You are an audit manager of Daniel & Co and are planning the audit of Pintas Jaya Bhd

(Pintas) for the year ending 30 June 2019. Pintas is a public company listed on Bursa

Malaysia. You have been assigned to audit Pintas for the last two years and this is your third

year with Pintas. The recent event at Pintas has made you considering not to continue

auditing since your sister has been offered a post as assistant accountant with the company.

But Hj Daud, the partner in charge of Pintas insisted you to continue since there is no one

capable of auditing Pintas.

The company is a food retailer with a large network of stores across the country and four

warehouses. The company has been a client of your firm for several years and the forecast

profit before tax is RM20 million. The audit manager has attended a planning meeting with

the finance director and has provided you with the following notes of the meeting.

Planning meeting notes

Pintas has an internal audit (IA) department which undertakes controls testing across the

network of stores. Each store is visited at least once every 18 months. The audit manager

has discussed with the finance director that the external audit team may rely on the controls

testing which is undertaken by IA.

During the meeting, the finance director provided some forecast financial information.

Revenue for the year is expected to increase by 3% as compared to 2018; the gross margin

is expected to increase from 50% to 54%; and the operating margin is predicted to decrease

from 20% to 17%.

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Pintas values inventory in line with industry practice, which is to use selling price less

average profit margin. The directors consider this to be a close approximation to cost. The

company does not undertake a full year-end inventory count and instead undertakes monthly

perpetual inventory counts, each of which covers one-tenth of all lines in stores and the

warehouses.

As part of the interim audit which was completed in February, an audit junior attended a

perpetual inventory count at one of the warehouses and noted that there were a large

number of exceptions where the inventory records showed a higher quantity than the

physical inventory which was present in the warehouse. When discussing these exceptions

with the financial controller, the audit junior was informed that this had been a recurring

issue.

Moreover, the control at the warehouse is lacking since there is only two staff incharge ofthe

warehouse and no supervisor is monitoring their job. You have asked the audit junior to

performed more substantive test to identify any fraudulent activities. During the year, IA

performed a review of the non-current assets physically present in around one-third of the

company's stores. A number of assets which had not been fully depreciated were identified

as obsolete by this review. The finance director is not satisfied with the review done by the

IA and he insisted that your team should have a relook on this review.

The company launched a significant TV advertising campaign in January 2019 in order to

increase revenue. The directors have indicated that at the year-end a current asset of

RM600.000 will be recognised, as they believe that the advertisements will help to boost

future sales in the next 12 months. The last advertisement will be shown on TV in early June

2019.

Pintas decided to outsource its payroll function to an external service organisation. This

service organisation handles all elements of the payroll cycle and sends monthly reports to

Pintas which detail wages and salaries and statutory obligations. Pintas maintained its own

payroll records until 31 December 2018, at which point all the payroll records were

transferred to the service organisation.

Pintas is planning to expand the company by opening three new stores during August 2019

and in order to finance this, in April 2019 the company obtained a RM2.5m bank loan. The

loan tenure is for 5 years and Pintas has to pay the monthly instalment of RM65.000. In

preparation for the expansion, the company is looking to streamline operations in the

warehouses and is planning to make approximately 60 employees redundant after the year

end. No decision has been made as to when this will be announced, but it is likely to be in

June 2019.

Required:

a. Based on the case above, identify two (2) key audit matters that need to be

communicated to those charge with governance of Pintas.

(2 marks)

b. Explain the objectives of the auditor to communicate with those charged with

governance.

(4 marks)

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c. Explain the auditor's responsibilities relating to suspected fraud in the warehouse

(4 marks)

d. Discuss the ethical issues found in the case above

(4 marks)

e. Describe five (5) audit risks and explain the auditor's response to each risk in planning

the audit of Pintas.

(10 marks)

f. Beside financial statement audit, explain other assurance services that can be

provided to Pintas

(6 marks)