QUESTION 1 (16 MARKS)

a) Discuss the need for an auditor to conduct audit sampling. (3 marks)

b) JaeMOn is an audit senior at Dorayaki & Partners. He is planning for an audit of an existing client, Sushi Tipuuda Sdn Bhd, a manufacturer of sushi and bakery products that operates in Cherating. The client has several outlets located in Chenore, Jebon, and Dongnae. Each outlet had a turnover of RM200,000 last year and it made a profit of RM50,000. JaeMOn is unsure of the best approach to select samples for inventory given the different locations of the client's outlets. JaeMOn also concerns that he may select a non-representing sample of inventory.

Required:

(i) Advice JaeMOn on which audit sampling approach is suitable to conduct audit testing on inventory. (5 marks)

(ii) Explain to JaiMOn about the importance of representative sample. (3 marks)

(iii) Elaborate factors that JaeMOn need to consider to avoid choosing a nonrepresentative sample.

QUESTION 2 (22 MARKS) Part A (10 Marks)

As an external auditor of TuDiaaa Sdn Bhd (TuDiaaa), Kundur is assessing the effectiveness of internal control for TuDiaaa's payroll cycle by conducting a first compliance test to gain an understanding of the structure of the internal control system. Kundur perceives that it is important to make sure that the key control arrangement exists in the payroll cycle.

Required:

a) Briefly discuss TWO (2) major aspects of internal control that Kundur should consider to assess the control risk for the payroll cycle. (4 marks) b) Briefly explain the main objectives of the test of control during the testing phase. (2 marks)

c) Advice Kundur on which action should be taken if the result of the test of control in

b) does not support his control risk assessment in a).

Part B (12 Marks)

SeSUDU Caf (SeSUDU) operates a chain of four restaurants each located inside Berudu Gulf shopping centers owned and operated by ShinChan Investment Sdn Bhd (SCISB). SeSUDU leases each of its premises from SCISB and is required by the terms of each lease to pay rent based on the level of revenue generated by each restaurant. SeSUDU is required to declare the revenue for each restaurant to SCISB annually and SCISB requires the revenue declared to be reviewed and reported on by an independent assurance provider. SeSUDU is exempted from a statutory audit under the Companies Act 2016. Your firm has been engaged by SeSUDU to review and provide assurance on the restaurant revenues declared by SeSUDU to SCISB for the year ended 31 December 2020. The terms of the engagement are restricted to making inquiries of management and applying analytical and other review procedures. In addition, your firm is required to provide a report to the management of SeSUDU regarding any relevant matters, such as any deficiencies in internal control identified during the review. During your firm's review, you identified that one of the four restaurants, located in Flower Cove, showed a decrease in revenue of 12% during the prior year compared with the other three restaurants, each of which showed a small increase. When you made inquiries of management regarding the decrease, you were told that the Flower Cove restaurant operated a new discount voucher scheme for customers from 1 January 2020. Vouchers are printed in the local newspaper and customers present the discount voucher on payment, reducing the final price of their meal by 5%. The net revenue figure, i.e., after deducting customer discounts, is reported by the restaurant to SeSUDU's head office and recorded in the sales account in the nominal ledger. The terms of each lease require SeSUDU to declare the net revenue for each restaurant. During discussions with the Flower Cove restaurant manager, you identified several internal control deficiencies in respect of the discount voucher scheme. After entering the full price of a meal into the cash till, staff members manually calculate and separately enter the 5% discount to give the final price of the customer's meal. Any member of staff may deduct a discount from a sale entered into the till without authorization. There is no daily reconciliation between discounts deducted on the cash till and physical discount vouchers presented as the vouchers are discarded by restaurant staff on the presentation by the customer. SeSUDU's management is unable to offer any other explanations regarding the 12% decrease in revenue at the Flower Cove restaurant. Your firm has identified no issues with the net revenue declared in respect of the other three restaurants.

Required:

a) Identify the internal control weaknesses of SeSUDU and explain the possible consequences of the identified internal control deficiencies to the management. You should provide recommendations to remedy the deficiencies. (ICAEW Adapted) (9 marks)

b) Based on your answer in a), assess and justify the level of control risk.