carried out in auditing accounts receivable balances. (4 marks) (Total: 20 marks)

iii.

QUESTION 4 ISA 500 (Revised) on "Audit Evidence" states that the auditor should use assertions for classes of transactions, account balances, and presentation and disclosures in sufficient detail to form a basis for the assessment of risks of material misstatement and the design and performance of further audit procedures. Required: a. Explain the meaning of 'sufficiency' and 'appropriateness' in the context of audit evidence. (4 marks) Give an example of audit evidence under each of the following categories: Evidence Evidence Evidence Evidence obtained from independent sources outside the entity; generated internally by the entity; obtained directly by the auditor; obtained indirectly by the auditor (4 marks) For each of the following audit objectives, suggest an appropriate audit procedure that may be performed by the auditor: Bank balance as per the company's record is accurate; Inventory items in the inventory listing schedule exist; Current year acquisitions of property, plant and equipment exist; The client has rights to current acquisitions of property, plant and equipment; Accounts receivable in the trial balance is accurate; Accounts receivable is stated at net realisable value. (9 marks)

b.

i. ii. v.

i. ii. v. v. vi.

d.

Distinguish a negative confirmation letter from a positive confirmation letter. (3 marks) (Total: 20 marks)

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CONFIDENTIAL PART C - COMPULSORY QUESTION QUESTION 1

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You are the auditor of Apocono Sdn. Bhd, a medium-sized enterprise that sells exportquality vegetables in the southern region of Malaysia. During the course of the audit, you have reviewed the company's sales internal control system. Sales Department Lina, the sales supervisor is responsible for receiving customer orders that are made either through e-mail or telephone call. Upon receipt of an order from the customer, regardless of whether it is on cash or credit term, Lina prepares a multi-copy pre-numbered sales order form. After indicating her approval by signing on the sales order, Lina sent a copy of the form to the respective customer for sales order confirmation and also copies to the personnel in the warehouse and accounts department. A copy is also filed by Lina according to its pre-printed serial number. Warehouse Jing Li is the only storekeeper who oversees the movement of inventories in the company. Upon receipt of the sales order, Jing Li immediately prepares the shipping advice and delivery note. He then stamps the sales order with the date on which the goods will be shipped and files the sales order according to dates. The goods are then sent to the customer, together with the shipping advice and delivery note. Inventory count is deemed unnecessary as obsolete vegetables are immediately scrapped or sold at lower prices to prevent further losses. Accounts Department Upon receiving the credit sales order, Siva, the assistant clerk checks the customer's outstanding balance. If a particular order is within the customer's credit limit, Siva prepares a multi-copy pre-numbered invoice for the customer and the accounts executive. If the customer order exceeds his credit limit, Siva will return the sales order to Lina. After receiving the approved sales order and invoice, Idris, the Accounts Executive, matches the information stated on the two documents and files them by customer in an open file in which the monthly statement of accounts is generated. He adds the total of the sales journal daily and cash receipt journal weekly. He then posts the totals to the general ledger. Upon receipt of the invoice, Celestina, the Collection Clerk updates the sales journal and the accounts receivable master file. The invoices are then filed by invoice number. Celestina also receives customers' cheques directly from the mail clerk. After recording the cheques received in the cash receipt journal, she deposits the cheques into the bank. At the end of each month, Celestina prepares a bank reconciliation statement since all the cash records are maintained by her.

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Required: a. Identify six (6) control weaknesses in the above system and suggest a recommendation to overcome each of the weaknesses identified. (12 marks) Explain three (3) audit procedures to identify errors in the above system. (6 marks) c. State two (2) methods to understand a company's internal control system. (2 marks) (Total: 20 marks)

b.

END OF QUESTION PAPER

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