QUESTION 4

a)Your firm has recently been appointed as the external auditor of Pharma Berhad

(Pharma), a listed company, which sells pharmaceutical products. The company operates

from a head office in Kuala Lumpur and eight offices in Middle East. Trading conditions

in Middle East have been difficult and Pharma has recently opened a network of offices

in Asean regional in a drive to increase business. Both Middle East and Asean offices'

managers have been set targets for generating revenue for their office and they are paid

bonuses when the targets are reached.

During the external audit for the year ended 31 March 2020, you identified the following

deficiencies in internal control to be reported to those charged with governance and

management at Pharma:

(1) Pharma does not have any bribery prevention policies.

(2) References were not always obtained for all new employees.

(3) The Middle East offices did not follow Pharma's accounting policies when preparing

monthly accounting returns for submission to head office. Consequently, revenue and

profits were overstated.

Required:

For each internal control deficiency identified above, you should outline the possible

consequence(s) of the deficiency and provide recommendation(s) to address each

deficiency. You should present your answer using the following subheadings:

(i) Bribery prevention policies

(ii) Employee references

(iii) Not following accounting policies

b)Described below are situations which have arisen at two unrelated external audit clients

of your firm. The year end in each case is 31 March 2020.

ABC Berhad (ABC)

ABC is an international company operating in the construction sector. The financial

statements for the year ended 31 March 2020 include cranes disposed of during the year

with a carrying amount of RM220,000. ABC has accounted for the proceeds of the

disposal in other income in the statement of profit or loss but has not removed the

carrying amount of the disposed cranes from the statement of financial position. The

directors refuse to amend the financial statements in respect of this matter because the

buyer of the cranes has not yet collected the cranes which are still on ABC's premises.

ABC uses sub-contractors who are paid a variable daily rate depending on the location

and complexity of the construction project. The system used to process the payments to

sub-contractors developed a fault during the year and many sub-contractors were paid at

incorrect daily rates. The directors estimate that RM340,000 was overpaid and they have

recorded a receivable for this amount at 31 March 2020. At the time of completion of the

audit, RM25,000 had been received in respect of this balance. Your firm's enquiries

during the audit revealed that ABC has not had any success in contacting any of the sub-

contractors that are still to reimburse the company as they no longer undertake work for

ABC. The directors refuse to include an allowance for doubtful debts in respect of the

outstanding amount. ABC's total assets at 31 March 2020 are RM42.3 million and profit

before tax for the year then ended is RM7.6 million.

Hip Berhad (Hip)

The managing director of Hip refused permission for your firm to contact Dome Berhad

(Dome), a customer, to confirm the balance of RM185,000 which was outstanding at 31

March 2020. She claimed that the relationship between the two companies was

particularly sensitive and that she did not want to upset that relationship. At the time of

completion of the audit, RM15,000 had been received in respect of the outstanding

balance and the managing director is confident that Dome will pay all outstanding

amounts. No alternative audit procedures were available to establish the existence of the

debt.

Hip's total assets at 31 March 2020 are RM5.2 million and profit before tax for the year

then ended is RM1.5 million.

Required:

For each of the situations outlined above, state whether or not you would modify the

audit opinion. Give reasons for your conclusions and describe the modifications, if any,

to each auditor's report.