CONFIDENTIAL 1 AC/JUL 2022/AUD689

UNIVERSITI TEKNOLOGI MARA

FINAL ASSESSMENT

COURSE : AUDIT AND ASSURANCE SERVICES

COURSE CODE : AUD689
ASSESSMENT : JULY 2022
TIME : 3 HOURS

INSTRUCTIONS TO CANDIDATES

1. This question paper consists of five (5) questions.

2. Answer ALL questions in the Answer Booklet. Start each answer on a new page.

3. Please check to make sure that this examination pack consists of :

i) the Question Paper

4. Answer ALL questions in English.

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

This examination paper consists of 7 printed pages
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CONFIDENTIAL 2 AC/JUL 2022/AUD689

QUESTION 1

A. Puan Sally joined as an audit manager at Faisal & Partners early this year. She was an
experienced audit senior from one of the big four audit firm. She was recently assigned
to audit Perfect Clean Bhd for the financial year ending March 31, 2022. Faisal &
Partners has audited the company for several years. Puan Sally assessed the audit
documents and had an initial discussion with the head of finance, Encik Sufian. Based
on the discussion, the following issues were revealed:

i. Faisal & Partners is the tax agent of Perfect Clean Bhd and a personal tax agent
for Encik Sufian. Perfect Clean Bhd was billed for all the services performed by
Faisal & Partners, including audit and consultancy services.

ii. At their first meeting, Encik Sufian informed Puan Sally that Perfect Clean Bhd
intends to establish a new website to provide online sales to its clients. He has
requested assistance from Faisal & Partners in designing and implementing the
website and online sales system.

iii. Bard Associates has performed a due diligence audit for Perfect Clean Berhad for
a possible merger exercise with one of the most reputable hygiene companies in
Japan in the middle of this year. Bard Associates allows Faisal & Partners to
access the working papers. There was a mountain of work done in the sales and
expenses area by Bard Associates. Faisal & Partners were so relieved that they
decided to fully rely on the work done by Bard Associates for these sections.

iv. The audit team was invited to attend the Perfect Clean Bhd annual dinner while
doing the field audit. The whole team attended the annual dinner and was
surprised to receive RM1,000 hypermarket coupon as a gift for each of the team
member.

Required:

Comment on the ethical and professional issues relating to MIA By-Laws (on
Professional Ethics, Conduct and Practice) arising from the scenarios above and
recommend actions required of Faisal & Partners to maintain their ethics and
professionalism.

Provide your answers using the format below:

No Ethical and Professional Issues Recommendation

(15 marks)

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B. The International Standards on Quality Control 1 (ISQC1) is closely related to but distinct
from the International Standards on Auditing 220 (ISA220). Both standards relate to
quality control - ISQC1 is established for the entire firm, whereas ISA220 is applicable
to individual audit engagement.

Required:

i. Explain two (2) reasons why the auditor has to provide quality audit services.
(4 marks)

ii. Explain two (2) quality control policies and procedures for human resources at the
firm level as set out in ISQC1.
(3 marks)

C. Star Technology Berhad is a company involved in supplying electrical components to

electrical factories all over Malaysia. In order to expand its business, the company
applied for a RM600,000 loan facility from Standard Merchant Bank. The bank requested
for the audited financial statements of the company as one of the main documents to
support the loan application. Star Technology Berhad provided the bank with the latest
audited financial statements for the year ended 31 December 2021 which was audited
by Radzi & Co.

The bank had approved the loan application after performing a credit analysis. For the
first few months after loan disbursement, Star Technology Berhad had no problem in
paying the loan in accordance with the payment schedule. However, Star Technology
Berhad started to default on subsequent payments due to cash problems.

The bank had then discovered that Star Technology Berhad suffered damages as
claimed by one of its customers, which was not duly reflected in the audited financial
statement presented to the bank. Standard Merchant Bank accused the auditor of
negligence and sued the auditor for their losses.

Required:

Evaluate whether Radzi & Co is liable to Standard Merchant Bank.

(8 marks)
(Total: 30 marks)

QUESTION 2

A. During the audit planning stage, you need to consider the audit risk and the level of
materiality deemed significant to discriminate between important matters and those of
unimportant ones. Your team of auditors consist mostly newly recruited staff who are
still unclear about the relationship between audit risk, levels of materiality, and the
amount of audit evidence to be obtained. They need a briefing to remind them of the
relationships between these variables.

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Required:

Explain to the new audit staff:

i. the relationship between audit risk and materiality.

ii. the relationship between audit risk and audit evidence.

(7 marks)

B. During the audit fieldwork, it was discovered that there were five misstatements being
classified as minor misstatements by the newly recruited audit staff and therefore should
be ignored for the purpose of expressing an audit opinion later. However, after a review
by the audit manager, the five minor misstatements must be re-classified as material
misstatements because the client has not satisfied the bank loan requirements and the
issues involving embezzlements by the accounts executive and storekeeper have not
been settled despite prior year audit advice.

Required:

Misstatements that are small in amount can still be considered material in view of their
qualitative nature. Discuss this statement.
(8 marks)
(Total: 15 marks)

QUESTION 3

You are the auditor of Mechamachines Engineering Bhd (MEB), a listed company, for the year
ended 31 December 2020. In February 2021, you have completed the audit of trade payables
and other liabilities for the company. Then, you are going to proceed in auditing contingent
liabilities and subsequent events. The company management have prepared and submitted
their representation letter as required for the audit purposes.

