2 Solution Audit COMBINE

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FAR 360 | AUDIT OF FINANCIAL STATEMENTS |TUTORIAL

II. Situations that violated the MIA By-Law and Companies Act 1965.

Situations violated the By-Law/Companies Act 1965

The MIA By-Law/Companies Act1965 violated.

Without further investigation, Juwitaaccepted the offer from the Citra BinaSdn Bhd, client company to be theirauditor.

By Law B-8.3 (2). Changes inProfessional AppointmentThe new auditor should communicatewith the old auditor to know whetherthere is any professional reasons forthe changes before the new auditorcan decide whether to accept theappointment.

Juwita decided to charge the audit fee atRM300 with the intention to secure moreprofessional engagement later in thefuture.

B-6.2 (1) unrealistically lowprofessional fee

No member shall charge anunrealistically low professional fee. Aprofessional fee of less than RinggitMalaysia Five Hundred (RM500.00) foraudit services shall be considered asan unrealistically low professional fee.

Juwita accepted the offer from the

management of Citra Bina Sdn Bhd ashare amounting to RM10,00 in thesubsidiary company which is not auditedby Juwita & Co.

B-1.6. Professional independence-Self

Interest Threat ^

A firm or a member of the assuranceteam benefit from material indirectfinancial interest in the assuranceclient.

Question 2A.

I. Four (4) Limitation of Internal Control Systema. Human Errorb. Management override controlc. Cost constraintsd. Lack of personal quality of staff (Integrity and independent)e. Inadequate/inefficient ICS due to changes in company size or activities

II. The procedures to be performed to ascertain ICS:a. Examine previous audit workb. Clients own documentation (manual, SOP)

c. Interview with clients staffd. Tracing transaction (Walkthrough test)e. Examining clients documents

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f. Observation of clients procedures

B.

I. Factors should an auditor consider before accepting appointment from a new client:

a. Obtain and review financial information.b. Inquire of third parties about any information concerning theintegrity of the prospective clients and its management.c. Communicate with the predecessor auditor as required by MIA By-Laws.d. Consider any circumstances that will require special attention suchas litigation and going concern issues.e. Determine if the auditor is independent of the client and able toprovide the desired service.f. Determine whether the auditor has the necessary technical skillsand knowledge on the clients industry.g. Determine if acceptance of the client would violate any applicableregulatory agency requirements or By-laws.

II. Responsibility of successor auditor:

a. The successor auditor should get the prospective clientpermission to communicate with the existing predecessor auditor. If thepermission is not given, the successor auditor should decline theappointment.b. The successor auditor should inquire the predecessor auditorwhether there is any professional reason for the proposed change. If thereare such reasons, the successor auditor should request the predecessorauditor to provide him with all necessary details in order to decide theacceptance of the appointment.c. If the successor auditor does not receive a reply to his inquiry, heis required to send a reminder to the predecessor auditor or communicatewith him through other means.

d. If no response within a reasonable period after sending of 2reminders, the successor auditor should inform the predecessor auditor of hisattention to accept the engagement.

QUESTION 3

I. External evidences are more reliable than internal evidences because it originatedfrom independence sources from outside the entity.

II. Type of evidence gathered:-

a. 1 Physical examinationb. 5 Analytical proceduresc. 4 - Confirmation

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d. 2 Computatione. 4 confirmationf. 3 inspection of documentation

QUESTION 4

A. Appropriate Audit Report and Reasons for each case:-

1. Qualified report DisclaimerDue to limitation imposed by the client to confirm the debtors account balances andthe auditor is unable to satisfy himself by the use of alternative procedures.

2. Unqualified report Modified paragraphThis situation relates to the matter regarding the going concern concept.

3. Qualified report - Except forThis situation relates to the material misstatement. The auditor should issue amodified report with except for opinion on the ground of disagreement with themanagement on the material misstatement.

B.

I. Describe three (3) main purposes of analytical procedures.a. Planning stage assist auditor to better understand the business and todesign nature timing and extend of audit procedures.b. Substantive testing stage to obtain audit evidence about particularassertion related to account balances or classes of transactionsc. Final stage For overall reviewing of financial information to ensurereasonableness of financial statements.

