QUESTION 1

A. List two (2) ethical threats to independence and give example for each threats.

Self-interest threat – the threat that a financial or other interest will inappropriately
influence the professional accountant judgment or behavior;
Examples of circumstances that create self-interest threats for a professional accountant
in public practice include:

(a) A member of the assurance team having a direct financial interest in the assurance
client.
(b) A firm having undue dependence on total fees from a client.
(c) A member of the assurance team having a significant close business relationship with
an assurance client.
(d) A firm being concerned about the possibility of losing a significant client.
(e) A member of the audit team entering into employment negotiations with the audit
client.
(f) A firm entering into a contingent fee arrangement relating to an assurance
engagement.
(g) A professional accountant discovering a significant error when evaluating the results
of a previous professional service performed by a member of the professional
accountant’s firm.

Self-review threat – the threat that a professional accountant will not appropriately
evaluate the results of a previous judgment made, or activity or service performed by the
professional accountant, or by another individual within the professional accountant’s firm
or employing organization, on which the accountant will rely when forming a judgment as
part of performing a current activity or providing a current service;

Examples of circumstances that create self-review threats for a professional accountant in

public practice include:
(a) A firm issuing an assurance report on the effectiveness of the operation of financial
systems after designing or implementing the systems.
(b) A firm having prepared the original data used to generate records that are the subject
matter of the assurance engagement.
(c) A member of the assurance team being, or having recently been, a director or officer
of the client.
(d) A member of the assurance team being, or having recently been, employed by the
client in a position to exert significant influence over the subject matter of the
engagement.
(e) The firm performing a service for an assurance client that directly affects the subject
matter information of the assurance engagement.

Advocacy threat – the threat that a professional accountant will promote a client’s or
employer’s position to the point that the professional accountant’s objectivity is
compromised;
Examples of circumstances that create advocacy threats for a professional accountant in
public practice include:
(a) The firm promoting shares in an audit client.
(b) A professional accountant acting as an advocate on behalf of an audit client in
litigation or disputes with third parties.

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 Familiarity threat – the threat that due to a long or close relationship with a client or
employer, a professional accountant will be too sympathetic to their interests or too
accepting of their work;
Examples of circumstances that create familiarity threats for a professional accountant in
public practice include:
(a) A member of the engagement team having a close or immediate family member who
is a director or officer of the client.
(b) A member of the engagement team having a close or immediate family member who
is an employee of the client who is in a position to exert significant influence over the
subject matter of the engagement.
(c) A director or officer of the client or an employee in a position to exert significant
influence over the subject matter of the engagement having recently served as the
engagement partner.
(d) A professional accountant accepting gifts or preferential treatment from a client,
unless the value is trivial or inconsequential. (e) Senior personnel having a long
association with the assurance client.

Intimidation threat – the threat that a professional accountant will be deterred from
acting objectively because of actual or perceived pressures, including attempts to
exercise undue influence over the professional accountant

Examples of circumstances that create intimidation threats for a professional accountant

in public practice include:
(a) A firm being threatened with dismissal from a client engagement.
(b) An audit client indicating that it will not award a planned non-assurance contract to the
firm if the firm continues to disagree with the client’s accounting treatment for a particular
transaction.
(c) A firm being threatened with litigation by the client.
(d) A firm being pressured to reduce inappropriately the extent of work performed in order
to reduce fees.
(e) A professional accountant feeling pressured to agree with the judgment of a client
employee because the employee has more expertise on the matter in question.
(f) A professional accountant being informed by a partner of the firm that a planned
promotion will not occur unless the accountant agrees with an audit client’s inappropriate
accounting treatment.

B. Three (3) factors that need to be considered in determining fees to be charged to audit
clients.
Fees charged for all engagements should be a fair reflection of the value of the work
involved and should take into account, among others:
(a) the skill and knowledge required for the type of work involved;
(b) the level of training and experience of the persons necessarily engaged on the work;
(c) the time necessarily occupied by each person engaged on the work; and
(d) the degree of responsibility and urgency that the work entails.

The Shariah Audit approach has three levels.

◦ 1. Audit of IFIs financial statements;
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 ◦ 2. Compliance audit of organizational structure, people and processes;
◦ 3. Review of the adequacy of the Shariah governance process,providing
recommendations to the Audit Committee and the Shariah Committee.

