BAC3624 (2120) Advanced Auditing Tutorial 5 Q
TUTORIAL 5
Described below are situations which have arisen at two unrelated clients of your
firm. The year end in each case is 31 December 2020.
Your firm has recently been appointed as the external auditor of Satria Sdn. Bhd.
(Satria) for the year ending 31 December 2020. The previous auditors did not seek
reappointment following the conclusion of the 2019 audit.
You are the audit senior and the engagement partner asked you to consider the
following two key areas of audit risk:
(1) Trade receivables
(2) Inventories.
During the audit planning, you have been provided with the following extracts from
the financial statements:
Statement of profit or loss for the year ending 31 December
2020 (estimated) 2019 (audited)
RM‘000 RM‘000
Revenue 125,500 108,137
Cost of sales (68,500) (64,007)
Gross profit 57,000 44,130
Statement of financial position as at 31 December
Current assets: 2019 (estimated) 2018 (audited)
RM‘000 RM‘000
Inventories 14,200 8,307
Trade receivables 15,500 9,222
In addition, the following information has been provided:
(a) Satria is a Malaysian-based producer of scientific instruments, for use in
hospitals and universities, which sells its instruments around the world. Each
year, the range of instruments is updated and presented in an online
catalogue which includes the selling prices. Customers either order directly
from the catalogue or agree a contract with Satria.
(b) Satria invoices customers in RM and requires payment within 30 days of the
invoice date. One major customer, Iriz Sdn Bhd (Iriz), is withholding payment
of RM1.3 million as it claims that the instruments it purchased are defective.
(c) Instruments are assembled, from bought-in components, to a standard
specification produced by the in-house design team. Components are
purchased from suppliers based in the Malaysia and overseas (China,
BAC3624 (2120) Advanced Auditing Tutorial 5 Q
Thailand and India) who invoice Satria in their local currency. Satria operates
a perpetual inventory system for components and finished instruments.
Quantities recorded in the perpetual inventory system are checked by periodic
counting throughout the year by the company’s employees. The company
does not undertake a full inventory count at the year end.
(d) The inventory system is fully integrated with the cost accounting system. The
cost accounting system records the cost of components, labour and
production overheads for each instrument.
(e) Each week, the inventory system generates an inventory valuation listing and
an aged inventory report. The inventory valuation listing includes the cost and
quantity on hand for each component and each instrument.
(f) During 2020, Satria experienced quality problems with components
purchased from one of its major suppliers, Kilau Sdn Bhd (Kilau). Satria
terminated its contract with Kilau on 30 September 2020 and switched to a
new supplier which charges higher prices for higher quality components.
Satria has not passed on these costs to its customers.
(g) The chief buyer had also exceeded reorder limits in respect of a number of
components in year 2020.
During the interim audit, the managing director of Satria requested that the audit
team completes the audit by 31 January 2021. The company requires the audited
financial statements to support an application for a bank loan to finance the purchase
of equipment. As an incentive to complete the audit to this deadline, the managing
director offered the audit team and their close family free use of Satria’s private box
for a premier league football match. He also offered to pay for the costs of travelling
and overnight accommodation at a luxury hotel following the football match.
Required:
(a) Justify why the items listed as (1) and (2) in the scenario have been identified as
key areas of audit risk. For each item identified above, describe the audit
procedures that should be included in the audit plan to address those risks.
(21 marks)
(b) Explain the ethical issues arising in respect of the offer of the free use of a
private box at a premier league football match and paid travel and hotel costs.
(4 marks)
