CONFIDENTIAL 2 MIAQE SEPTEMBER 2017

QUESTION 1

A. Auditors are required to adhere to the Fundamental Principles of By-Laws (On

Professional Ethics, Conduct and Practice) of the Malaysian Institute of Accountants
(MIA) in order to safeguard the accountancy profession.

Required:

Define the following Fundamental Principles of MIAs By-Laws.

a. Integrity
b. Objectivity
c. Professional competence and due care
d. Confidentiality
(4 marks)

B. Legal liability damages as a result of investor lawsuits in the case of auditor negligence
can be important in motivating auditors to provide sufficiently high audit quality.

Required:

a. Explain auditors duties as stipulated in the Companies Act 1965.

(2 marks)

b. Explain four (4) factors that can reduce the potential of lawsuits against the
auditors.
(6 marks)

c. State three (3) conditions that should be met in order to establish auditors duty
of care towards the client.
(3 marks)
(Total: 15 marks)

QUESTION 2

Cempaka Sdn Bhd is a family-owned construction company located in Sungai Petani. The
company is in the business for five years. Your firm, Tan & Koh Associates is a newly
appointed auditor succeeding Aha & Co., who had tendered a resignation. A team of three
auditors have been doing the review for the past few days. You are the auditor in charge for
reviewing and evaluating the accounting system and related internal controls of the purchasing
system. Here is the description of the purchasing system and there are no other controls apart
from those described.

Cempaka has no separate department for purchasing. Employees place orders of building
materials from the construction site offices. Here, a triplicated order forms are issued:

Copy 1 is retained by the respective site offices,

Copy 2 is sent to the accounting department, and
Copy 3 is mailed to the supplier.
 CONFIDENTIAL 3 MIAQE SEPTEMBER 2017

Once the building materials are received by the respective site offices, the materials are either
immediately use for construction or kept in the store. Here, no employee is assigned to inspect
the materials. However, the site offices must ensure that the shipping document and purchase
order must be sent to the accounts payable clerk in the accounting department.

When the suppliers invoice is received, the accounts payable clerk checks the details, initials
and staples the shipping document with purchase order. Then, the accounts payable clerk
records the invoice in the purchase register. The invoice is subsequently sent to the respective
site offices manager for perusal. The respective manager approves the invoice and returns it
to the accounts payable clerk. The approved purchase invoices are entered in the purchase
journal and posted to the general ledger and accounts payable ledger on a weekly basis.

The cashier pays the suppliers on monthly basis upon receiving instructions from the accounts
payable clerk. The accounts payable control account is reconciled every month by the
accounts payable clerk who is also responsible for the reconciliation of the suppliers
statement of account.

Required:

a. State four (4) internal control weaknesses in the purchasing system.

(4 marks)

b. Explain the possible errors that could result from the weaknesses identified in (a).
(8 marks)

c. Describe four (4) types of audit tests that are normally performed by the auditors. Each
test must be supported by an example of related audit procedure.
(8 marks)

d. Explain how the size of Cempaka Sdn Bhd affects its internal control system.
(5 marks)
(Total: 25 marks)
QUESTION 3

An assurance review engagement is carried out in accordance with the International Standard
for Review Engagements (ISRE) 2400. The procedures for the engagement are more heavily
concentrated in areas where there are enhanced risks of misstatement. Inquiries of
management and sophisticated analytical review techniques allow the auditors to provide
assurance on the financial statements that no material modifications that should be made to
the financial statements.

Required:

a. Discuss four (4) examples of inquiries made to the management during a review
engagement.
(6 marks)

b. Distinguish between the review engagement with the audit and compilation of financial
statements.
(4 marks)
(Total: 10 marks)
 CONFIDENTIAL 4 MIAQE SEPTEMBER 2017

QUESTION 4

A. My Food Store Bhd (MFSB) operates 25 supermarkets. The companys year-end is 31

December 2016. The partner-in-charge and audit manager had attended a meeting
with the financial controller and minutes of meeting was immediately prepared to assist
the auditors in planning.

You are the audit senior, and this is your first year engagement with this company. In
order to familiarise yourself with MFSB, the audit manager has asked you to undertake
some research on the nature of the business, so that you are able to prepare the audit
planning memorandum effectively. In addition, he has asked you to identify relevant
audit risks from the minutes of meeting and to consider how the team should respond
to the identified risks.

