Aud 689 Test Apr 2019 Question

COMMON TEST
AUD 689 - AUDIT AND ASSURANCE SERVICES

ANSWER ALL QUESTIONS
TIME: 1 HOUR 45 MINUTES
Question 1
Salhadi & Co is the auditor for Baller Cafe Sdn Bhd. On 1 January 2019, Baller Cafe had
ceased the company’s accounting department and outsourced the accounting function to
Salhadi & Co.
The partner-in-charge, En. Salhadi Zambri, always looking forward for a business in food and
beverages. Therefore, on 28 Februari 2019, he signed a franchise agreement with Baller Café
for a right to operate the cafe in Balakong.
a. Explain the importance of auditors’ independence.

(3 marks)
b. Explain the following threats:

i. Self-interest
ii. Advocacy threat.
(4 marks)
c. Discuss the ethical threats which may affect the independence of Salhadi & Co. and
provide the safeguards for each threat identified.
(9 marks)
Question 2
The auditing profession faces great exposure to legal actions especially in countries such as
in America, United Kingdom, Canada and Australia. In Malaysia, auditors are also exposed
to similar legal action.
a. The auditor has liability under statutory laws which are stipulated in different Acts. State
explain any three (3) of the relevant Acts.
(6 marks)
b. Explain any four (4) methods that may be used by an audit firm to minimise its audit failure.
(4 marks)
Question 3
a. Quality control comprises the methods used to ensure that the firm meets its professional
responsibilities to client and others. Discuss the requirements and example of a procedure
for the following elements of quality control under ISQC 1:
• Ethical requirements
• Acceptance and continuance of clients and engagements
(4 marks)
b. Malaysian Institute of Accountants has established its Practice Review Program on 15

November 2002. Explain the reason (or reasons) and the objective of Practice Review
Program.
(4 marks)
1
Question 4
Risk is a fundamental concept that underlies the audit process. An auditor engaged in an
audit of financial statements faces a certain level of audit risk. However, the auditing
standards do not provide specific quantitative guidance on what constitutes an acceptable
audit risk.
Required:
a. Explain the audit risk model

(2 marks)
b. State any two (2) limitations of the audit risk model and explain how does the auditor’s
assessment of inherent risk and control risk at planning stage affects materiality level and
the extent of substantive audit tests to be performed.
(4 marks)
c. The finance director of Lala Bhd has recently approached you to act as an auditor of the
company for the year ended 31 December 2018.
The director has indicated that she has been unhappy with the present auditors for some
time as she feels they are out of step with the company's aggressive approach, both in
the market place (computer software) and their method of reporting. There have in the
past been several disagreements with regard to accounting policies adopted, including a
qualification in the audit report for the year ended 31 December 2017 pertaining to the
valuation of the software.
The finance director has given you the following additional information about the
company.
1. The Company was formed in 2013, has grown rapidly since then and now based in
four locations throughout Malaysia and one in Indonesia.
2. In 2017 one manager was sacked, due to fraud. The matter was re ported, and
although the directors intend to improve the control environment, because of the
competitive nature of the industry, they have not been able to make it a priority.
3. In 2017 the method of remuneration for the directors, senior and middle management
was changed from salary only to a salary plus profit related pay. Since then
management turnover has increased.
Required:
Describe four (4) risks associated with the audit of Lala Bhd and how to overcome the
risk.
(10 marks)
Total: 16 marks
Question 5
You are responsible for the audit of Rocket Sdn. Bhd. which supplies automotive parts to local
car manufacturers and service centres in the country. The company’s draft financial
statements recognise total assets of RM15·2 million and profit before tax of RM1·8 million.
2
Assuming that the materiality level was set at 1% and 5% of total assets and profit before tax
respectively, discuss on the materiality of each issues identified above.
During the recent audit team meeting, the following issues have been highlighted by the
auditors:
a. The company recorded interest expense of RM20,000 for loan taken to expand the factory
early this year. The loan covenant states that company must maintain the interest cover
ratio of 1.5 times or else the loan facility will be cancelled.
b. Sales for one of its divisions dropped by RM40,000 which represented 0.2% of total
revenue as a result of slowing demand. This was the first time the division records
negative growth since the company started its operation a few years back.
c. The company’s internal auditor reported that there were 5 fraud cases investigated this
year involving false claims made by employees for travelling expenses. Total amount of
travelling expenses recorded this year was RM10,000.
d. The non-current liabilities include RM 1 million of government grant received this year and
recorded as deferred revenue. The grant was awarded as part of training schemes for the
unemployed graduates.
e. The company has not recorded RM5,000 depreciation charge for a welding machine
acquired in the first quarter of the year.
(the computation 0.6 and explanation 1 = 1.6 marks x 5 = 8 marks)

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COMMON TEST

AUD 689 - AUDIT AND ASSURANCE SERVICES

a. Explain the importance of auditors’ independence.

b. Explain the following threats:

b. Malaysian Institute of Accountants has established its Practice Review Program on 15

a. Explain the audit risk model

(the computation 0.6 and explanation 1 = 1.6 marks x 5 = 8 marks)

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