AUD689 ANSWER SCRIPTS FRONT PAGE

CONFIDENTIAL

ANSWER BOOKLET

FACULTY ACCOUNTANCY
PROGRAM CODE AC220
COURSE CODE AUD689
LECTURER’S NAME DR. NADZRI AB GHANI
DATE OF EXAMINATION 29 JULY 2022

STUDENT NO. 2019252944
STUDENT’S GROUP KAC2206A
TOTAL PAGES USED 8 PAGES

UiTM’s  I agree to act in a manner that is consistent with UiTM’s academic
ACADEMIC assessment and evaluation policy and processes. I will practice integrity in
INTEGRITY regard to all academic assessments, and pursue scholarly activities in UiTM
PLEDGE in an open, honest, and responsible manner. I will not engage or tolerate
acts of academic dishonesty, academic misconduct, or academic fraud that
include but are not limited to Cheating, Plagiarism, Fabrication,
Deception or Furnishing False Information.

 As a student of UiTM, I am expected to conduct myself in a manner that

exemplifies honesty and integrity. If for any reason, I am found to be

violating the policies set out by UiTM, I understand that disciplinary action

can be taken against me. Source: UiTM’s Academic Integrity Pledge

DATE: 29/7/2022 SIGNATURE: HAKIM

EXAMINERS’ VERIFICATION: Question No. Marks
Tick(√) in the relevant boxes
I have marked all the written pages in this
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FIRST EXAMINER

Name : DR NADZRI AB GHANI

Date :

Signature :

SECOND EXAMINER / MODERATOR

Name :

Date :

Signature : TOTAL

QUESTION 1 ETHICAL AND RECOMMENDATION
A. PROFESSIONAL ISSUES
NO
Perfect Clean Bhd was billed Given that consulting
1 for all the services performed services are not audit
by Faisal & Partners, services, Faisal & Partners'
2 including audit and fee should not be included.
consultancy services.
3
4 Encik Sufian has requested Encik Sufian's work shouldn't
assistance from Faisal & be accepted by Faisal &
Partners in designing and Partners. They must
implementing the website complete their task and
and online sales system of provide an auditor's report
Perfect Clean Bhd. that includes the auditor's
opinion after having
reasonable confidence that
the financial statements are
free from serious
misstatement, whether as a
result of fraud or error.

Faisal & Partners decided to
fully rely on the work done by
Bard Associates for these
sections because there was
a mountain of work done in
the sales and expenses area
by Bard Associates.

The audit team was invited to If the audit team was given
attend the Perfect Clean Bhd the opportunity to attend the
annual dinner while doing the annual dinner of Perfect
field audit. The whole team Clean Bhd while doing the
attended the annual dinner field audit, their impression of
and was surprised to receive independence or objectivity
RM1,000 hypermarket would be compromised.
coupon as a gift for each of Additionally, each team
the team member. member receives a present
of a RM1,000 hypermarket
coupon. They shouldn't have
accepted RM1,000
hypermarket coupons as
gifts for each team member
while doing the field audit
and attending the Perfect
Clean Bhd annual dinner.

B.

i. Explain two (2) reasons why the auditor has to provide quality audit services.

The systematic evaluation of a company's quality management system is known as quality
auditing (QMS). A quality audit is often performed by a team of auditors, either internal or
external.

To instill confidence in the accuracy of financial reports, need to maintaining trust in the
independent assurance they give requires increasing audit quality and consistency of
performance. In addition, the quality of the information contained in financial reports may be
accepted by investors and other users.

ii. Explain two (2) quality control policies and procedures for human resources at the

firm level as set out in ISQC1.

The first quality control policies and procedures is cover the policies and procedures that
relates to recruitment process, development of competence, carrier development,
performance evaluation and the compensation to the start.

Next, human resources policies also must ensure the staff are committed to ethical principal
in carry out engagement in accordance with professional standards and also failure to
comply with may result in disciplinary action. This to ensure the firm has taken reasonable
steps to hired and to have right person that can deliver the high quality work.

C. Evaluate whether Radzi & Co is liable to Standard Merchant Bank.

Due to the lack of a contractual connection and the auditor's lack of a duty of care to the
plaintiff, Radzi & Co. is not accountable. Because Star Technology was affected, the audited
report may not have accurately represented the company's true financial situation. Only
those who are particularly prepared for a third party for a specific purpose should be held
responsible for the accounts, such as principal beneficial third parties and anticipated third
parties. This is demonstrated in the case of Ultramares Corporation vs. Touche et al. (US,
1931), where the court found that the auditors owed the plaintiff no duty of care since they
were not contractually related.

