QUALIFYING EXAMINATION
INSTRUCTION TO CANDIDATES:
This question paper contains 6 questions on 8 printed pages.
______
Answer all questions
Answer questions 1, 2 and 3 in a separate booklets(s) from questions 4, 5 and 6
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Do not open this paper until instructed by the invigilator
Question 1
a) (i) An auditor considers audit risk in planning his audit.
What is audit risk? Explain the components of audit risk.
(5 marks)
(ii) Ms Sia Siew Hoon is a partner in an audit firm who is responsible for the audit of a cooperative bookstore in Pulau Tikus, Penang. The bookstore has about 20 employees and caters more for textbooks for university students. It uses a fully integrated computer system and has the latest edition of books. The manager of the bookstore is a person of integrity, who understands her business well and is thus able to give her fullest cooperation to the audit conducted. She is respected by the employees, customers and suppliers. However, the sales of the firm have been declining for the past two years due to the existence of a new competitor in the vicinity.
Required:
Assess the risks associated with the audit of the bookstore above, and provide your reasons for them. Explain how your assessment will have an impact on the audit evidence that needs to be gathered.
(5 marks)
b) Hanafiah is the auditor of Maritime Engineering Sdn Bhd (ME), a small business specializing in metal fabrication. ME employs 60 welders and metal workers. The owner, Datuk Kamal, works occasionally with the accountant, Ms Loh, but spends most of his time dealing with marketing and operations. Ms Loh keeps all of the financial records in a computer which uses a UBS integrated financial package. She is quite familiar with the security system provided by UBS, and has implemented the password access control over all modules to prohibit unauthorized persons from assessing them. She also uses Microsoft Excel to track the work schedule of the workers, their hours of work including overtime, and other payroll information. Ms Loh is proud of her abilities with the computer and runs a paperless office.
When she works from home, she transmits the results to the office computer via modem. The access by modem is protected by a password.
Due to the heavy workload, Datuk Kamal has delegated most of the office functions to Ms Loh, including cash receipts, bank deposits, and cheque writing. Occasionally, he reviews the financial records with her.
Ms Loh has been working for Datuk Kamal over the past five years and has never taken a vacation. Datuk Kamal views Ms Loh as very competent, reliable, and possessing good computer skills.
Required:
i. Briefly describe any six weaknesses in the internal control system of ME.
(6 marks)
ii. Hanafiah is considering performing a detailed verification of the UBS password security implemented by Ms Loh. If the internal controls are good, he intends to rely on them. Discuss his audit approach.
(4 marks)
(Total: 20 marks)
QUESTION 2
APEX Sdn. Bhd. is a private company manufacturing wooden window frames, doors and staircases for domestic houses. It has prepared draft financial statements for the year ended 30 September 2003. As the external auditor, you are concerned that the company may have serious going concern problems. Excerpts of the Income Statements and Balance Sheets for the last three years are as follows:
2001 / 2002 / 2003Income Statements / (RM ‘000) / (RM ‘000) / (RM ‘000)
Sales / 2,242 / 3,322 / 3,762
Cost of sales / (1,924) / (2,652) / (3,020)
Gross Profit / 318 / 670 / 742
Other expenses / (322) / (480) / (576)
Finance costs / (116) / (180) / (234)
Net profit/ (loss) / (120) / 10 / (68)
2001 / 2002 / 2003
Balance Sheets / (RM ‘000) / (RM ‘000) / (RM ‘000)
Fixed Assets / 1,088 / 1,200 / 1,174
Current Assets:
Inventory / 362 / 614 / 898
Receivables / 606 / 626 / 728
968 / 1,240 / 1,626
Less: Current Liabilities:
Payables / 710 / 980 / 1282
Bank overdraft / 422 / 538 / 730
Hire purchase payable / 196 / 184 / 118
1328 / 1702 / 2130
Total net assets / 728 / 738 / 670
Represented by:
Share capital / 34 / 34 / 34
Reserves / 94 / 104 / 36
128 / 138 / 70
Long term loan / 600 / 600 / 600
728 / 738 / 670
The company has been in business for about fifteen years. In 2001, it decided to build a new factory on a site leased from the local authority which would facilitate a major increase in sales. This new factory was completed a year later. The factory was financed by a bank overdraft and a long-term loan of RM600,000.
Banking facilities are secured by a fixed and floating charge on the leasehold factory and other assets of the company.
The company purchases its main raw material (i.e wood) from timber wholesalers. It sells about 80% of its production to local and national builders of new domestic houses.
Required:
i. Based on the excerpts of the financial statements provided, what are the relevant factors you would consider in determining whether the company is facing a going concern issue?
(10 marks)
ii. What are the audit procedures that should be conducted in reviewing the going concern problem?
