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QUESTION 5 Your firm has recently been appointed as external auditor of Pertiwi Berhad (Pertiwi), a listed company following the resignation of the previous auditor.

QUESTION 5

Your firm has recently been appointed as external auditor of Pertiwi Berhad (Pertiwi), a listed company following the resignation of the previous auditor. Pertiwi is a retailer of a range of new and used cars from sites in major cities in peninsular Malaysia. In order to secure the sale of a new car, Pertiwi frequently takes a customer's used car in part exchange. The used car is then sold to another customer or is sent to an auction to be sold. This is your firm's first listed company client and its only client in the motor trade. During the audit of the financial statements for the year ended 30 September 2021, the following was discovered:

(i) On a number of occasions, sales staff granted customer discounts in excess of authorized levels.

(ii) Pertiwi publically claims that each used car is assessed against a checklist of 100 items to ensure that it is safe to drive. Workshop managers have stated that, because of insufficient time, some of these checks are rarely performed.

(iii) Inventories of used cars with a book value of RM2.4 million at 30 September 2021 were sold at auctions in October 2021 for RM0.9 million. The directors have refused to amend the financial statements as the amendment will cause the profit to fall below the level required for the payment of directors' bonuses. The draft financial statements for the year ended 30 September 2021 show profit before tax of RM22.9 million and total assets of RM121 million.

Required:

(a) Explain why the risk of expressing an inappropriate opinion may be higher in your firm's first audit of Pertiwi's financial statements. Assess how your firm can mitigate this risk.

(b) In respect of the internal control deficiencies listed in (i) and (ii), draft points for inclusion in your firm's report to those charged with governance and management of Pertiwi. For each deficiency, you should produce the possible consequence(s) of the deficiency and provide recommendations to address it. You should present your answer using the following subheadings: - Excessive discounts - 100 item checklist

Format for Question B:

- Excessive discounts

Deficiency Possible Consequence Recommendations

- 100 item checklist

Deficiency Possible Consequence Recommendations

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