Question 2

A. Comment on the ethical and professional issues arising from the above case

no Issues MIA BYLAWS

1 Your client, Amo has asked Accompanying the client to a meeting with
whether representatives of your their bankers will create an advocacy
firm would be available to attend threat to objectivity as the auditor may be
a meeting with the company’s perceived to be representatives of Amo
banker
2 They are banking on your presence Your presence to support Amo mgmt.
to support the management team team will lead to self-interest threats coz
in conveying the suitability of the as auditor you are not allowed to indulge
acquisition of Mochi Sdn Bhd. with the management of the client
company.
3 the management team of Amo Reviewing the work of the team engaged
has requested that the interim in the interim financial statements review
review is completed quickly so would also create a self-review threat to
that it does not hold up objectivity as the audit team would be
reviewing the work of another team within
negotiations with the bank
the audit firm.
4. it may affect the outcome of The request by OSB to ensure that the
the next audit tender if the interim review does not impede the
auditor did not do the review application for a loan may be perceived as
quickly, which is due to take intimidation threats by the client. It
place after the completion of appears as though they are putting
pressure on the auditor to finish the work
this year’s audit. based on the deadlines imposed by the
bank

B.
i. Auditor can minimize their potential liability for professional negligence in several ways.
Explain Four (4) ways to reduce auditor’s exposure to lawsuits.

 Deal only with clients possessing integrity and investigate prospective

clients thoroughly
 Hire qualified personnel and train them properly
 Follow the standards of the profession perform quality audit
 Maintain independence
 Perform high standard of quality audits
 Document the work properly
 Obtain an engagement letter and a representation letter
 Maintain confidential relations

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  Carry adequate insurance coverage
 Alert to risk factors that may result in lawsuit
 Maintain adequate professional indemnity cover
 Investigate prospective clients thoroughly
 Perform audit quality
 Establish stronger auditing and assurance standards (IFAC/MIA)
 Continually updating the code on professional ethic and sanction (official
order to stopping trade) members for improper conduct and performance
 Disclaimer of Liability
 Establish peer review (auditing the auditors -individual) requirement
 Education of users

ii. Four (4) circumstances the client must prove in order to recover its losses from the
auditors?
1. The auditor owed a duty of due care to the plaintiff.
2. The auditor has failure to act in accordance with due care. The standard of care is that
of the responsible skill and care of another person carrying the same assignment.
3. There is causal relationship or connection between the auditor’s negligence and
damage. The plaintiff must demonstrate that the loss is the consequence of the breach in
the duty of care and at the time the breach was committed, the loss was reasonable
foreseeable as a consequence. Example: To proof of connection between auditor’s
failure to detect a fraud and the loss arising from the fraud.
4. The plaintiff suffered actual loss or damage. Type of damages is loss of investment,
overpayment for investment, loss due to defalcation by management or employee and
overpayment of dividends.

QUESTION 3

A. Auditors are required to issue an audit report at the end of the audit. However, there
are circumstances where auditors will face with uncertainty in the process of issuing
audit report.

i. Discuss four (4) circumstances that give rise to uncertainty to the auditor.
 Litigation and claims
The auditor will have to determine whether the litigation and
claims constitute contingent liabilities or provisions. If the claims
represent contingent liabilities, and the client has given adequate disclosure,
an emphasis of matter paragraph is required. If no disclosures have
been made a qualified or adverse report will issued.
If, in the auditor’s opinion, the claims should be provided and no provision
has been made in the accounts, qualified or adverse opinion will be given.
 Suspicion of fraud
If the auditor is precluded by the entity from obtaining sufficient appropriate
audit evidence to evaluate whether a fraud has, or is likely to have occurred,
the auditor should express a qualified opinion or disclaimer of opinion.
If the auditor is unable to determine whether fraud has occurred because of
limitations imposed by the circumstances rather than by entity, the auditor
should consider the effect on auditor’s report. Non-compliance with laws and
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 regulations If the auditor suspects an non-compliance of laws and
regulations but adequate information cannot be obtained for the suspected
non-compliance, the auditor should consider the effect of lack of
audit evidence on auditor’s report.
 Going concern problem
The auditor should determine if a material uncertainty exists which may cast
significant doubt on the entity’s ability to continue as a going concern.
If adequate disclosure is made in the financial statements, the
auditor should express an unqualified opinion but add a paragraph
emphasizing the matter. If adequate disclosure is not made in the financial
statements the auditor should express a qualified or adverse opinion.
 Scope limitation
When in substantial doubt as to a material account balance and the
auditor cannot obtain sufficient appropriate audit evidence, he
should express a qualified opinion or disclaimer of opinion.

ii. Explain four methods in reducing the uncertainty to the auditor.

