AUD589 – JUNE 2018

SUGGESTED SOLUTION – AUD 589

JUNE 2018

QUESTION 1

a. Purposes of audit planning:

 To devote appropriate attention to important areas of the audit.
 To identify and resolve potential problems on a timely basis.
 To effectively and efficiently organize and manage the audit engagement.
 To select engagement team members with appropriate levels of capabilities and
competence.
 To direct and supervise engagement team members.
 To coordinate work to be done among the engagement team members.
 To assist in the review of the findings by the engagement team members.
(Any 6 purposes x 1 mark each = 6 marks)

b. Benefits of conducting ratio analysis for the analytical procedures:

 Ratio analysis makes it easy to grasp the relationship between various items and
helps in understanding the financial statements.
 Ratio analysis establishes the numerical or quantitative relationship between two
figures of a financial statement to ascertain strengths and weaknesses of the
company as well as its current financial position and historical performance.
 Ratio analysis helps the auditors to make an evaluation of certain aspect of a
firm’s performance and going concern prospect.
(Any 2 with explanation x 2 marks each = 4 marks)

c. Risks of material misstatements noted from the conversation:

 Lack of training during the two hours on operating the sales system could lead to
error.
o Lead to errors in the initial setting-up of the menu and prices.
o Employees not trained by the vendor, but trained by the two employees,
might make errors when using the system.
 Lack of accounting skills and segregation of duties.
o Account executive just recently appointed hence could lead to errors in
recording, since not familiar with the accounting system.
o Incompatible duties, authorization, record keeping and physical custody are
done by one person.
 The company operations are subject to regulations (JAKIM’s halal certification).
o Non-compliance with the regulation could result in litigations.
o Company might have to temporarily close the business and this could result
in writing off of spoilt perishable goods.
 The company depends on foreign kitchen workers on contract basis.
o Poor retention rates, might affect the completeness payroll registers.
o Attendance and overtime need to be closely monitored and approved in
order to avoid fraudulent claims.
 The cash are kept overnight for protection.

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o If the cash are not physically safeguarded, then they can be stolen,
damaged or misplaced.
o Company might require to write off the cash receipts and accounts
receivable for the stolen, damaged or misplaced cash.
(Any 5 with explanation x 2 marks each = 10 marks)
(Total: 20 marks)

QUESTION 2

A. Characteristics of good audit documentation:

 Each audit file should be properly identified with such information as the client’s
name, period covered, a description on contents, initials of preparer, date of
preparation and an index code.
 Audit documentation should be indexed and cross-referenced to aid in organizing
and filing.
 Completed audit documentation must clearly indicate the work performed. E.g.
notations on each schedule used.
 Audit documentation should include sufficient information to fulfill the objectives
for which it was designed.
 The conclusions that were reached about the segment of the audit should be
plainly stated in the audit documentation.
(Any 4 with explanation x 2 marks each = 8 marks)

B. Two factors that may affect reliability of external confirmations:

 The form of the confirmation
 Prior experience with the entity
 The nature of the information being confirmed
 The intended respondent
(Any 2 with explanation x 2 marks each = 4 marks)

C. a. Audit procedures for inventory:

 Observe the physical inventory stock count
 Examine the receiving and issuing activity
 Perform cut – off analysis
 Perform analytical procedure i.e. computation of related ratios
 Reconcile inventory count to inventory ledger
(Any 2 with explanation x 2 marks each = 4 marks)

b. The importance of auditor’s attendance during physical inventory stocktaking:

Attendance at stocktaking can provide evidence to the auditor in respect of the:
 Existence assertion
 Completeness assertion
 Valuation assertion
 Consideration of possible inventory obsolescence and deterioration
(Any 2 with explanation x 2 marks each = 4 marks)
(Total: 20 marks)

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QUESTION 3

a. The risk assessment procedures that Amri can perform:

 Analytical procedures
Amri had audited the client for 2 years. He should be able to apply his previous
experience about the company and the food industry to the preliminary analytical
procedures.
 Tour/site visit
Amri can perform site visit to study the organizational structure, and observes
the segregation of duties and the safekeeping of documents and records.
 Review of documentation
Internally, Amri can review the minutes of meetings, internal audit reports,
budgets and procedural manuals. Externally, Amri can read the publication
relevant to the food industry and reviews significant legislation and regulation
affecting the company.
 Discussion with management and staff and external parties
Internally, Amri can discuss with the management and staff, including the
internal auditors. Externally, Amri can discuss with the legal advisers and other
advisers that provided services to the company.
(Any 2 with explanation x 2.5 marks each = 5 marks)

b. The procedures for test of control to verify the completeness of the recorded
purchases:
 Review the numerical sequence of payment voucher recorded in the purchase
journal. Noted for any missing number and inquire whether the voucher was
appropriately cancelled.
 Review the numerical sequence of receiving report. Noted for any missing number
and inquire whether the receiving report was appropriately cancelled.
 Trace from duplicate receiving reports to purchase invoice. Noted for any goods
received but not invoiced by suppliers.
 Any other relevant answers.
(Any 3 with explanation x 2 marks each = 6 marks)

c. The control activities to improve the internal control of the purchase cycle:
 After preparing the purchase requisition, the clerk needs to get the approval from the
purchasing executive or manager. If the clerk simply prepares the document without
obtaining for approval, the purchases could be made for unnecessary items or could
lead to misappropriation of purchasing items.
 Receiving department should have a copy of purchase order. If not, the department
had no reference to verify the description and quantity of the goods received.
Therefore, the company could receive under shipment or even worst, a wrong
shipment.
 Payment voucher and supporting documents should be approved by an executive or
accountant instead of the clerk. A clerk has the responsibility to keep the documents
organized, but the approval is the responsibility of an executive or accountant.
Having access to both approval and recordkeeping would mean that the duty is not
properly segregated. Hence, poor segregation of duties can lead to misappropriation
of purchasing items.