MFSB has spent RM1.6 million in refurbishing all its supermarkets. As part of this
refurbishment programme the central warehouse has been overhauled and a smaller
warehouse, which was occasionally used, has been disposed at a profit. In order to
finance this programme, a sum of RM1.5 million was borrowed from the bank. The
loan is payable over a 5-year period.

The company will be performing a year-end inventory count at the central warehouse
and at all of the 25 supermarkets on 31 December 2016. Inventory is valued at a selling
price less an average profit margin because the financial controller believes that this
is a close approximation to cost.

Prior to 2016, each of the supermarkets maintained their own financial records and
submitted monthly return to the head office. However, during 2016, all accounting
records have been centralised at the head office. Therefore, at the beginning of the
year, each supermarkets opening balances were transferred into head offices
accounting system. The increased workload at the head office has led to some
changes in the finance department. In November 2016, the financial controller had left
the company and the replacement will only report for duty later in December 2016.

Required:

a. State five (5) sources of information that are relevant in gaining an

understanding of My Food Store Bhd.
(5 marks)

b. Explain four (4) audit risks face by the company from the information provided
in the case above.
(6 marks)

c. Describe the auditors responses to each of the risks in planning the audit as
identified in (b).
(8 marks)
 CONFIDENTIAL 5 MIAQE SEPTEMBER 2017

B. Internal controls can provide only a reasonable assurance that the company can
achieve its specific objectives which were established by the management.

Required:

List six (6) inherent limitations of internal controls.

(6 marks)
(Total: 25 marks)

QUESTION 5

Shaz Fitness Club Sdn Bhd (Shaz) operates a chain of fitness clubs. Its year end is 31 October
2016. You are the audit manager and the year-end audit is due to commence in November
2016. The following matters have been brought to your attention.

Trade payables and accrual

Shazs financial controller has notified you that an error had occurred in the closing of the
accounts payable ledger at the year end. Rather than close on 31 October, a fault in the
computer program had accidentally closed one week earlier on 24 October. All purchase
invoices received between 25 October and the year-end have been posted to the 2017s year-
end accounts payable ledger.

Receivables
Shazs trade receivables have historically been insignificant as most club members pay
monthly subscription in advance. However, during the current year audit, a number of
companies have taken up corporate memberships, hence, the receivables balance is now
material. The audit senior has undertaken a receivables confirmation for the balances at the
year-end. However, there are a number of companies have not responded and also a number
of responses with disagreement.

Required:

Describe the substantive procedures that you would perform in order to obtain sufficient and
appropriate audit evidence in relation to the following matters:

a. Trade payables and accrual.

(6 marks)
b. Receivables.
(4 marks)
(Total: 10 marks)

QUESTION 6

You are a manager in the audit department of Nazri & Associates, responsible for the audit of
Don Dang Bhd, a new audit client operating in the construction industry for the financial year
ended 31 January 2017. The draft financial statements recognise a profit before tax of RM225
million (2016 RM20 million) and total assets of RM370 million, including cash at bank of RM3
million.

The audit is coming to completion and you are reviewing the audit working papers. The audit
senior has brought several matters to your attention:
 CONFIDENTIAL 6 MIAQE SEPTEMBER 2017

Bridge Contract
Don Dang Bhd is working on a major contract relating to the construction of a bridge for
Penang River Bhd. The work started in July 2016, and tentatively the contract will be
completed in September 2017. The contract sum is RM20 million, and it is estimated that a
profit of RM5 million will be generated on completion of the contract. The full amount of this
profit has been included in the statement of profit or loss for the year ended 31 January 2017.
Don Dangs management believes that this accounting treatment is appropriate given that the
contract was signed during the financial year, and no setback has arisen in the work carried
out so far.

Legal Action
A major contract was completed in September 2016 for BaruBena Bhd. This contract related
to the construction of a 20 kilometres highway in a remote area. In November 2016, several
large cracks appeared in the road surface after duration of unusually heavy rain, and the road
had to be closed for ten weeks while repair work was carried out. BaruBena Bhd paid for these
repairs, but has taken legal action against Don Dang Bhd to recover the costs incurred of
RM40 million. Disclosure on this matter has been made in the notes to the financial statements
of Don Dang Bhd. A written confirmation from Don Dangs lawyer concludes that there is a
possibility, but not a probability, of Don Dang having to settle the amount claimed.

Required:

a. Discuss the implications of the matters described above on the completion of the audit
and on the auditors report.
(8 marks)

b. Discuss the relevant audit procedures to assist the auditor in concluding the audit of:
i. Bridge contract.
ii. Legal action.
(7 marks)
(Total: 15 marks)

END OF QUESTION PAPER