Q1 (a) You are an audit manager of Morline & Co, a Public Accounting firm. The audit engagement partner, Joe Tan, has called you into his office to discuss a new audit client. You have been assigned to take charge of the audit for the financial year end, 31 December 2019 of Crown Hotel Group Bhd. (Crown Group) a listed company. The Group operates a chain of luxury hotels across Malaysia. As part of the expansion strategy, Crown Group has recently acquired a new hotel in Melbourne. You are very excited about auditing this luxury group of hotels, and are hoping that you may get to stay in one of the hotels during the audit.

Recently you had a meeting with Joe Tan, Datuk Paul Wong, the managing director of Crown Group, and Lisa Goh, the finance director of Crown Group. From detailed discussions with them, you note the following information:

Background information:

Crown Group owns four hotels in Malaysia namely Dolce, Corus, Korma, Morib, one hotel, Belux in Singapore and a newly acquired hotel in Melbourne namely Aston, which was acquired in September 2019. Each hotel operates through a separate legal entity, and Crown Group owns 100% of each entity. The Group prepares consolidated financial statements on an annual basis. The Head Office is located in Petaling Jaya, Malaysia.

In 2019, the Crown Group had total revenues of RM 90 million (2018: RM 80 million), and operating profits of RM 8,500,000 (2018: RM 11,000,000).

Lisa Goh explained that all the hotels have been performing well over the last year, with the exception of Hotel Belux. See notes below

Information Technology (IT)

Lisa Goh highlighted that the Crown Group relies heavily on the use of information technology (IT) and noted that approximately 96% of bookings are made online via its website. The Group invested significantly in IT over the last six months, which resulted in an extensive upgrade of its website and the development of a user-friendly app. Datuk Paul Wong said, "We have spent a significant amount of money developing our IT systems and ensuring they are secure, as the rapid increase in cybercrime in Malaysia is frightening." This development cost was capitalised in Financial Year 2019.

Bonus

During the year, a new bonus scheme was introduced for both managers and directors for all the hotel within the group in order to increase revenue. The bonus is directly linked to revenue.

Advance payment

Advance deposits of 50% are collected for those booking for conferences and wedding packages.

Hotel Belux

The hotel Belux is one of the biggest in the Group, and contributes 25% of total revenue is located in Singapore. Although revenue has increased in 2019, profit has fallen significantly due to a number of "special offers" in both accommodation rates and the restaurant. Datuk Paul Wong believes the main causes for this fall are reduced gross margins (due to the successful uptake of the various special offer promotions during the year) and increasing costs (mainly driven by payroll). The number of special offers were approved by management in a bid to counter the tough economic environment within which the hotel operates and thereby increase revenue.

Required:

(i) Identify and explain to the audit partner SEVEN (7) key audit risks in respect of Crown Group. (14 marks)

(ii) Describe the matters Morline & Co should consider in the context of ISA 620 in order to evaluate the adequacy of the expert's work in relation to engaging the services of a property expert to value Land and Buildings. (5 marks)

(iii) Evaluate the ethical issues(s) if any in respect of the Crown Group audit engagement and recommend appropriate safeguard(s). (5 marks)

Q2. You are the senior manager in charge of the audit of Southern Bhd. (South) for the year ended 30 April 2020. Southern owns and manages a chain of ten gourmet sandwich outlets. Sandwiches are prepared on demand for customers, from a range of fresh ingredients that local suppliers deliver on a daily basis.

You are aware that the directors of Southern are currently discussing opportunities for expansion and are pursuing a listing on Bursa Securities. The listing rules of the stock exchange require compliance with corporate governance principles, and the directors have indicated that they are fairly confident they are adhering to best practice.

You have documented the following in relation to corporate governance in Southern:

Corporate Governance

The board comprises six directors; four executives who originally set up the company and two non-executive directors who recently joined Southern.

Each director has a specific area of responsibility and only the finance director reviews the financial statements and budgets.

As the board is relatively small, and to save costs, the chief executive officer, Dato Tommy Mak, has recently taken on the role of chairman.

Dato Tommy Mak, originally set up the audit committee and he sits on this sub-committee along with the finance director and the non-executive directors.

The finance director and the chairman make decisions regarding the nomination of the external auditors and their remuneration.

To save costs, an internal audit function has not been established to monitor internal controls.

The executive directors' remuneration is proposed by the finance director and approved by the chairman. They are paid an annual salary, as well as a generous annual revenue-related bonus.

