GROUP 1

GROUP 1 (1 Centre) st

Group Members:
1. Auni Bahriah Binti Mohamad Shobbri (CN2200143)
2 .Elaine Chow Wan Leng (CN2000004)
3 .Lau Siaw Lin (CN2100051)
4 .Nageswary A/P Kandiah (CN2200101)
5 .Sam Kah Chun (CN2100012)
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6 .Wong Yoke Teng (CN2200072)
 INTRODUCTION
 Dan, Din & Co. (DDC), are the external auditors of Cheap & Good Sdn. Bhd. (CGSB) since 2010.
 CGSB are discount retailers which sell a vast variety of low-priced items (usually paid in cash).
 CGSB has 10 branches in the Klang Valley & 30 other branches widely located throughout the country.
 We are the audit senior in DDC & are about to commence the audit of CGSB for the year ended 31 December
2022.
 CGSB opened its first shop in 2005 & became very popular, especially among price sensitive consumers.
 Inventory is considered a particularly high-risk area on this audit.
 CGSB engages a professional inventory counting company (InventCount Sdn Bhd) to attend every branch at the
close of business on 31 December.
 There is also reports from the audit personnel who attended the inventory counts for the current financial year 31
December 2022 audit in branches where a representative from CGSB was not present during previous years’
counts.
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 Question A

A. Examine critically the audit risks at both the

financial statement level and the assertion (or
account balance) level in relation to the audit of
CGSB.

(12 marks)
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A. Examine critically the audit risks at both the financial statement level and the assertion (or account balance) level
in relation to the audit of CGSB.

In relation to the audit of CGSB, the audit risks at both the financial statement level that can be identified is the inherent risk

and control risk.

1. Inherent risk at the financial statement level:

Inherent risk is the risk that a misstatement will occur due to environmental influence and the nature of the company and the

nature transaction. The errors will occur ignoring the control.

 CGSB is a high-volume retailer operating in a fiercely competitive sector with relatively low profitability.

 It can be vulnerable to outside shocks like exchange rate fluctuations throughout the year. It is also susceptible to being

harmed by changes in the nature of business because the type of firm is more likely to experience irregularities in financial

reporting. Any of these can result in it having extra inventory and having to get rid of it.

 Being a cash business vulnerable to theft and/or incorrect recording.

 CGSB sells inexpensive items that are typically paid in cash. To guarantee the correctness and thorough recording of all

cash balances, strong controls are required. 4

A. Examine critically the audit risks at both the financial statement level and the assertion (or account balance) level
in relation to the audit of CGSB.

2. Control risk at the financial statement level:

Control risk is the risk that a misstatement that could occur in an account balance or class of transactions and

that could be material either individually or when aggregated with misstatement in other balance or class, would

not be prevented or detected and corrected on timely basis, by the accounting and internal control systems.

 It always runs the risk of having inaccurate inventory valuations.

 CGSB inventory counters (InventCount Sdn Bhd) completed a lot of work that violated the count instructions,

which will have an impact on the financial statement (inventory, cash, and purchase), such as fraud or

misstatement.

 The counter must inspect every item to prevent theft of inventory by workers who were present during

inventory counting. There is always a risk, and the expense of controls will be a concern given the generally

modest worth of individual things in inventory.

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A. Examine critically the audit risks at both the financial statement level and the assertion (or account balance) level
in relation to the audit of CGSB.

2. Control risk at the financial statement level:

 The likelihood is that a sizeable section of the workforce at the shops will be part-timers or employees making

at or near minimum wage.

 As these employees have no actual "stake" in the company and some may not even view termination as very

serious, control over them will be more difficult.

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A. Examine critically the audit risks at both the financial statement level and the assertion (or account balance) level
in relation to the audit of CGSB.

On the other hand, the detection risk can be recognized at the assertion or account balance level.

3. Detection risk at assertion or account balance level:

• Detection risk is the risk that auditor’s substantive procedures do not detect a misstatement that exist in an account balance or class of

transactions that could be material either individually or when aggregated with misstatements in other balance.

Inventory, cash, and accounts payable are likely the three riskiest balances at the account balance level.

Accounts payable accuracy may be a problem, particularly if individual branches hold accounts with regional vendors. To guarantee

that the financial accounts contain accurate valuations, strict controls will be necessary.

The client seems to be concerned about the audit fee.

This puts the auditor at risk for detection since it suggests that the auditor is constantly worried about the expense of gathering audit

evidence.

The client's behaviour in this regard is rather troubling. Even the client's honesty can be questioned by this, or perhaps the client is just

constantly looking for ways to save costs.

But, since we are now in our second decade as auditors, we should have a solid foundation of cumulative auditing knowledge and

experience, which helps to reduce the risk a little.

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 Question B

B. Critically analyse and discuss DDC’s approach

to the audit of CGSB’s inventories for both the
year ended 31 December 2022 and for previous
years.

(12 marks)
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B. Critically analyse and discuss DDC’s approach to the audit of CGSB’s inventories for both the year ended 31
December 2022 and for previous years.

DDC Junior Auditor.

I. Lack of necessary expertise

 Audit junior may not effectively identify and assess the risks of material misstatement in the inventory account
balances. This could result in a higher risk of errors and omissions in the audit performed.