In addition, during the audit fieldwork, you have identified material situations as follows:

i. On January 16, 2021, a lawsuit was filed against MEB for a patent infringement action.
In the opinion of MEB's attorneys, there is a reasonable possibility of a significant loss
to MEB.

ii. On February 19, 2021, MEB settled a lawsuit out of court that had originated in 2015
and is currently listed as a contingent liability.

iii. On February 2, 2021, MEB suffered losses due to flash flood amounting to RM100,000.

iv. On April 7, 2021, you discovered that a debtor of MEB went bankrupt on January 22,
2021.

Required:

a. Identify two (2) procedures commonly conducted to audit contingent liabilities.

(4 marks)

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b. Explain four (4) specific matters that should be included in a client representation letter.
(8 marks)

c. In each of the situations (i - iv) above, justify the appropriate treatment that should be
taken by MEB on their financial statements.
(8 marks)
(Total: 20 marks)

QUESTION 4

The computerised information system (CIS) leads to significant impact on auditing and
auditors in two areas: the internal control structure and the use of the computer as an audit
tool.

Required:

a. Explain how CIS can improve the client’s internal control system.
(4 marks)

b. Explain three (3) approaches auditor may use to obtain an understanding of client’s
general and application controls.
(6 marks)
(Total: 10 marks)

QUESTION 5

Asli Linen Sdn Bhd (Asli Linen), a retailing company specializing in modest clothing set up 7
years ago, has appointed Shah & Shah, a Chartered Accountant to perform the audit of the
company’s financial statements. During the audit for the year ended 31 December 2021, you
were informed by the managing director that the company has recently lost a major
government contract. You are aware that Asli Linen’s projections include a fifty percent of cash
inflows from this contract. Recently, the company has also been experiencing some cash flow
issues and extended their credit facility in order to pay day-to-day expenses. The following
details are provided to assist you in assessing whether the going concern assumption is
appropriate for Asli Linen.

Significant accounting ratios:

Year ended Year ended

31 Dec 2020 31 Dec 2021
Gross profit (%) 21.20 18.70
Other expenses: sales (%) 13.40 15.30
Net profit (%) 0.40 (1.70)
Current ratio (%) 0.70 0.83
Liquidity ratio (%) 0.37 0.30
Gearing (%) 9.55 20.78
Stock age (months) 2.79 3.60
Debtors age (months) 2.28 3.57
Creditors age (months) 3.54 6.09

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A few years prior to the COVID-19 pandemic, Asli Linen’s management intended to expand
its business in the future. To further automate and streamline the bookkeeping process, the
management is considering upgrading its accounting system to use artificial intelligence (AI).
The management believes that staff expenses can be significantly decreased with the
installation of the AI accounting system. To conduct the audit, you are reviewing Asli Linen’s
internal control framework. The information relating to the company’s purchase and payment
cycle is as follows:

Purchase & Payment Cycle

Husin, the audit senior in-charge, found only one signature on the procurement of raw
materials costing more than RM100,000 during the audit of purchase transactions. Other than
that, there are no security measures in place, so anyone from the public can enter the
warehouse. Shah & Shah also discovered that the only person responsible for ordering and
receiving supplies for Asli Linen is Encik Kamal, the purchase manager. Encik Kamal does
not perform any checks on the goods received. He immediately signed the receiving report
from the vendor.

In addition, Tajuddin, a junior auditor, discovered that one of Asli Linen cashiers had pilfered
RM1,500 for the past 4 months. Even though the omission of the transaction was not
supported by any documents, he decided that the amount was immaterial and did not probe
further. He also failed to discover the overstatement of goods because he disregarded the
audit programme provided by the audit manager. As such, there is no further review of
Tajuddin’s work. After the completion of the audit, Shah & Shah delivered 10 copies of the
audited financial statements to Asli Linen. The audit firm was aware that Asli Linen required
that copies of the financial statements are to be distributed to the banks and other potential
lenders. One of the major suppliers, Awais Textiles Sdn Bhd (Awais), relied on the audited
accounts and supplied RM300,000 worth of goods to Asli Linen on credit. Awais had analysed
the audited financial statements and discussed the report with his accountant before allowing
Asli Linen to buy on credit. When Asli Linen failed to pay the amount owed due to bankruptcy,
Awais decided to recover his loss from Shah & Shah.

Required:

a. Explain the relationship between Shah & Shah and Awais Textiles Sdn Bhd, based on
the auditor’s duty of care. Students may provide a common law case as an example.
(6 marks)

b. Suggest four (4) possible audit risks and their respective control measures based on the
case of Asli Linen Sdn Bhd. You may present your answer following the format below.

Audit Risk Control Measures/ Recommendation

(8 marks)

c. Based on the information provided in the case of Asli Linen Sdn Bhd, develop three (3)
financial indicators which you would consider in determining whether the company is
experiencing going concern problem.
(6 marks)

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d. Identify two (2) potential risks to Asli Linen Sdn Bhd in operating in Computerised
Information System (CIS) environment.
(5 marks)
(Total: 25 marks)

END OF QUESTION PAPER

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