CONFIDENTIAL, ACIJUL 2017/AUD589 UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION COURSE AUDITING 1 COURSE CODE AUD589 EXAMINATION JULY 2017 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 Do not bring any material into the examination room unless permission is given by the invigilator. 4 Please check to make sure that this examination pack consists of ) the Question Paper ii) an Answer Booklet ~ provided by the Faculty 5 ‘Answer ALL questions in English, DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO This examination paper consisis of 6 printed pages: (© Hak Cipta Universiti Teknologi MARA, CONFIDENTIALCONFIDENTIAL 2 ACIJUL 2017/AUD589 Answer ALL questions QUESTION 4 A ISA 530 Audit Sampling, ascertain the auditor's use of audit sampling when designing and performing tests of controls and tests of details. The auditor shall determine a sufficient sample size to allow the auditor to conclude with an appropriate level of sampling risk. Required: ‘a. Identify TWO (2) advantages and disadvantages of monetary sampling. (4 marks) b. Briefly discuss the THREE (3) steps in applying materiality to audit procedures. (6 marks) B. The auditor should consider audit risk when planning and performing an examination of financial statements in accordance with auditing standards. Audit risk should also be considered in determining the nature, timing and extent of auditing procedures and in evaluating the results of those procedures. Requi a, __ Define the meaning of ‘Audit Risk’. (2 marks) b. Describe the component of audit risks. (3 marks) ©. Discuss how these components and interrelated to each other. ( marks) (Total: 20 marks) QUESTION 2 ‘A. ISA 500 Audit Evidence, defines audit evidence as information used by the auditor in arriving at the conclusions on which the auditor's opinion is based. Audit evidence includes both information contained in the accounting records underlying the financial statements and other information. Required: a. __List FOUR (4) factors that affect the reliability of confirmations. (4 marks) (© Hak Cipta Universit! Teknologi MARA CONFIDENTIALCONFIDENTIAL 3 ACIJUL 2017/AUD589 b. Evidence comes in various types and has different degrees of reliabilty. For each of situation given below, briefly discuss whether the first or second type of evidence is more reliable. i. A bank confirmation versus observation of the segregation of duties between cash receipts and recording payment in the accounts receivable subsidiary ledger. ii, An auditor's recalculation of depreciation versus examination of raw material requisitions. (4 marks) B. Discuss the type of audit procedure and audit assertions for each of the following specific procedures: a Sending a written request to the company’s customers requesting that they report the amount owed to the entity. b. Examining large sales invoices for a period of two days before and after year end to determine if sales are recorded in the proper period. ©. Agreeing the total of the accounts receivable subsidiary ledger to the accounts receivable general ledger account d. Discussing the adequacy of the provision for doubtful debts with the credit managers. . Comparing the current-year gross profit percentage with the gross profit f percentage for the last four years, Reviewing the general ledger for unusual adjusting entries. Please provide your answer in the format given below: Audit procedures | Type of audit procedures ‘Audit assertions (12 marks) (Total: 20 marks) @ Hak Cipta Universiti Teknologi MARA CONFIDENTIALCONFIDENTIAL, 4 ACIJUL 2017/AUD589 QUESTION 3 Lilly is new in business. She has just opened a branded and fashionable shoe store located in Shah Alam. The store, Elegant Shoes Sdn Bhd (Elegant), sells various kinds of branded shoes. She is assisted by her brother, Adam, who is the manager cum cashier of Elegant. ‘Adam is in charge of running the store and oversight the inventory. Lilly hopes that she can control the business from home and will come to the store whenever require her attention. Lilly gets her supplies from established agent who has license to order shoes from abroad, Required: ai Identify FIVE (5) elements of internal control (2.5 marks) i, Explain TWO (2) elements of internal control that has been identified above. (2.5 marks) b. Discuss THREE (3) inherent limitations of internal controls and suggest ways that can be undertaken to reduce the risk of errors and fraud that might arise. (6 marks) As mentioned earlier, Lilly is new in business and less knowledge on fraudulent cases. Advise THREE (3) types of error and fraud that could take place in her company and suggest the internal controls with reasons that have to be implemented to prevent such error and fraud from occurring, Use the following format to provide your answers lo. |_ Types of error and fraud ‘Types of internal controls to implement QUESTION 4 You and your team are in charge of the audit of assets and sales transactions of a client ‘company, Required: a. Briefly explain the difference between current asset and non-current asset (2 marks) b. Explain THREE (3) substantive audit procedures on the non-current asset and identify relevant balance-related audit objectives for such audit procedures. (9 marks) (© Hak Cipta Universit Teknologi MARA CONFIDENTIALCONFIDENTIAL 5 AGIJUL 2017/AUD589 ° Elaborate THREE (3) management assertions that relate to sales and the relevant audit procedures to confirm the assertion. (9 marks) (Total: 20 marks) QUESTION 5 A ‘When the financial report as a whole give a true and fair view and the requirements has been met, the auditor will issue an unmodified audit report. Required: Explain THREE (3) elements for unmodified audit reports, (6 marks) You are the audit senior in-charge for the audit of Eco-Fitness Sdn Bhd. Since the audit assignment is straightforward, you delegate the responsibility to prepare the audit report to the junior auditor. ‘The following is the opinion paragraph drafted by the junior auditor: We certify that the attached financial statements as at 31 August 2016 give a true and correct view in accordance with the accounting framework and the requirements of the Companies Act 1965 in Malaysia. Our duties also include the reporting on the proper maintenance of accounting and other records and the registers, and our opinion that all the relevant Sections and Ninth Schedule have been complied with. Required: Discuss FOUR (4) errors that have been made by the junior auditor in drafting the opinion paragraph. (8 marks) Treat the following situations (i) and (ji) independently and assuming all amounts involved is material. Your audit client, a pharmaceutical company is a manufacturer of generic drugs. The company is affected with the intellectual property restriction of the Trans-Pacific Partnership Agreement (TPPA). As a result, the company has no longer the right to market the drugs. You discussed this matter with the chief financial controller and advised the company to write-off the inventories of generic drugs. The directors refused to make the write-off although you have explained to them that this is important in order to reflect the fair value of the inventories. (© Hak Cipta Universiti Teknologi MARA CONFIDENTIALCONFIDENTIAL, 6 ACIJUL 2017/AUD589 ji, The audit senior instructed you to select 25 samples of the client's personnel from the payroll master file. Subsequently, you requested the personnel records for the 25 selected staffs from the human resource manager. Initially, he refused to allow you to inspect the files as he is afraid that you might unintentionally disclose the private and confidential information to third parties. However, after you have convinced the manager that the records are important to verify the rate of pay, authorized deductions, and terminations of employment, he then gave the approval, but the procedures are performed by the audit supervisor. Required: Suggest the audit report that an auditor would issue and the reasons for the above situations independently. (6 marks) (Total: 20 marks) END OF QUESTION PAPER © Hak Cipta Universit Teknologl MARA CONFIDENTIAL,