An auditors can reduce the uncertainty to a tolerable level through:

 adequate planning,
 supervision of team and staff performing the audit
 conduct of audit in accordance with approved auditing standards and firm’s
quality control policies in Quality Audit.
 Perform appropriate audit procedures

B.
i. A subsequent event is an event that occurs after a reporting period, but
before the financial statements for that period have been issued or are
available to be issued//. Depending on the situation, such events may or may
not require disclosure in an organization's financial statements

ii. The information was received after the year end but provides further evidence
of the recoverability of the receivable balance at the year end. /If the customer
is experiencing cash flow difficulties just a few months after the year end, then
it is highly unlikely/ that the year-end receivable was recoverable as at 31 st
October 2018 and hence is an adjusting event.
The receivables balance is overstated and consideration should be given to
adjusting the balance through the use of an allowance for receivables or by
being written off. Furthermore, the total amount outstanding is material/ as it
represents 7.4% of profit before tax. Hence the directors should amend the
2018 financial statements.

i. Describe audit procedures which should be performed in order to form a

conclusion on any required amendment.
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  Reviewing management procedures /policies in identifying subsequent event.
 Reading minutes of meeting
 Review budget, cash flow forecasts and other management report
 The correspondence with the customer should be reviewed to assess
whether there is any likelihood of payment. /
 Discuss with management as to why they feel an adjustment is not required in
the current financial statements. /
 Review the post year-end period to see if any payments have been received
from the customer. /
Any 4 x 1 marks = 4 marks
Total: 20 marks

QUESTION 4
A.

i. Auditing around the computer

This term means that the ‘internal’ software of the computer is not documented or audited
by the auditor, but that the inputs to the computer are agreed to the expected outputs
from the computer.

This method of auditing increases audit risk because:

 The actual computer files and programs are not tested; the auditor has no direct
evidence that the programs are working as documented.
 Where errors are found in reconciling inputs to outputs, it may be difficult or even
impossible to determine why those errors occurred.
 Constructive amendments to clients’ systems cannot be made and there is an
increased likelihood of audit qualifications.

ii. 4 audit procedures

 Cast the receivables ledger to ensure it agrees with the total on the receivables
control account
 Compare the balance on each receivable account with its credit limit to ensure this
has not been exceeded
 Review the balances in the receivables ledger to ensure no balance exceeds total
sales to that customer
 Calculate receivables days for each month end to monitor control of receivables over
the year
 Stratify receivables balances to show all material items and select appropriate
sample for testing
 Produce an aged receivables analysis to assist with the identification of irrecoverable
receivables

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iii. 4 potential problems of using audit software
- Cost
There may be substantial setup costs to use the software, especially where the computer
systems of the client have not been fully documented, as is the situation in DASB.A cost
benefit analysis from the audit point-of-view should be carried out prior to deciding to use
audit software.

- Lack of software documentation

The computer audit department at DASB cannot confirm that all system documentation is
available, especially for the older ‘legacy’ systems currently in [Link] again confirms the
view that use of audit software should be deferred until next year to avoid extensive setup
costs which cannot be recouped due to system changes.

- Change to clients’ systems

Changes to clients’ computer systems can result in costly amendments to the audit
software. Given that DASBs systems will change next year, this is almost certain to result
in amendments to the software. Starting to use audit software this year is therefore not
advisable.

- Outputs obtained
The audit manager needs to be clear exactly what audit assertions are to be tested with
the audit software and what outputs are expected.
Starting testing just to obtain knowledge of the system is inappropriate as testing may be
too detailed and output produced that is not required, increasing the cost for the client.

- Use of copy files

The use of copy files means that the auditor will not be certain that these are the actual
files being used within DASB’s computer systems, especially as the provenance of those
files will not be checked.
To ensure that the files are genuine either the auditor should supervise the copying or the
‘live’ files on DASB’s computer systems should be used.

