FAR 360 | AUDIT OF FINANCIAL STATEMENTS | TUTORIAL

QUESTION 1 A. I. Disqualification of the auditor. Section 9 (1) : A person is disqualified from acting as auditor of the company a) if he is not an approved company auditor. b) if he is indebted with the company or to the corporation that is related to the company in an amount exceeding RM2,500. c) if he is : (i) an officer of the company; (ii) a partner, employer or employee of an officer of the company; (iii) a partner or employee of an officer of the company; or (iv) a shareholder or his spouse is a shareholder of a corporation whose employee is an officer of the company; (v) if he is responsible for or he is the partner, employer or employee of a person responsible for the keeping of the register of members or the register of holders of debenture of the company. II. Auditors reporting responsibilities: a. Auditors opinion on the financial statements whether they are properly drawn up in compliance with the Act and applicable accounting standards and give a true and fair view b. Auditors opinion on whether the accounting and other records and the registers required by the Act have been properly kept in accordance with the Act. B I. Situations that according the MIA By-Law and Companies Act 1965. Situations according to the ByLaw/Companies Act 1965 The audit partner Juwita was an accounting graduate from UiTM and has been working with the Big 4 accounting firm for the past three years. Juwita is an MIA member and be awarded with the audit licence to practice. Juwita & Co has printed name card for the partner and the audit manager. In the business card, it stated the name of the audit firm, address and contact number. There are also personal particulars on the designation and qualification of the partner and audit manager The MIA By-Law/Companies Act 1965 followed. Sec 8, Companies Act 1965 An Approved Company Auditor is a licenced person approved by the Ministry of Finance to act as company auditor. The person must be of good character, competent and MIA member. By Law B-3.1(1). Advertising, Publicity and Solicitation. A member who is a chartered accountant may advertise himself as being engaged in practice as long as the promotional material issued by member firms (business card) contain factual statement, the truth of which a member is able to justify.

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II. Situations that violated the MIA By-Law and Companies Act 1965. Situations violated the ByLaw/Companies Act 1965 Without further investigation, Juwita accepted the offer from the Citra Bina Sdn Bhd, client company to be their auditor. The MIA By-Law/Companies Act 1965 violated. By Law B-8.3 (2). Changes in Professional Appointment The new auditor should communicate with the old auditor to know whether there is any professional reasons for the changes before the new auditor can decide whether to accept the appointment. Juwita decided to charge the audit fee at B-6.2 (1) unrealistically low RM300 with the intention to secure more professional fee professional engagement later in the future. No member shall charge an unrealistically low professional fee. A professional fee of less than Ringgit Malaysia Five Hundred (RM500.00) for audit services shall be considered as an unrealistically low professional fee.

Juwita accepted the offer from the management of Citra Bina Sdn Bhd a share amounting to RM10,00 in the subsidiary company which is not audited by Juwita & Co.

B-1.6. Professional independence-Self Interest Threat ^ A firm or a member of the assurance team benefit from material indirect financial interest in the assurance client.

Question 2 A. I. Four (4) Limitation of Internal Control System a. Human Error b. Management override control c. Cost constraints d. 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 work b. Clients own documentation (manual, SOP) c. Interview with clients staff d. Tracing transaction (Walkthrough test) e. Examining clients documents

FAR 360 | AUDIT OF FINANCIAL STATEMENTS | TUTORIAL

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 the integrity of the prospective clients and its management. c. Communicate with the predecessor auditor as required by MIA ByLaws. d. Consider any circumstances that will require special attention such as litigation and going concern issues. e. Determine if the auditor is independent of the client and able to provide the desired service. f. Determine whether the auditor has the necessary technical skills and knowledge on the clients industry. g. Determine if acceptance of the client would violate any applicable regulatory agency requirements or By-laws.

II. Responsibility of successor auditor: a. The successor auditor should get the prospective client permission to communicate with the existing predecessor auditor. If the permission is not given, the successor auditor should decline the appointment. b. The successor auditor should inquire the predecessor auditor whether there is any professional reason for the proposed change. If there are such reasons, the successor auditor should request the predecessor auditor to provide him with all necessary details in order to decide the acceptance of the appointment. c. If the successor auditor does not receive a reply to his inquiry, he is required to send a reminder to the predecessor auditor or communicate with him through other means. d. If no response within a reasonable period after sending of 2 reminders, the successor auditor should inform the predecessor auditor of his attention to accept the engagement.

QUESTION 3 I. External evidences are more reliable than internal evidences because it originated from independence sources from outside the entity. II. Type of evidence gathered:a. 1 Physical examination b. 5 Analytical procedures c. 4 - Confirmation

FAR 360 | AUDIT OF FINANCIAL STATEMENTS | TUTORIAL

d. 2 Computation e. 4 confirmation f. 3 inspection of documentation

QUESTION 4 A. Appropriate Audit Report and Reasons for each case:-

1.

Qualified report Disclaimer Due to limitation imposed by the client to confirm the debtors account balances and the auditor is unable to satisfy himself by the use of alternative procedures.

2.

Unqualified report Modified paragraph This situation relates to the matter regarding the going concern concept. 3. Qualified report - Except for This situation relates to the material misstatement. The auditor should issue a modified report with except for opinion on the ground of disagreement with the management 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 to design nature timing and extend of audit procedures. b. Substantive testing stage to obtain audit evidence about particular assertion related to account balances or classes of transactions c. Final stage For overall reviewing of financial information to ensure reasonableness of financial statements. State and explain two (2) types of analytical procedures. a. Trend analysis Examine change in the account over time b. 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 using financial data, non-financial data or both to test account balances or changes in account balances.

II.