QUESTION 2

A.

i. the relationship between audit risk and materiality.

The level of audit risk and the level of materiality have an inverse connection, meaning that
the higher the amount of materiality, the lower the audit risk, and vice versa. When
determining the type, timing, and scope of audit processes, auditors evaluate the inverse
connection between materiality and audit risk.

ii. the relationship between audit risk and audit evidence.

The quantity of evidence that the auditor should gather grows along with the risk. For
instance, in order to respond to substantial threats, more evidence is typically
required.Quality of the audit evidence obtained.The demand for further confirming evidence
declines as the quality of the supporting evidence rises.

B.

A material misstatement is information in the financial statements that is sufficiently incorrect
that it may impact the economic decisions of someone relying on those statements. When
management fails to rectify a substantial misrepresentation that is discovered by an auditor,
the auditor should assess the impact of the error on the financial statements and determine
whether to revise the audit opinion.

The auditor should determine if the risks of substantial misrepresentation resulting from
fraud may be connected to particular account balances, classes of transactions, and related
statements in the financial statements, or if they are more generically related to the financial
statements as a whole.

QUESTION 3

a. Identify two (2) procedures commonly conducted to audit contingent liabilities.

The first procedures is identification. According to whether they are probable, conceivably
possible or remote, the auditors must estimate the probability of each contingency.

The next one is checking amount. Before include a contingent liability in a financial report, an
auditor must determine its warranty and materiality.

b. Explain four (4) specific matters that should be included in a client representation
letter.

The first specific matters that need to be included in a client representation letter is the
management acceptance of responsibility and accountability for assortism. Management
members provide confirmation may find themselves in the position of conflict of interest.

Next, management confirmation of completeness of information provided in the
representation. For the example, as representations faithfulness is an essential for reliable
financial statements.

The next matters is management responsibility for compliance with financial reporting
framework. In addition, this can be seen where a written format confirmation is a practical
way of obtaining the audit evidence.

The last one is a merger and acquisition after balance sheet date. This situation make that
the balance sheet need to be consolidated by management and need to response fast.

c. In each of the situations (i - iv) above, justify the appropriate treatment that should
be taken by MEB on their financial statements.

Situation i - Liability for lawsuits is conceivable but not likely. In such circumstances, the
corporation is required to include a notation of contingent liabilities in the financial
statements. A business does not have to disclose its prospective debt if it decides it is
unlikely to take on debt.

Situation ii - Since the lawsuit-related event took place before the audit report was released,
it is the auditor's duty to update the financial statements. Companies were also ignorant of
their debt related to accounts receivable. As a result, the financial report has to be modified.

Situation iii - Before the audit report was released, a flood happened after the balance sheet
date. The loss of RM 100,000 will have a significant effect on user choices the next year. As
a result, the occurrence must be included in the financial report's notes.

Situation iv- The statement of financial situation comprised the current customer accounts
receivable. A customer's bankruptcy that takes place after the balance sheet date often
verifies that a loss on a trade receivable occurred at that time. As a result, revisions to the
financial statements are required to reflect those who were declared bankrupt and were alive
as of the balance sheet date.

QUESTION 4

a. Explain how CIS can improve the client’s internal control system.

The first improval that can make is by segregation of roles is critical in an IT system since it
is the responsibility of all functions that involve initiation, authorization, and record keeping.
As a result, division of roles is essential for the internal control system.

Structured authority and responsibility are critical controls in manual and computerized
systems to ensure that the client's objectives are satisfied.

Employees that are capable and dependable are a crucial component of any internal control
system. It is critical to have staff with the necessary expertise and ability to administer and
operate the information system.

The majority of the resources and records of an IT application may be stored in a database
system. Physical control is essential for the client's internal control in any system. As a result,
robust backup techniques for computer programmes and data files are critical.

b. Explain three (3) approaches auditor may use to obtain an understanding of client’s

general and application controls.

The first approaches is audit around computer. Auditor can perform procedures to obtain
understanding accounting and internal control. It is crucial to ensure the completeness,
accuracy and validity of information. This procedure is needed in testing client’s sexual
control.

For testing client’s application control. Auditor might use CAAT of computer. Assisted Audit
Techniques. The first one is Generalized Audit Software (GAS). It is program to program
data processing function such as need and extract data from entity’s computer files and
databases. It helps auditor to understand clients by further auditing testing, perform
calculation, select sample or prosocial report.

