UNIVERSITI TEKNOLOGI MARA

FINAL ASSESSMENT

COURSE : AUDITING 1

COURSE CODE : AUD589

EXAMINATION : JULY 2021
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 6 printed pages

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QUESTION 1

A. Auditors accept some level of risk or uncertainty in performing the audit function. The
auditor recognises, for example, uncertainty about the effectiveness of a client’s
internal controls, and uncertainty about whether the financial statements are fairly
stated when the audit is completed.

Required:

a. Explain TWO (2) factors that lead to audit risk.

(4 marks)

b. Material misstatements may be caused by errors and fraud. State TWO (2)
quantitative bases that an auditor may consider the use to set the materiality
level at planning stage.
(2 marks)

B. The auditor shall design and perform audit procedures that are appropriate in the
circumstances for the purpose of obtaining sufficient appropriate audit evidence
(ISA500).

Required:

a. Discuss THREE (3) types of audit evidence that may be obtained by the
auditors in conducting the audit procedures.
(6 marks)

b. Discuss TWO (2) situations that prevent an auditor to obtain sufficient

appropriate audit evidence. Provide TWO (2) examples for each situation.
(8 marks)
(Total: 20 marks)

QUESTION 2

A. Management assertions are implied or expressed representations by management

about classes of transactions, related accounts balances, and disclosures in the
financial statements.

Required:

a. Identify the appropriate type of assertion for each of the following audit
procedures.

i. Examine the client’s closing balance on the bank statement.

ii. Physical inspection of the forklift at the construction site.
iii. Verification of the company’s title to all property listed by the management.
iv. Review on trade debtors’ reconciliation.
(4 marks)

b. Illustrate FOUR (4) possible audit procedures and the audit objective for each
procedure in verifying the accounts receivable of a client company.
(8 marks)

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B. Identify the possible misstatements that might have been occurred based on the
following analytical procedures that were conducted on the accounts receivable of a
client company.

Required:

i. Comparison of yearly gross profit margin by product line.

ii. Comparison of yearly sales return and allowances as a percentage of gross

sales by product line.

iii. Comparison of individual customer balances over a stated amount year to year.

iv. Comparison of bad debt expense as a percentage of gross sales with previous
years’ amount.
(8 marks)
(Total: 20 marks)

QUESTION 3

A. The International Auditing and Assurance Standards Board (IAASB) recently revised
the auditor’s report in the International Standards on Auditing (ISAs) to require auditors
to communicate “key audit matters” (KAM). KAM includes communication information
such as areas of higher assessed risk of material misstatement and the effects of
significant events or transactions that occurred during the period.

Required:

a. Explain how users of the financial statements may benefit from the
communications about these matters in an audit report.
(4 marks)

b. Explain the difficulties that may be faced by auditors in communicating about

these matters.
(4 marks)

B. Ali recently joins Ahmad Kadri & Associate as Junior Auditor. He approached you to
get clarification on the effect of lack of evidence on the audit opinion.

Required:

Illustrate to Ali the effect of lack of evidence caused by client’s restrictions on audit
opinion.
(4 marks)

C. For the following independent situations, assume that you are the audit partner on the
engagement:

1. Majid Logistics Sdn Bhd has a fleet of several delivery trucks. In the past, the
company had followed the straight-line depreciation method. In the current
year, they decided to change to the reducing balance method. This change in
policy is fully disclosed in footnotes.

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2. The auditor found out that the client, DD Sdn Bhd has not provided any
allowance for the long outstanding debts due to downturn in the economy for
the financial year ended 31 December 2020. The management ignored and
argued that the company had provided for them in the previous years when the
auditor advised for the allowance to be made.

3. JJ Clean Maid has been in business for several years but has struggled to stay
afloat given the economic conditions. Over the last two years. Based on audit
work, the auditor has substantial doubt that JJ Clean Maid will be in business
by the end of its next financial year. There was no issue in the financial
statements as all accounting records have complied with the Malaysia
Financial Reporting Standard (MFRS).

4. During your audit of Serapi Home Décor Sdn Bhd., you conclude that there is
a possibility that the inventory is materially overstated. The client refuses to
allow you to expand your audit work to verify whether the balance is actually
misstated. You are also aware that the inventory is a material item to the
company.