FAR 360 | AUDIT OF FINANCIAL STATEMENTS | TUTORIAL

QUESTION 5 Model 3: Modified Opinion _ Except For (matter do affect the auditors opinion) REPORT OF THE AUDITORS FOR COMPANIES INCORPORATED IN MALAYSIA PURSUANT TO THE COMPANIES ACT, 1965 Company No 397652 W Report of the Auditors to the Members of GEMILANG Sdn Bhd (Incorporated in Malaysia) We have audited the financial statements set out on pages for the year ended 31 December 2007. xx to yy of Gemilang Sdn Bhd

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 financial statements and to report our opinion to you, as a body, in accordance with Section 174 of the Companies Act 1965 and for no other purpose. We do not assume responsibility towards any other person for the content of this report. Except as discussed in the following paragraph, we conducted our audit in accordance with 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 and explanations, which we considered necessary to provide us with sufficient evidence to give reasonable assurance that the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence relevant to the amounts and disclosures in the financial statements. An audit includes an assessment of the accounting principles used and significant estimates made by the directors as well as evaluating the overall adequacy of the presentation of information in the financial statements. We believe our audit provides 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, since that 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 inventory quantities by other audit procedures.

FAR 360 | AUDIT OF FINANCIAL STATEMENTS | TUTORIAL

In our opinion, except for the effect on the financial statements of the matter referred to in the 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 accordance with the provisions of the Companies Act, 1965 and applicable approved accounting standards 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 in the accounts of the Company and

(ii)the state of affairs of the Company as at 31st December 2007 and of the results of
the operations of the Company and of the cash flows of the Company for the year ended 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 as auditors have been properly kept in accordance with the provisions of the said Act.

KAMAL FADZIR & Co., AF 2500 Chartered Accountants Kuala Lumpur, Date: 20 May 2008

AHMAD FADZIR FIRDAUS Partner 2502/08/08/(J)

QUESTION 6 To discuss definition of audit independence, independence in fact and in appearance. Discuss why the independence issue is importance in an auditing List out the specific circumstances that may create threats to the independence and apply 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

FAR 360 | AUDIT OF FINANCIAL STATEMENTS | TUTORIAL

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, and accounting manual. Current files- include all audit documentation applicable to the year under audit.i.e. copy of financial statements and auditors report, audit plan and audit programs, working balance sheet and income statement, and adjusting and reclassification journal entries.

QUESTION 8 Internal Auditor Certification body Certified designation License to practice Primary Responsibility Scope of audit Audit Evidence Responsibility The institute of Internal Auditors Malaysia (IIAM) Certified Internal Auditor (CIA) No To Audit Committee or Board of Directors All activities of an organization Detail Evaluating, examining the effectiveness of accounting and internal control system Employee within a company or outside party engaged by the company Reviews activities continually. External Auditor Malaysian Institute of Malaysia (MIA) Chartered Accountant (CA) Yes To Shareholders of the company Financial statements Sampling Expression of opinion by reporting independently on the financial statement prepared by the management Chartered Accountant (CA) independently form the entity Reviews records supporting financial statements periodically usually once a year Determined by statue, Companies Act 1965 Focuses on the accuracy and understandability of historical events as expressed in financial statements. Is incidentally concerned with the prevention and detection of fraud in general, but is directly

Status Job Scope

Roles and duties Responsibility

Determined by management Focuses on future events by evaluating controls designed to assure the accomplishment of entity goals and objectives. Is directly with the prevention of fraud in any form or extent in any activity reviewed. Responsible for all fraud

Responsible for Fraud

FAR 360 | AUDIT OF FINANCIAL STATEMENTS | TUTORIAL

concerned when financial statements may be materially affected. Responsible for material fraud.

QUESTION 9 a. Type of audit report The type of report issued is Qualified Report Except For Reason: The situation relates to the disagreement regarding the records of inventory which should be valued at lower of cost or net reliasable value as required by FRS 102. Since the company refused to amend the inventory figure (which is material but not pervasive), and other figures in the financial statement are fairly presented, the auditor should issue an Except For opinion. b. Audit procedures Audit procedures Explanations & Example

1. Inspection of Vouching internal & external documents & normally makes up bulk of evidence. records or E.g. Sales invoices documentation 2. Examination of physical assets 3. Observation 4. Inquiries Inspecting and counting of physical assets. E.g. Counting cash on hand, certificates of deposit. Looking at a procedures performed by others. E.g. observation of the counting of stock Seeking information of knowledgeable person. E.g. inquiry management about entity.

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. scanning credit balance in the debtors ageing report.

7. Computation Checking mathematical accuracy. E.g. recalculate the depreciation expenses or re-calculation

FAR 360 | AUDIT OF FINANCIAL STATEMENTS | TUTORIAL

8. Reperformance The auditor independence execution of procedures. E.g. the auditor re-performs the 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 and delivery 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 that the purchasing has been made for the business and within the budget limits. 2. An open tender procedure should be implemented so that the company can obtain the best price and be fair to other suppliers. 3. The purchase order issued by Samad should be approved and authorised by higher 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 of goods received before issuing the good receive notes.

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5. 6. 7. 8. Notification of goods receive should also be made in written so that a proper record is kept by the receiving department. For a proper control of payment, all cheques should be signed by two officers. All cheques should be crossed and marked account payee only. All payment documents should be marked paid or cancelled before it is filed to avoid double payments.

b) Segregation of Duties Segregation of duties will reduce the opportunity of any one person to be in the position of 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. 2. 3. 4. Segregation of duties is impossible because the small number of staffs. The cost of implementing formal internal control outweigh the benefits The possibilities of system only controlled by one or few people. The reliability of internal control of small company will be less because of lack of internal audit.

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