II. State and explain two (2) types of analytical procedures.

a. Trend analysis Examine change in the account over timeb. Ratio analysis Comparison across time or to a benchmark of relationship

between financial statements items or between financial and non-financial date.c. Reasonableness Analysis Or Test - forming and expected relationship usingfinancial data, non-financial data or both to test account balances or changes inaccount balances.

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QUESTION 5

Model 3:Modified Opinion _ Except For (matter do affect the auditors opinion)

REPORT OF THE AUDITORS FOR COMPANIES INCORPORATED INMALAYSIA PURSUANT TO THE COMPANIES ACT, 1965

Company No397652 W

Report of the Auditors to the Members ofGEMILANG Sdn Bhd

(Incorporated in Malaysia)

We have audited thefinancial statements set out on pages xx to yy of Gemilang Sdn Bhdfor the year ended 31 December 2007.

The financial statements are the responsibility of the company's directors. Our responsibility

is to express an opinion on the financial statements based on our audit.

It is our responsibility to form an independent opinion, based on our audit, on those financialstatements and to report our opinion to you, as a body, in accordance with Section 174 ofthe Companies Act 1965 and for no other purpose. We do not assume responsibility towardsany other person for the content of this report.

Except as discussed in the following paragraph, we conducted our audit in accordancewith approved Standards on Auditing issued by the Malaysian Institute of Accountants.These standards require that we plan and perform the audit to obtain all the information andexplanations, which we considered necessary to provide us with sufficient evidence to givereasonable assurance that the financial statements are free of material misstatement. An

audit includes examining, on a test basis, evidence relevant to the amounts and disclosuresin the financial statements. An audit includes an assessment of the accounting principlesused and significant estimates made by the directors as well as evaluating the overalladequacy of the presentation of information in the financial statements. We believe our auditprovides a reasonable basis for our opinion.

DO NOT OBSERVE THE COUNTING INVENTORIES

We did not observe the counting of the physical inventories as of 31 December 2007, sincethat date was prior to the time we were initially engaged as auditors for the Company. Owing

to the nature of the Companys records, we were unable to satisfy ourselves as to inventoryquantities by other audit procedures.

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In our opinion, except for the effect on the financial statements of the matter referred to inthe preceding paragraph,

a) the financial statements which have been prepared under the historical cost convention,as modified by the revaluation of certain assets, are properly drawn up in accordancewith the provisions of the Companies Act, 1965 and applicable approved accountingstandards so as to give a true and fair view of :-

(i) the matters required by Section 169 of the Companies Act, 1965 to be dealt with inthe accounts of the Company and

(ii)the state of affairs of the Companyas at 31st December 2007 and of the results ofthe operations of the Companyand of the cash flows of the Company for the yearended on that date;

and

b) the accounting and other records and the registers required by the Companies Act,1965 to be kept by the company and by the subsidiaries of which we have acted asauditors have been properly kept in accordance with the provisions of the said Act.

KAMAL FADZIR & Co., AHMAD FADZIR FIRDAUS

AF 2500 PartnerChartered Accountants 2502/08/08/(J)

Kuala Lumpur,Date: 20 May 2008

QUESTION 6

To discuss definition of audit independence, independence in fact and inappearance. Discuss why the independence issue is importance in an auditing List out the specific circumstances that may create threats to the independence andapply safeguards for each of the specific circumstances. Effort and understanding of the group should be main the criteria for mark allocation.Mark allocation upon lectures assessment and discretions.

QUESTION 7

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Permanent files- contain data of historical or continuing nature, i.e copies of excerpts from,the memorandum of association of the company, charts of accounts, organization chart, andaccounting manual.

Current files- include all audit documentation applicable to the year under audit.i.e. copy offinancial statements and auditors report, audit plan and audit programs, working balancesheet and income statement, and adjusting and reclassification journal entries.

QUESTION 8

Internal Auditor External Auditor

Certification body The institute of Internal AuditorsMalaysia (IIAM)

Malaysian Institute ofMalaysia (MIA)

Certified designation Certified Internal Auditor (CIA) Chartered Accountant (CA)

License to practice No Yes

Primary Responsibility To Audit Committee or Board ofDirectors

To Shareholders of thecompany

Scope of audit All activities of an organization Financial statements

Audit Evidence Detail Sampling

Responsibility Evaluating, examining theeffectiveness of accounting andinternal control system

Expression of opinion byreporting independently onthe financial statementprepared by themanagement

Status Employee within a company or outside party engaged by thecompany

Chartered Accountant (CA)independently form theentity

Job Scope Reviews activities continually. Reviews records supporting

financial statementsperiodically usually oncea year

Roles and duties Determined by management Determined by statue,Companies Act 1965

Responsibility Focuses on future events byevaluating controls designed toassure the accomplishment ofentity goals and objectives.