The audit is nearing completion, and the audit manager is currently drafting the management letter to communicate relevant audit matters to those charged with governance.

Required:

Describe FOUR (4) corporate governance weaknesses faced by Southern Bhd., and provide recommendation(s) to address each weakness in order to ensure compliance with corporate governance principles. (8 marks)

Q3. An Audit Committee member of public listed entities, mentioned that he solely relied on the work of the external auditors to detect financial reporting fraud in his company. Comment on this statement. (3 marks)

Q4. Critically assess the reasonableness of the assumption that since statistical sampling techniques do not require auditors to exercise professional judgement and these techniques are of no benefit to the auditor. (5 marks)

Q5.You work as an audit senior for Moh & Co.,a public accounting firm. Delicious Kek Sdn Bhd. (DK) is one of your portfolio of clients with a 31 January 2020 year-end.

You are at present planning the year-end audit of DK which specialises in the production of high-quality wedding cakes and pastries.

During preliminary audit work, you noted that the profitability of the company has declined and costs are increasing, while prices have been higher than competitors due to low volumes of output.

The company, in recent years, has relied on a bank overdraft facility to finance its activities. This area of concern for DK's management was raised at a meeting with you. During this meeting, a discussion took place which focused on actions that could be taken to improve the liquidity of the company. The management team informed you of a plan to expand facilities for producing wedding cakes, as this line had maintained its market share. The company has asked the bank for a loan to finance the expansion and also to maintain the present level of working capital.

To support its request for a loan, the company has prepared a cash flow forecast for the two years from the end of the reporting period. The internal audit department has reported on the forecast to the board of directors. However, the bank has said it would like a report from your practice, as the external auditors, to confirm the reasonableness of the forecast. Following this request, the company has asked you to examine the cash flow forecast and to report to the bank

Required:

(i) Explain the level of assurance that should be included in your response to the bank's request. (4 marks)

(ii) Draft SIX (6) procedures that should be adopted to examine the cash flow forecast. (6 marks)

Q6. You are the audit manager of MM Electronics Bhd (MM). The company markets its products through retail outlets in nine major cities. The net profit after tax is RM 20 million with net assets of RM150 million for financial year ended March 2020. The audit team has noted the following matters for your consideration

(i) During the year the MM has changed its policy on valuation of property, plant and equipment from historical cost to revalued amount. For this purpose, the services of a professional valuer, Jones International Sdn Bhd was hired. They have issued valuation reports of three outlets indicating a revaluation surplus of RM 10 million, which has been recognized in the financial statements. The management has informed you that the valuation reports of the remaining properties are expected to be issued in June 2020.

(ii) In February 2020, MM was sued for breach of contract by a customer claiming damages of RM10million. The legal advisor has confirmed the management's assertion that no liability existed at the date of financial statements. However, while reviewing the customers' files, you found an email from the Manager (Legal Department) addressed to the Chief Executive in which he has agreed that the company will have to pay at least 50% of the damages claimed.

(iii) With effect from 01 July 2019, the company has introduced a policy of providing one year warranty on its television sets. No warranty is provided on the other products. Sales of television sets aggregated RM. 20 million, whereas the total sales for the year amounted to RM 80 million. The company has a customer support department which provides after sales services on all products. For defects not covered under the warranty, the company bills the customers at 25% above cost. The management has included a note in the draft financial statements stating that no provision has been made in respect of the warranty, as the amount cannot be measured reliably.

Required: Express your views on each of the above situations and discuss the act thereof on the audit report (10 marks)

Q7.You are a member of the recruitment panel for an accounting and auditing practice which is currently seeking to recruit a new audit manager. The clients comprise, largely but not exclusively, family owned SMEs which over recent years have increased their use and reliance on Information Technology (IT) to conduct business affairs.

To ensure appropriate candidates are selected for interview, all applicants have been asked to submit a report that outlines their understanding of the following IT-related topics:

"The factors an auditor should consider when auditing a company involved in e-Commerce and cloud computing"

Required:

In the report, as part of his/her job application, candidate should:

(i) Explain TWO (2) key factors which an auditor should consider when auditing a client company which is involved in e-Commerce. (4 marks)

(ii) Describe THREE (3) factors the auditor should consider when auditing a client company involved in cloud computing. (6 marks)

Q8.You are planning the external audit of Sillouet Sdn Bhd (Sillouet) for the year ended 30 April 2020. The principal activity of Sillouet is the manufacture of biscuits, which it sells under its own brand name and under that of a national supermarket chain Millax Sdn Bhd (Millax). Sillouet owns two production sites; one is dedicated to the production of the Millax brand biscuits and the other is dedicated to the production of its own brand biscuits.