Required:

Decide the type of audit report for EACH of the situation given above and explain the
reasons for the type of audit report that you have decided.
(8 marks)
(Total: 20 marks)

QUESTION 4

A. Based on the following audit processes, identify whether the auditor is exercising
“Professional Judgment” or “Professional Skepticism”.

i. Auditor discovered there were errors in the financial information relating to non-
current assets, the auditor then made an appointment to discuss this matter
with the management.

ii. Auditor evaluates whether sufficient appropriate audit evidence has been
obtained to achieve the objectives of the auditor.

iii. Auditor applies appropriate audit procedures on audit items.

iv. Auditor reviews sales transactions that are beyond the usual amount of the
transactions.
(4 marks)

B. Professional skepticism plays a fundamentally important role in the audit and forms an
integral part of the auditor’s skill set. Professional skepticism is closely interrelated with
professional judgment. Both are essential to the proper conduct of the audit and are
vital inputs to audit quality.

Required:

a. Explain TWO (2) circumstances that the auditor needs to apply professional
skepticism when performing the audit work.
(4 marks)

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b. Identify the possible impact if the auditor does not exercise professional
skepticism discussed in (a)?
(2 marks)
(Total: 10 marks)

QUESTION 5

A. Test of controls are performed by the auditor to evaluate whether the controls are
working effectively for two main purposes, namely, to reduce substantive audit
procedures and to obtain additional audit evidence.

Required:

Identify THREE (3) tests of control procedures that shall be carried out to determine
the effectiveness of internal controls on account receivables and receipts.
(6 marks)

B. Mutiara Kasih Sdn Bhd is a company selling a variety of healthy snacks suitable for
people on a strict diet either to lose weight or under medical control. In order to handle
a massive response for their products, the sales department undertakes the following
job functions:

Sales

i. Online Sales
Online orders are electronically received via the Internet. Related information
of orders such as customers’ name and address, account number, type and
the serial number of items ordered, and quantity of items ordered are
automatically linked from the company’s website to the system handling orders.
The system will be linked to the website on the availability of the inventory.
Customers will receive the confirmation email immediately after the payment is
successful and no change of orders is allowed. All online orders are at a cash
basis.

ii. Telephone Sales

Telephone orders are received by an operator in the sales department. Related
information for telephone orders such as customers’ name and address,
account number, type and the serial number of items ordered, and quantity of
items ordered are entered directly into a computer terminal by the operator. The
system verifies the customer data against the approved customer file. The
specific purchases are then compared to a list of inventory items currently being
held in the company’s warehouse. The system indicates to the operator the
validity of the customer’s credit and the availability of the inventory. This
information is conveyed immediately over the telephone to the customer with
the transaction finalized at that time. The operator either enters approval for the
sale or voids the transaction. The name of the operator who processes the
order will appear on the system for every order taken. Customers will be sent
an email or message for confirmation of orders made immediately after the
order is approved. No change of orders is allowed once the order is approved.
Orders through telephone are grouped into cash and credit sales. All credit
sales are given 60 days credit term and those customers who fail to settle the
outstanding with the credit term given will be notified by the system and it will
be reflected during verification of the customers’ data.

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Then, the system will combine the data of online and telephone orders for
further processing. A computerized list of the approved sales orders is
maintained in chronological order and every order is assigned a sequence
order number for control purposes. Sales invoices for credit sales and the sales
receipts for cash transactions are automatically generated by the system and
pre-numbered.

iii. Inventory Shipments

Using a terminal, the shipping department requests the next order to be
processed. The customer and address are shown on the screen as well as the
individual items that have been ordered. Once the items have been packed, the
staff of the shipping department enters the date of the shipment, the goods
dispatch note and the bill of lading number. Edit checks are incorporated into
the software to verify the shipment data against the order and indicate any items
that do not match. Unmatched items will be returned for checking and will go
through the edit checks again. The completed packaging will be shipped to the
customer together with a copy of the sales invoice or receipt.

Required:

a. Determine FIVE (5) existence of internal controls implemented by Mutiara

Kasih Sdn Bhd.
(10 marks)

b. Based on the above case, identify THREE (3) consequences if internal controls
mentioned in (a) are not present.
(6 marks)

C. Salaries are paid on a monthly basis to employees normally working in administrative

departments usually via electronic transfers to their bank accounts. However, wages
are normally paid weekly to employees working in departments such as production.
For some companies where only, a few employees have bank accounts, employees
are still paid in cash for their wages based on hours in attendance or work completed.

Required:

Describe FOUR (4) substantive procedures that may be carried out by the auditor
during the final audit to verify the payment of wages within the payroll function.
(8 marks)
(Total: 30 marks)

END OF QUESTION PAPER

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