B.

i. If the Group Engagement Partner (GEP)concludes that the work of component

auditor cannot be used and the GEP has not been able to perform sufficient
additional procedures in respect of the matter, then he should modify the report.

ii. Four (4) matters to be considered before accepting the appointment as principal
auditor.
- The materiality portion of the FS, which the FS audits.
- The PA’s degree of knowledge regarding the business of the components.
- The risk of material misstatements in the FS of the components audited by the OA.
- The performance of additional procedures as set out in the auditing standard
regarding the components audited by the OA resulting in the PA having significant
participation in the audit.

Question 5
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& Co to assist with their Finance department until they recruit a new finance director.

Required:

a. Discuss any two (2) ethical issues found in the above case
no Ethical Issues MIA by laws
1 This is Salma & Co second year audit Issue of not so familiar with the client
for WWB - professional competence and due
care. Possibility of misstatements
might occurs that might lead to audit
risk.

2 The auditor or the firm is also assisting Self-review threats and providing
the company in preparation for their multiple services will lead to non-
listing exercise independence of the auditor. Slef
interest coz Salma & Co
3. The company has temporarily asked Familiarity threats and self interest
Slam & Co to assist with their Finance threats might be created since
department until they recruit a new Salma is obliged to assist the
finance director company in maintaining their
relationship.

b. Explain the other services that can be provided by Salma & Co in assisting WWB for
listing.
1. Examination of prospective financial information (PFI)
2. Review of financial statements
3. Consultancy on the proposed listing

c. Composition requirements of Audit Committee…

The AC should consist of a minimum of three members appointed from the board
1. The members of the AC should be appointed by the board after taking into
consideration the recommendations of the nominating committee.
2. In determining the appropriate size and composition of the AC, the board should
in particular, take into consideration the necessary mix of skills and experience
required for the AC to effectively discharge its responsibilities.
3. If for any reason the number of AC members at any point in time is reduced to
below three, notification should be provided to the Bank within two weeks.
Identify and

d. Identify five (5) audit risks at the planning stage of the audit of WWB.

no risk Why risk

1 WWB sells all of its goods to large Too dependent on one buyer could cause
home improvement stores, with a problem if Zelvet decide to terminate or
60% being to one large chain store Zelvet failed to pay WWB and will affect
Zelvet WWb cash flow
2 WWB offering a three-month credit Risk of unable to collect the receivable
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 period while the company’s normal and may be irrecoverable since the
credit period is one month. outstanding has been outstanding for too
long
3 Cut off purchases and inventory WWB import good from China and the
may not be accurate coz purchase paint can be in transit for up to 2 mths.
orders for overseas paint are made The company accts for goods when they
six months in advance and goods receive them. Therefore at the year end
can be in transit for up to two only goods that have been received in the
months. warehse be included in the inventory
balance and respective payables balance
are recognized.

4 production facility is a large amount Occupy space in the production faciilty

of old plant and equipment that is and the space should be use for much
now redundant and has minimal better purpose. And keeping these junk is
scrap value a wastage of space.

5 The warehouse has been divided Control of inventory is lacking and there
into 10 areas and these are each to might be missing of inventory coz poor
be counted once over the year. supervision
6 the finance director was terminated There might be problem in the finance
by the board due to disagreement dept since the head is longer available
with the them and increase the risk of misstatements
due to no supervision and monitoring by
the head of dept

Discuss the importance of assessing risks at the planning stage of an audit.

 Attention is focused early on the areas most likely to cause material misstatements.-
 Help the auditor to fully understand the entity, which is vital for an effective audit
 Any unusual transactions or balances would also be identified early, so that these could
be addressed in a timely manner.
 To developed proper audit strategy and detailed work program
 Able to perform an efficient audit.
 The team will only focus their time and effort on key areas as opposed to balances or
transactions that might be immaterial or unlikely to contain errors.
To ensure that the most appropriate team is selected with more experienced staff
allocated
to higher risk audits and high risk balances.
 To reduce the risk of an inappropriate audit opinion being given. The audit would have
focused on the main risk areas and hence all material misstatements should have been
identified, resulting in the correct opinion being given.
 To have a good understanding of the risks of fraud, money laundering, etc.
 To enable the auditor to assess whether the client is a going concern.