ACC5215: AUDITING AND ASSURANCE SERVICES 2

SECTION A

Question 1

You are the audit manager of BGM Malaysia. You have attended a monthly meeting of audit partners and managers at which client-related matters were discussed. The following were    discussed in the meeting.

The audit report on the financial statements of Mazar Bhd, a long standing audit client, for     the year ended 31 December 2020 was issued in April 2021, and was unmodified. In May      2021, Mazar Bhd’s audit committee contacted the audit engagement partner to discuss a fraud that had been discovered. The company’s internal auditors estimate that RM 4.5 million has   been stolen in payroll fraud, which has been operating since May 2020.

The audit engagement partner commented that neither tests of control nor substantive audit procedures were conducted on payroll in the audit of the latest financial statements as there were no deficiencies found in controls over payroll in previous years’ audit. The total assets recognized in Mazar Bhd’s financial statements at 31 December 2020 were RM 80 million. Mazar Bhd is considering suing BGM Malaysia for the total amount of cash stolen from the company, claiming that the audit firm was negligent in conducting the audit.

Required:

a)  Explain the matters that should be considered in determining whether BGM Malaysia is liable to Mazar Bhd in respect of the fraud.                                            (10 marks)

b)  Explain actions that the auditors could have taken to prevent such a legal action from arising.                                                                                                           (6 marks)

c)  Auditors of financial statements has a fraud detection responsibility. Discuss.

(9 marks)

(Total 25 marks)

Question 2

You are the audit manager in Rahman & Associates. You are reviewing two situations which have recently arisen with respect to potential and existing audit client of your firm.

Polar Sdn Bhd’s managing director, Jason Lee, has approached your firm to invite you to       tender for its audit. Polar Sdn Bhd is a small, owner-managed company providing financial    services such as arranging mortgage and advising on retirement plans. The company’s            previous auditors recently resigned. Jason states this was due to a disagreement on the            accounting treatment of commission earned, and because the predecessor auditor thought that their controls were not very good. You are aware that Polar Sdn Bhd has been investigated by the tax authority for alleged non-compliance with its regulations. As well as performing the    audit, Jason would like Rahman & Associates to give business development services.

The audit of Citra Sdn Bhd’s financial statements for the year ended 30 November 2020 will  commence shortly. You are aware that the company is in financial difficulties. Citra Sdn        Bhd’s managing director, Ros has been requesting that the audit engagement partner               accompanies her to a meeting with the bank, where a new loan will be discussed and the draft financial statements reviewed. Ros has hinted if the partner does not accompany her to the     meeting, she will put the audit out of tender. In addition, an invoice relating to interim audit   work performed in August 2020 has not been settled to the firm.

Required:

Discuss how should Rahman & Associates assess the situation (risk and threats) in

a)  Polar Sdn Bhd.

b)  Citra Sdn Bhd.

(12.5 marks)

(12.5 marks)

(Total 25 marks)

Question 3

Pandan (M) Sdn Bhd manufactures chemicals and has a factory and three different storage      locations for finished goods. Pandan (M) Sdn Bhd’s year end was 30 April 2020. The final     audit is almost complete and the financial statements and audit report are due to be signed      next week. Revenue for the year is RM 55 million and profit before taxation is RM26 million.

The following two events have occurred subsequent to the year end. No amendments or disclosures have been made in the financial statements.

Event 1 - Defective chemicals

Pandan (M) Sdn Bhd undertakes extensive quality control checks prior to the despatch of any chemicals. Testing on 3 May 2020 found that a batch of chemicals produced in April was      defective. The cost recorded for this batch was RM 0.85 million. In its current condition it     can be sold at a scrap value of RM 0.1 million.

Event 2 – Explosion

An explosion occurred at one of the three offsite storage locations on 20 May 2020. This        resulted in some damage to inventory and property, plant and equipment. Pandan (M) Sdn      Bhd’s management have investigated the cause of the explosion and believe that they are        unlikely to be able to claim on their insurance. Management of Pandan (M) Sdn Bhd has        estimated that the value of damaged inventory and property, plant and equipment was RM 0.9 million and it now has no scrap value.

Required:

For each of the two events above:

a)  Explain whether the financial statements require adjustments.                            (6 marks)

b)  Describe THREE (3) audit procedures that should be performed in order to form a         conclusion on any required amendment.                                                             (12 marks)

Present your answerfor (a) & (b) in thisformat:

c)   The directors do not wish to make any amendments or disclosures to the financial           statements for the explosion (Event 2). Explain the impact on the auditor’s report should this issue remain unresolved.                                                                               (7 marks)

(Total 25 marks)