Focuses on the accuracyand understandability ofhistorical events asexpressed in financialstatements.

Responsible for Fraud Is directly with the prevention of

fraud in any form or extent in anyactivity reviewed. Responsiblefor all fraud

Is incidentally concerned

with the prevention anddetection of fraud ingeneral, but is directly

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concerned when financialstatements may bematerially affected.Responsible for material

fraud.

QUESTION 9

a. Type of audit report

The type of report issued is Qualified Report Except For Reason: The situationrelates to the disagreement regarding the records of inventory which should be valuedat lower of cost or net reliasable value as required by FRS 102. Since the companyrefused to amend the inventory figure (which is material but not pervasive), and otherfigures in the financial statement are fairly presented, the auditor should issue an ExceptFor opinion.

b. Audit procedures

Auditprocedures

Explanations & Example

1. Inspection ofrecords ordocumentation

Vouching internal & external documents & normally makes up bulk of evidence.E.g. Sales invoices

2. Examinationof physicalassets

Inspecting and counting of physical assets. E.g. Counting cash on hand,certificates of deposit.

3. Observation Looking at a procedures performed by others. E.g. observation of the counting

of stock

4. Inquiries Seeking information of knowledgeable person. E.g. inquiry management aboutentity.

5. Confirmation Specific type of inquiry in writing. E.g. bank balance, debtors etc

6. Scanning Review of accounting data to identify significant or unusual items. E.g. scanningcredit balance in the debtors ageing report.

7. Computationor re-calculation

Checking mathematical accuracy. E.g. recalculate the depreciation expenses

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8. Re-performance

The auditor independence execution of procedures. E.g. the auditor re-performsthe PPE listing.

QUESTION 10

a) The Internal Control

10 Weaknesses are:1. Samad does not verify the approval of purchase requisition before proceed with the

purchasing process.2. No open tender procedures to assure the best price is obtained.3. No supervision over Samads work. He issue and authorised the purchase order without

approval from any superior.4. Before placing an order, Samad does not determine the adequacy of the vendors past

record as a supplier to them.5. The confirmation of agreed price by the vendor is made verbally and not in written.

6. Taufiq, the receiving clerk compare the quantity stated both in purchase order anddelivery notes from supplier but he does not count the goods received.

7. A written notice of goods received is not send to requisition department.8. The mathematical accuracy of the invoice is not recomputed by Samira.9. Quantity of goods stated in the invoice is not compared with a report of quantity received.10. The cheques is signed by one officer only.11. The authorization of payment voucher should be done by En Azhar before the issuance

of cheque.12. The cheque is not crossed with account payee only.13. The amount of the cheque should be matched with the amount of invoice.14. All documents to support the payment voucher are not cancelled before it is filed.

5 Recommendations are:1. Samad should have verified the approval of purchase requisition by the

requisition departments head before processing the purchase. This is to ensure thatthe purchasing has been made for the business and within the budget limits.

2. An open tender procedure should be implemented so that the company canobtain the best price and be fair to other suppliers.

3. The purchase order issued by Samad should be approved and authorised byhigher officer

4. Taufiq should count the goods receive and compare with the amount stated in

purchase order and the delivery notes from supplier and check on the condition ofgoods received before issuing the good receive notes.

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5. Notification of goods receive should also be made in written so that a properrecord is kept by the receiving department.

6. For a proper control of payment, all cheques should be signed by two officers.7. All cheques should be crossed and marked account payee only.

8. All payment documents should be marked paid or cancelled before it isfiled to avoid double payments.

b) Segregation of Duties

Segregation of duties will reduce the opportunity of any one person to be in the positionof both to perpetrate and conceal errors or fraud in the normal cause of is or he duties.

c) The Problems may exist

Problems that may exist in implementing formal internal control in small business are:

1. Segregation of duties is impossible because the small number of staffs.2. The cost of implementing formal internal control outweigh the benefits3. The possibilities of system only controlled by one or few people.4. The reliability of internal control of small company will be less because of lack of

internal audit.

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2 Solution Audit COMBINE