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 The particulars in the statement of account must match with the particulars in the
accounts payable. The documents need to be checked for agreement. If there are
discrepancies, then reconciliation needs to be done. The possibility of reconciling
items could be for those items due to the timing differences between the date of
payment and the date of bank-in by the suppliers.
 Any other acceptable answers.
(Any 3 with explanation x 3 marks each = 9 marks)
(Total: 20 marks)

QUESTION 4
A. a. Imprest petty cash fund is commonly used to pay for small, routine and incidental
expenses. This account has a fixed debit balance, which is replenished should the
balance fall below certain amount.
(2 marks)

b. Objective of testing bank reconciliation statement:

 To substantiate that the balance of client’s bank/cash book agree with the bank
statement.
 To determine adjusting entries to reconcile two sets of records for cash/bank
transactions.
(Any 1 with explanation X 1.5 marks = 3 marks)

c. Audit procedures that can be performed for cash and bank balances:
 Confirm bank balances
 Verified bank reconciliation
 Counting cash on hand
 Performed cut off bank statement
(Any 3 with explanation x 2 marks each = 6 marks)

B a. Importance of maintaining a proper property, plant and equipment register:

 Assists in both short and long term planning: A well-prepared PPE register
presents a valuable planning tool to any business. This helps the
company to keep track of details of each PPE, including their date of
purchase and risk assessment.
 Helps in preventing fraud: Companies should have their PPE audited
regularly to check that the internal accounting control systems are
accurately reflecting the company’s PPE position. When there are
accurate controls in place, asset theft and the opportunity to lose assets at
service providers, customer sites etc. reduces significantly.
 Helps keep things organised: By tracking the movement of PPE, a
business can optimise the utilisation of their PPE including increased
billings. With a PPE register in place, an organisation’s assets become
safeguarded from any threats that would impact the business’ ability to
maximise revenue.
 Saves cost: A PPE register presents many cost saving opportunities for
most businesses. By understanding what assets you have on hand, this

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will prevent duplication of asset purchases thus improving cash flow and
profitability.
(Any 2 with explanation x 2 marks = 4 marks)

c.
(1 Analytical review procedures used in auditing property, plant and equipment:
 Compare prior-year balances in PPE and depreciation charges with current
year balances after consideration of any changes in the asset’s condition.
 Compute the ratio of depreciation charges to the related PPE.
 Compute the ratio of repair & maintenance expenses related to PPE.
 Compute the ratio of insurance expense to the related PPE.
 Review capital budget and comparison of the amount spent with amount
budgeted for PPE.
(Any 2 with explanation x 2.5 marks each = 5 marks)
(Total: 20 marks)

QUESTION 5

A. 1. The auditor should issue an audit report with a (qualified or disclaimer opinion) in
view that the auditors are restricted from performing the audit procedures and the
account receivables are potentially major customer of which any complaint from
these customers could lead to the company losing a material amount of
sales/assets.

2. The auditor should issue an audit report with a (qualified or adverse opinion)
since the applicable financial reporting framework such as IFRSs, requires
including a statement of cash flows among the financial statements. The auditor
is not required to prepare the statement of cash flows for disclosure in the audit
report.

3. If the information in the management report is not revised, the auditor should
issue an (emphasis of matter report describing the material inconsistency) in the
management report.

4. Orochimaru Bhd’s financial performance is not strong enough as being reflected

by net liabilities position and net loss result. It might not be able to continue its
operation without disruption if it keeps on showing poor performance. This will
definitely raise substantial doubt that the company can continue as a going
concern. Thus, modified report with emphasis of matter paragraph should be
issued to draw attention on the going concern issues in the notes.
(1 mark for type of audit report + 1 mark for justification = 8 marks)

B. a. The significance of the following basic elements of the audit report is:
i. Report title - the audit report should be appropriately titled so that it is
clear to the user that the financial statements have been audited. The title
will also distinguish the auditors’ report from reports for non-audit
engagements and other statements contained in the annual report such
as the directors’ report or the chairman’s statement.

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ii. Addressee - the audit report should be appropriately addressed as

required by the purpose and circumstances of the engagement.
For audit of financial statements, the audit report must be
addressed to the members or shareholder of the
company.

iii. Scope paragraph - the scope paragraph in the audit report are to inform
the financial statement users that the audit was conducted in accordance
with generally accepted auditing standards, in general terms what those
standards mean, and whether the audit provides a reasonable basis for
an opinion.
(2 marks each = 6 marks)

b. i. The opinion paragraph is not intended to be a certification or a guarantee

of the accuracy and correctness of the financial statements, but
rather is intended to be an expression of professional judgment
based upon a reasonable audit of the statements and underlying records.
Hence, it represents the auditor’s opinion based on the audit conducted.

ii. "Our audit was performed to detect material misstatements in the financial
statements" is flawed because the purpose of the audit is to determine
whether financial statements are fairly stated, not to specifically
search for material errors and fraud. It also fails to recognize the
standards used by the auditor to conduct the engagement.
"We conducted our audit in accordance with approved Standards on
Auditing" identifies the auditor's responsibilities for conduct of the audit,
accumulation of evidence and reporting requirements. It is a much
broader statement than the alternative clause. It also implies that if the
auditor has conducted the audit in accordance with generally accepted
auditing standards but does not uncover certain material errors or fraud,
the auditor is unlikely to have responsibility for failing to do so.

ii. The name of the CA firm rather than that of the individual practitioner
should appear on the accountant’s report because it is the entire
firm that accepts responsibility for the report issued.
(2 marks each = 6 marks)
(Total: 20 marks)

END OF SOLUTION