(5 marks)
iii. Assuming the company is experiencing going concern problems in the near term, you as the auditor, are required to draft the section of the audit report describing the matter (the whole audit report is not required).
(5 marks)
(Total: 20 marks)
QUESTION 3
In connection with your audit of Quality Components Bhd. for the financial year ended 31 December 2003, you are involved in the planning and evaluation of nonstatistical samples for the confirmation of the year end balances of Accounts Receivable.
The following is the Trial Balance of the company as at 31 December 2003:
Quality Components Bhd.
Trial Balance
Debit (RM) / Credit (RM)Cash / 12,170
Accounts Receivable - Gross / 1,637,830
Allowance for Doubtful Debt Accounts / 25,000
Inventory / 2,250,000
Prepaid Expenses / 25,000
Fixed Assets - Net / 2,600,000
Accounts Payable / 962,500
Notes Payable - Long term / 2,200,000
Share Capital / 2,000,000
Retained Earnings / 737,500
Sales / 8,500,000
Cost of Sales / 5,500,000
Selling Expenses / 2,000,000
General and Administrative Expenses / 400,000
14,425,000 / 14,425,000
Required:
i) From the Trial Balance given, list four bases that can be considered by auditors in planning materiality. For each of the four bases, you are required to indicate your materiality threshold.
(6 marks)
ii) Judgement of planning materiality would differ in the presence of qualitative factors. Give four examples of such factors.
(4 marks)
(Total: 10 marks)
Question 4
You are in charge of the audit of Popular Bhd. for the year ended 31 December 2003.
(a) Jamal, a fresh graduate, has been assigned to assist you in the audit. You want him to complete the audit of purchases and accounts payable.
Required:
Explain the audit objectives for auditing purchases and accounts payable to Jamal.
(7 marks)
(b) On reviewing the audit working papers relating to the accounts payable, the following came to your notice:
(i) The accounts payable balance on 31 December 2003 was stated at RM250,000 in the General Ledger as compared to RM450,000 on 31 December 2002.
(ii) As the current year balance of accounts payable is immaterial (overall materiality was set at RM325,000), Jamal carried out limited work on accounts payable. He selected the four largest payables from the client’s purchase ledger and agreed the balances to the photocopies of suppliers statements.
Required:
What additional audit procedures would you perform to ensure that the balance of accounts payable is properly stated?
(8 marks)
(c ) Your scrutiny of suppliers statements against the balances on the purchase ledger revealed the following:
(i) A difference in the balance as per the purchase ledger and the balance as per the supplier’s statement of a major supplier, Khir Sdn Bhd.
(ii) Non-availability of supplier’s statements from another major supplier, Jamshed & Co.
Required:
(i) State the possible reasons that could cause the difference in the balance as per the purchase ledger and the balance as per the supplier’s statement of Khir Sdn Bhd.
(3 marks)
(ii) How will you satisfy yourself as to the balance in the account of Jamshed & Co. in the absence of the supplier’s statement?
(2 marks)
(d) Popular Bhd relies on the inventory counts at the year end to value the inventory in the financial statements.
Required:
Describe the audit procedures to be performed to verify the accuracy of the inventory count:
(i) before the inventory count, and
(5 marks)
(ii) at the inventory count.
(5 marks)
(Total: 30 marks)
Question 5
In each of the following cases concerning Aziz Saari & Co., a practicing firm of Chartered Accountants, indicate with reasons whether the effect on the MIA’s By-laws (On Professional Conduct And Ethics) is (i) a violation, (ii) not a violation or (iii) indeterminate.
1. Khairul, the audit senior in charge of Bikim Bhd, owns shares in the company. The shareholding is less than one percent of the total shares of the company.
2. The audit firm audits two clients, Constructions Sdn. Bhd. and Developers Sdn. Bhd. who are in direct competition with each other.
3. Zinger Automotive Sdn. Bhd is a new audit client of the firm. The audit fee is to be one percent of the Net Profit of the company.
4. The firm declined the audit of Wong Sdn. Bhd. for the current year as they have not been paid the audit fees for the last two years.
5. One of the audit partner’s schoolmate, Jamil, is the chief loan officer at Rimjim Finance Company Bhd., an audit client of the firm. He approached Jamil for an unsecured loan of RM20,000 from Rimjim and Jamil approved the loan.
(10 marks)
Question 6
One of your audit clients, Mark Sdn. Bhd., is the wholesaler for house and office furniture of some known brands for the last ten years. The company has now decided to have its own furniture manufacturing unit and developing its own brand.
After considering various options, the company has entered into negotiations to purchase Multipurpose Furniture Sdn. Bhd., whose owners are retiring. Before determining the purchase price your client requests you to carry out a due diligence exercise on the company.
Required:
Outline the matters you would consider in performing the due diligence exercise.
(10 marks)
END OF QUESTION PAPER
CONFIDENTIAL