II. Inexperienced audit junior

 Audit of a critical account such as inventories may negatively impact the overall quality of the audit and erode
confidence in the audited financial statements.

 They may not have the necessary skills to obtain sufficient and appropriate audit evidence to support their conclusions
and recommendations, leading to a higher risk of audit findings being disputed by management or other stakeholders.

III. Lack familiar with the relevant accounting standards, industry practices, and regulatory requirements

 They may make incorrect assumptions or judgments in their audit work, which could result in incorrect
conclusions being drawn and incorrect audit opinions being issued. This could damage the reputation of
the audit firm and the audit profession as a whole. 9
B. Critically analyse and discuss DDC’s approach to the audit of CGSB’s inventories for both the year ended 31
December 2022 and for previous years.

Counters from InventCounter Sdn Bhd

I. Lack in understanding of the CGSB's operations and inventory systems

 Lead to incorrect counting or an incomplete count, which can result in an over/understatement of the inventory
balance. Additionally, there may be a lack of control over the inventory counting process, as the independent firm is
not directly overseen by the client or the auditors

II. Potential increase of cost

 This could be a concern for CGSB, as it is noted in the scenario that the client may be sensitive to any increase in the
audit fee.

III. Risk of conflict interest

 InventCounter Sdn Bhd may have prior business relationship with CGSB. This could lead to bias in the inventory
count and potentially impact the reliability of the information provided by the firm.

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B. Critically analyse and discuss DDC’s approach to the audit of CGSB’s inventories for both the year ended 31
December 2022 and for previous years.

Lack of
Independence
Lack of
understanding
of client's Limited scope
business and of work
inventory
systems

Summary of the
Limited impacts associated
substantive with DDC’s approach Reputation
testing to the audit of
CGSB’s inventories

Inadequate
Reliance on
audit
prior audit work
documentation

Conflict of
interest

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 Question C

C. Recommend relevant additional work regarding

the existence of inventories, which may be
necessary in order to obtain sufficient,
appropriate evidence in respect of the year ended
31 December 2022.

(12 marks)
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 Question C

Physical inventory count at least once a year

 ISA 501 – Audit Evidence of Special Considerations for
Selected Items.
 Attending physical inventory count involves:
 To ascertain and evaluate inventory
 Perform test counts
 Observing management’s instructions
 Obtain audit evidence
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 Question C

 In this case of Cheap &Goods Sdn. Bhd.

o Serious issue in relation to existence and valuation of inventory
o Inventories are not open and checked?
“Sample should be open to check that the content correspond to inventory
records”
“As such, inventory may be overstated by treating the empty cartons as full
cartoons”
o Inventory on shelf by sold by date? “expiry date” was not checked
“Inventory remain on shelf could remain unsold and gone beyond (Sell by
date)”
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 Question C
Before the count
o Access previous year’s working paper and discuss with management
o Discuss timing of physical count
o Discuss inventory count arrangement and instructions
o Identify nature and volume of inventories
o Access internal control of inventory system – generate useful analytical review
o Inventories are protected against unauthorized person
o To check any others inventories held at third’s location
o Assistance of auditor’s expect – ISA 620
“Invent Count Sdn Bhd in breach of count instruction”

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 Question C
During the count
• Perform test counts
• Observe management’s instructions and the performance of procedures
compliance for record and control the physical inventory count results
• Year-end cut-off procedure
• Acquire audit evidence as to the reliability of management’s count procedures

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 Question C
During count, whether control procedures are observed
• Arranged and grouped together, and divided
• Movements of inventory
• Inventory count should be carried out by persons other than those normally
responsible for physical custody of the inventories
• Appropriate supervisory controls
• Spot check
• Inventory count sheets should be standardized and pre-numbered with dates
• Strict controls over the cut-off issues
• Appropriate procedures to identify, count and record slow moving, damaged
and obsolete inventories 17
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 Question C
After the Count
• Cut-off procedures
• Compare with the photocopied sheets and test-count made
• Follow up if identified any issues during the count and report to the
management if necessary
• To evaluate any significant differences between the physical count and the
perpetual inventory records

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 Question D

D. Evaluate Murali’s recommendation about the

audit fee in relation to inventories for the audit of
CGSB’s financial statements ended 31 December
2022.

(9 marks)

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D. Evaluate Murali’s recommendation about the audit fee in relation to inventories for the audit of CGSB’s financial
statements ended 31 December 2022.

Issue : Independence

Self-interest threats
 inappropriately influence auditor’s judgement and behaviour

 prioritize whether the audits that they perform are of the quality

 not reducing the audit fee but choose to reduce audit work

Lowballing
 setting audit fees below audit costs to better compete for large and prestigious clients

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D. Evaluate Murali’s recommendation about the audit fee in relation to inventories for the audit of CGSB’s financial
statements ended 31 December 2022.

Issue : Independence

Conclusion
 it is not considered ethically wrong to charge a low price

 auditor must ensure that the audits they perform are of the quality required by the auditing standards

 the reduction in audit fees does not call into question their independence

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 CONCLUSION
Risk Detection risk Issue

Inherent risk Control risk

Independence (audit fee)

Weaknesses and
Implications

Necessary expertise to identify

Inexperienced audit junior
and assess risks

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