auditing

QUESTION 2 (a) Management is responsible in designing and maintaining the internal control of a company. However, an internal control system can only provide reasonable confidence that all control objectives are achieved because of inherent limitations in any system. Explain these inherent limitations. (4 marks) (b) Provide your comments and justifications on the appropriateness of the following statements given by a CPA. "My job is only to determine whether the payroll records are fairly stated with accounting standards, not to find whether they are following proper hiring and termination procedures. When I conduct an audit of the payroll cycle, I will skip the the HR department and only check on the time cards, joumal entries and payroll check to make sure that the salaries are accurate. I don't care whom they hire and whom they fire, as long as the monthly salary is correct, according to the number of hours they work in that respective month." (6 marks) (c) The following are misstatements that have occurred in Techno Pro Sdn. Bhd. (TP), a retail company. For each misstatement, identify the type of control activities that were absent and suggest a control to prevent. i. A vendor invoice was paid even though the inventory was not received. The accounts payables software does not require an input of valid receiving report number before payment is released. ii. An account payable clerk processed payments to himself by adding a fictitious vendor address to the approved vendor master file. iii. TP has lost all their current years' records that was stored in the company's accounting system. iv. During the physical count of inventory, the counter miscounted the quantity of few items and accidentally wrote wrong descriptions. v. A salesman of TP sold the company's product at a price below cost because he did not know that the price had increased in the past few weeks. vi. Incorrect prices was used on sales invoices for billing shipments to customers because the wrong price was entered in the computer master file of prices. (15 marks) (Total: 25 marks) QUESTION 1 (a) Certified Public Accountant (CPA) firms normally involve in providing assurance and non-assurance services to the auditon-audit client. Explain any two (2) types of non-assurance services provided by the CPA firms. (4 marks) (b) One of the requirements to become a certified public accountant (CPA) is to have working experience. Describe the detailed requirements and provide two (2) justifications on the importance of having working experience before being an accountant/auditor approved by the Malaysian Institute of Accountant (MIA). (6 marks) (c) Becker \& Co (B\&C), is a CPA firm that offers various assurance and nonassurance services mainly to large, privately owned companies. Evaluate whether B&C is independent or not in the following situations by providing your justification. (6 marks) i. Becker \& Co, was appointed to perform a statutory audit and provide advisory services to AA Sdn. Bhd. ii. One of the partners in B\&C has acquired 25% of ordinary shares in BB Sdn. Bhd, a company that used to be their audit client in the last 10 years. iii. Alfian, a senior auditor of B\&C is in-charged of an audit of CC Sdn. Bhd., whom the CFO is his father in law. iv. DD Sdn. Bhd (DD), an audit client of B\&C is experiencing staff shortages and B\&C has agreed to assigned a few of B\&C staff to help DD on a temporary basis. (d) Generally Accepted Auditing Standards requires a CPA to have adequate training and proficiency. Explain how auditors could fulfil that requirement. (4 marks) (e) Reza, Alvin and Co, (RAC) is a local CPA firm which is interested to develop a website for its firm to continue engage with their audit clients particularly during the Movement Control Order instructed by the government. List any two (2) types of information that can be provided on RAC's website and discuss how a website can be useful for any CPA firm in their auditing practice. (5 marks) (Total: 25 marks) QUESTION 3 (a) Audit report is essential in auditing because they communicate auditors' findings. (i) Predict two (2) major problems that stakeholders will be facing if the audit report is not prepared by independent entity. (4 marks) (ii) One of the audit reports that auditors issue is "Unqualified Report with Explanatory Paragraph". One condition when this report is issued is when the auditors have a substantial doubt about going concern of their audit client. Present why having a doubt on the ability of the client to continue their business operation in the next financial cycle does not require auditors to issue "Qualified Audit Report". (6 marks) (b) For each of the following independent situations, express the type of audit report that you would issue considering the conditions and materiality (if any) for each case: (i) Your team is responsible to audit Cempaka Sdn Bhd (CC) for the year ended 30 June 2021. During your audit investigation, your team managed to verify all flower inventories of CC. Due to the recent Covid- 19 pandemic, your team was not able to perform audit for the wrapping paper inventory. Based on your evaluation, this item is considered as not material. (ii) Maju Bhd (MM) has been struggling with its cash flow for the past six months. Based on your team's investigation, all financial documentation and internal controls are well in place. (iii) During your audit investigation in Shikamaru Bhd (SS), one of your team members discovered the way the accounting staff record and treat SS equipment lease is not according to the Malaysian Accounting Standards. When this is brought to the management, they insisted to retain their current recording in their books and financial statement. Even though the overall financial statements are still deemed as true and fair, the lease amount is still material. (iv) Neji Bhd (NN) specialises in manufacturing organic fertilizers. Since the Covid19 pandemic hits globally, there was very tight restriction on travelling. Therefore, your team was not able to verify the inventories values, which are found to be highly material and would affect the overall financial statements. Continu 4/ HMH/AAK 3/5 BAC2664 AUDITING 19 NOVEMBER 2021 (v) Teraju Bhd (TT) has been struggling with cash flows for the past two years. Nevertheless, the company still manages to stay afloat since they have very strong and loyal customers. Based on your team's investigation, everything seems to be fairly disclosed - financial statements are in order. Towards the end of your investigation, you found out that one of their major customers' warehouse caught fire and everything was damaged. (15 marks) (a) Describe the advantages of performing analytical procedures to an auditor. (2 marks) (b) Distinguish the difference between permanent file and current file with two (2) relevant examples. (4 marks) (c) As part of the audit planning, auditor must understand the business operations and processes of the client. One of the methods to obtain the understanding is through identifying the related parties. Explain why this step is important and relate your answer with inherent risk. how related parties could help auditors in planning their audit effectively. (4 marks) (d) Berjaya Sdn. Bhd. (BSB) has the following internal controls related to the inventory and warehousing cycle: For each of the internal controls, identify the specific transaction-related audit objectives affected by the controls, its relevant general transaction-related audit objectives and describe the potential misstatement if the control is lacking. i. The inventory purchasing system only allows purchases from pre-approved vendors ii. The perpetual inventory system tracks the average number of days each inventory items were stored in the warehouse iii. Only authorised inventory warehouse personnel are allowed in inventory storage areas. iv. All inventories products are stored in warehousing areas that are segregated from other storage areas. Continued... BAC2664 AUDITING 19 NOVEMBER 2021 v. On a weekly basis, inventory accounting personnel select inventory items on hand in the warehouse and verify that the item is included in the perpetual inventory listing at the correct amount. vi. The perpetual inventory system subtotals the quantity of inventory in the system and interfaces with the GL system on a daily basis to ensure quantities agree. (15 marks) Please use the following template to answer this