QUESTION 5

a. Explain the relationship between Shah & Shah and Awais Textiles Sdn Bhd, based
on the auditor’s duty of care. Students may provide a common law case as an
example.

By demonstrating that they relied on the poorly constructed audited financial statements that
Shah & Shah had audited while giving credit to the client, Awais Textiles Sdn Bhd must
demonstrate a causal link between the duty violation and their loss. Awais Textiles Sdn Bhd
must demonstrate that the auditor, who was hired only to conduct a due diligence audit on
Asli Linen Sdn Bhd (Asli Linen), acted carelessly in carrying out the assignment. For
example in the case, in JEB Fasteners vs. Marks, Bloom & Co. Plaintiff, the court
determined that the auditor "ought to have reasonably foreseen" that a takeover was a
potential source of capital and that someone planning to acquire the business might rely on
those accounts. The auditor knew at the time the accounts were prepared that the company
needed outside financial support. As a result, the auditor owes a duty of care to third party.

The auditors must constantly use expertise and care in performing their tasks because of the
contractual connection they have with their clients. His client has the right to sue the auditor
for contract breach, negligence, or both if the auditor fails to carry out his duties effectively.
Cases: Ultramares v Touche. Et. Al (1931; Candler v Crane, Christmas and Co. (1951);
Hedley Byrne vs Heller & Partners (1963); JEB Fasteners Ltd v. Marks, Bloom & Co (1981);
Caparo Industries Pty Ltd v. Dickman & Others (1990); Royal Bank of Scotland v.
Bannerman Johnstone Mc Clay and Others (2002)

b.

AUDIT RISK CONTROL MEASURES/
RECOMMENDATION

1. The document was not properly reviewed. Conduct appropriate documentation and
only one signature on the procurement of review on a regular basis. At least two
raw materials costing more than RM100,000 persons should be in charge of reviewing the
during the audit of purchase transactions. materials.
This situation has the potential to create
multiple misstatements due to fraud or
errors.

2. There are no security measures in place, To implement physical access control,
so anyone from the public can enter the security guards may be used to validate IDs
warehouse. or access key cards.

3. No segregation of duties. the only person Request a list of all recent new vendors and
responsible for ordering and receiving check to see whether they are acceptable.
supplies for Asli Linen is appropriateness.
Encik Kamal, the purchase manager. Encik
Kamal does not perform any checks on the
goods. received. He immediately signed the
receiving report from the vendor.

4. Discovered that one of Asli Linen cashiers Perform monthly bank reconciliations and
had pilfered/steal RM1,500 for the past 4 credit card statements for company use.
months. Work with a licensed business accountant to
make sure that records are kept up to date,
transactions are reported accurately, and the
audit trail doesn't reveal any shady activities.

C. Based on the information provided in the case of Asli Linen Sdn Bhd, develop three
(3) financial indicators which you would consider in determining whether the
company is experiencing going concern problem.

The first financial indicators is profitability where Asli Linen Sdn Bhd is now reporting a loss
of -1.7 percent for the year ending on December 31, 2021, after being profitable the year
prior. This performance drop is considerable. Profitability will certainly suffer even more in
the following fiscal year as a result of the product's obsolescence, which accounted for
RM300,000 in items provided to Asli Linen on credit by Awais Textiles Sdn Bhd (Awais).
Problems with the going concern are indicated by significant operating losses.

Asli Linen Sdn Bhd (Asli Linen) has higher current liabilities than current assets, which
means that it would not be able to pay its debts when they fall due, according to the current
and quick ratios. Supply restrictions due to unpaid vendors might exacerbate the working
capital problems. It's possible that there won't be enough money to pay for labour, overhead,
or loan fees. Additionally, due of its ongoing cash flow issues and need to extend its credit
facility to cover ongoing expenses, the company's cash inflows are likely to be reduced.

d. Identify two (2) potential risks to Asli Linen Sdn Bhd in operating in Computerised

Information System (CIS) environment.

The first potential risks is to reliance on programmes or systems that incorrectly analyse data,
process false data, or both could lead Asli Linen to make poor business decisions or
incorrect judgments. Furthermore, a third party with knowledge may purchase shares or
stocks in the aforementioned company using an audited financial statement that contains an
error as a result of processed data that may be faulty and inaccurate data. Profit estimates
could be inaccurate or inflated.

Next, unauthorized access to data any company entity might have unrestricted access to the
data, view it, and perhaps make unintended changes to it. Data deletion and inaccurate
changes, such as the recording of transactions that either didn't happen or were recorded
wrongly, would also be a result of unauthorised access.