During your planning meeting with the finance director, she informed you of the following.

On 12 February 2020, the board of directors of Sillouet was informed by Millax that, following a strategic review of its supply base, it was giving notice that it would not be renewing its contract with Sillouet when the current contract expires in August 2020. Millax also notified Sillouet that, with immediate effect, it would reduce demand for biscuits to the minimum stipulated in the contract.

Although sales to Millax represent 35% of revenue, the directors are convinced that Sillouet will be able to continue to trade as they have always had a contingency plan in the event of losing the contract. This plan entails Sillouet scaling down its operations and focusing on its own brand goods, which have a higher profit margin. In addition, the directors plan to expand the recently launched export range, which has already exceeded sales targets.

The equipment dedicated to producing biscuits for Millax will be transferred to the site where Sillouet produces its own brand biscuits, to replace some of Sillouet's older and less efficient equipment which will be scrapped. Most of the staff involved in producing the Millax brand biscuits will be made redundant. The freehold factory used to manufacture Millax biscuits will be sold. The factory has recently been valued at an amount substantially greater than its current carrying amount. Some of the sale proceeds will be used to pay a loan instalment falling due in January 2021 and the balance will be used to reduce the company's overdraft.

The company has managed to pay suppliers and stay within its overdraft facility only by delaying payments due to Inland Revenue Department (IRD) for income taxes. The finance director has recently negotiated a deferred payments plan with IRD to pay off the arrears of tax over four months. A condition of this concession granted by IRD is that the company pays all its future tax liabilities on the due dates.

Sillouet has made an operating loss for the year ended 30 April 2020. This is mainly due to the reduced demand from Millax and costs involved in launching its export range of biscuits. The directors have assessed the company's ability to continue as a going concern and have prepared profit and cash flow forecasts for the two years ending 30 April 2022. The profit forecasts indicate a return to profitability in the year ending 30 April 2021 and the cash flow forecasts indicate that Sillouet can pay its debts as they fall due.

Required:

(i) Identify and explain SIX (6) factors which give rise to an uncertainty about the going concern status of Sillouet. (9 marks)

(ii) Assuming your firm concludes there is an uncertainty about the going concern status of Sillouet, explain the potential implications for your firm's audit opinion on the financial statements of Sillouet for the year ended 30 April 2020 if the directors:

make appropriate disclosures; or

do not make any disclosures.

Your answer should describe the effects, if any, on your firm's audit report in each situation. (6 marks)

Q9.You are the supervisor on the external audit of Plummer Sdn Bhd (Plummer) for the year ended 31 December 2019. Whilst performing the planned audit procedures in the week commencing 12 March 2020, the audit team noted the following issues in the schedule of unadjusted errors:

Issue (i)

The balance on a trade receivable account, totalling RM 435,000, remains unpaid and is in dispute. No allowance against the receivable has been made.

Issue (ii)

Goods despatched and delivered to a customer on 2 January 2020 were included at RM 260,000 in both revenue and trade receivables at 31 December 2019. A member of the engagement team attended the year-end inventory count and obtained a copy of the count records.

The draft financial statements of Plummer for the year ended 31 December 2019 show profit before tax of RM 11.3 million.

Explain why further audit procedures are required and, for each of the issues, identify ONE (1) relevant audit procedure to address each of the issue noted.(6 marks)

Computer-assisted audit techniques (CAATs) are the applications of auditing procedures using the computer as an audit tool. The overall objectives and scope of an audit do not change when an audit is conducted in a computerised environment.

However, the application of auditing procedures may require auditors to consider techniques that use the computer as an audit tool. Computer assisted audit techniques (CAATs) may be used by auditors to execute substantive procedures or in testing application controls. An auditor may find it necessary to use CAATs in advanced IT systems when the validation and processing controls for routine transaction are embedded in the application programs. Use of CAATs for substantive procedures may be efficient when the entity's data files are maintained in machine readable form.

Required:

(i) An outline of THREE (3) matters which an audit practice must consider when deciding whether or not to use computer audit software. (3 marks)

(ii) Draft TWO (2) procedures that may be adopted by auditors using CAAT, to ensure efficiency and effectiveness of audit for each of the following components in the financial statements of a client.

Sales and trade receivables

Inventories

Purchases and trade payables (6 marks)