Sorfina Berhad, a diversified manufacturer has four divisions that operate throughout Malaysia. The company has historically allowed its divisions to operate autonomously. Corporate intervention occurred only when planned results were not obtained. Corporate management has high integrity, but the board of directors and audit committee are not very active. Sorfina Berhad has a policy of hiring competent people. The company has a code of conduct, but there is little monitoring of compliance by employees. Management is fairly conservative in terms of accounting standards and practices, but employee compensation packages depend highly on performance. The company does not have an internal audit department, and it relies on external auditor to review the controls in each division. Shahrul is the general manager of the Fabricator Division. This division produces a variety of standardised parts for small appliances. Shahrul has been the general manager for the last ten years, and each year he has been able to improve the profitability of the division. He is compensated based largely on the divisions profitability. Much of the improvement in profitability has come through aggressive cost cutting, including substantial reduction in control procedures over inventory. During the last year a new competitor has entered Fabricators markets and has offered substantial price reductions in order to gain market share. Shahrul has responded to the competitors actions by matching the price cuts in the hope of maintaining market share. He is very concerned because he cannot see any other areas where costs can be reduced so that the divisions growth and profitability can be maintained. If profitability is not maintained, his salary and bonus will be reduced. BAC5083 AUDITING AND ASSURANCE JULY-SEPT 20Final AssessmentCONFIDENTIAL Page 6 of 7 2020 Turn Over Shahrul has decided that one way to make the division more profitable is to manipulate inventory because it represents a large amount of the divisions balance sheet. He also knows that controls over inventory are weak. He views this inventory manipulation as a short-run solution to the profit decline due to the competitors price cutting. He is certain that once the competitor stops cutting prices or goes bankrupt, the misstatement in inventory can be corrected with little impact on the bottom line. Required: (a) Discuss FIVE (5) strengths and FIVE (5) weaknesses of Sorfina Berhads internal control. [20 marks] (b) Identify the control environmental factors that causes that Shahruls manipulation of inventory in Sorfina Berhad

b:

The Companies Act 2016 requires a company to appoint an approved company auditor. The final responsibility of the auditor is to issue a written report expressing an opinion on whether the financial statements give a true and fair view. i. Explain the term 'true' and 'fair' view.

ii. Explain THREE (3) rights that enable auditors to carry out their duties.

(b) Discuss the differences between errors, frauds, and illegal acts. Give an example of each.

(c) Discuss THREE (3) reasons why auditors are responsible for "reasonable" but not "absolute" assurance.