CONFIDENTIAL

FINAL EXAMINATION

COURSE : PRINCIPLES OF AUDITING

COURSE CODE : PAT3023

DURATION : 2 HOURS

INSTRUCTIONS TO CANDIDATES :

1. This question paper consists of TWO (2) parts: PART A (TRUE or FALSE: 20 questions)
: PART B (STRUCTURED: 4 questions)

2. Answer ALL questions from PART A in the True or False Sheet and PART B in the
Answer Booklet provided.

3. Please check to make sure that this examination pack consists of:
i. The Question Paper
ii. True or False Sheet
iii. An Answer Booklet

4. Do not bring any material into the examination hall unless permission is given by the
invigilator.
5. Please write your answer using a ball-point pen.

MYKAD NO : _____________________________________________________
ID. NO. : _____________________________________________________
LECTURER : _____________________________________________________
SECTION : _____________________________________________________

DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO

The question paper consists of 09 printed pages

2023/B/PAT3023
 CONFIDENTIAL
OCT2023/B/PAT3023

PART A: TRUE or FALSE. (20 points)

State either True or False for ALL the following statements.

No. Statements

1. Audit risk is the result of inherent risk, control risk, and detection risk.

2. The responsibility of auditor is to eliminate all the audit risks in financial statements.

3. The materiality amount for different accounts under audit will remain the same even
though after the auditor allocates materiality to each segment.

4. The assessment of materiality is influenced by the nature of the misstatement.

5. Audit for materiality is the same for all financial statement items.

6. The process of transactions in the sales and collection cycle include acquisition of
goods, services, and cash disbursements.

7. Cash receipts are not included in the acquisition and payment cycle.

8. Two primary processes of transaction in the sales and collection cycle are
purchases and account payables.

9. Normally, wages expense is not associated with the acquisition and payment cycle.

10. The most difficult and complex part of an audit is commonly auditing related to
inventory.

11. Management and auditors are responsible to establish the internal controls of an
entity.

12. The control environment consists of the actions, policies, and procedures that reflect
the overall attitudes of top management.

13. The substantive tests to be performed by auditor are influenced by the effectiveness
of internal control.

14. Adequacy of documents and records is one of the components for control
environment.

15. The extent of adequacy in separation of duties strongly depends on the size of the
organization.

16. The content of an audit report should include the ability of the entity to remain going
concern in the future.
2 2023/B/PAT3023
 CONFIDENTIAL
OCT2023/B/PAT3023
17. The unqualified audit report with explanatory will be issued to the client when the
auditor has no substantial doubt on going concern of the company.
18. An audit report provides absolute assurance that the financial statements are free
from any errors or fraud.

19. The audit report is issued before the audit procedures are performed.
20. Qualified audit report will be issued when the financial statements do not show a
true and fair view or the auditor has not obtained sufficient appropriate audit
evidence to make that conclusion.

3 2023/B/PAT3023
 CONFIDENTIAL
OCT2023/B/PAT3023

PART B: STRUCTURED (60 points)

Answer ALL questions.
1. (15 points)

A. Explain the relationships between:

i. Control risk and audit evidence. (1 point)
ii. Acceptable audit risk and audit evidence. (1 point)
iii. Inherent risk and planned detection risk. (1 point)
iv. Acceptable audit risk and planned detection risk. (1 point)

B. Halim has been assigned to lead the team to audit Specs4U Sdn Bhd for the year
ended 30 June 2023. During the audit, Halim and the audit team found that:
Findings
1. Confirmation of account receivables sent by them failed to detect a material
misstatement.

2. A new account executive who is unqualified for the position has been appointed
in September 2022 because she is the daughter of the director.

3. The directors met with a bank officer to get financial assistance for a new store.

4. Purchase invoices have been prepared and approved by the same person.

Required:

a. Describe the relevant type of risks for each of the above findings. (6 points)

b. Halim found that inventory account has been understated by RM50,000. The
tolerable materiality for this financial statement item was determined at RM45,000.
Prepare the steps of response that should be taken by Halim in relation to the
misstatement. (5 points)

4 2023/B/PAT3023
 CONFIDENTIAL
OCT2023/B/PAT3023

2. (15 points)
A. Explain the following audit procedures for financial statement cycles. (4 points)

i. Substantive procedures
ii. Analytical procedures

B. Perkasa Manufacturing, is a medium size company involved in the manufacturing of

furniture from rubber wood. The company normally purchases new materials on credit
terms in operation of their business.

You as an audit team leader has been engaged to perform an audit on purchase or
acquisition and payment cycle for the company. The critical area related to the cycle is
account payable balances.

Required:

a. Describe ANY FIVE (5) assertions for the purpose of auditing the account payable
balances to the audit team members. (11 points).

5 2023/B/PAT3023
 CONFIDENTIAL
OCT2023/B/PAT3023

3. (15 points)

A. Explain ANY TWO (2) responsibilities of management in establishing the internal

control. (4 points)

B.

TERMS

Control Control activities Independent checks on Adequate

environment performance Documents and
Records
Internal Flowchart Separation of duties Physical control
control over assets
Monitoring Risk Authorization and approval External control
assessment

Choose the suitable terms listed above for each of the following practices of internal
controls. (11 points)

Internal Control Practices

i. Management of the company regularly and periodically evaluates the

effectiveness of internal control especially related to operating activities in
order to take any necessary actions for improvement.

ii. A company enforces the policies for the verification of all transactions within
the stated limits.

iii. The top management and directors are committed in conducting training and
courses in order to ensure the employees are competent towards their
respective positions and job scope.

iv. The employee who is responsible for inventory in warehouse will not be the
same with the employee who handles the record keeping in the accounting
system.

v. The managements of a company identify and analyze the impacts of any

possible changes of the external environment that may lead to
ineffectiveness of practiced internal control.

6 2023/B/PAT3023
 CONFIDENTIAL
OCT2023/B/PAT3023

vi. The management of a company has established the policies and procedures
in operation to address any risks in the achievement of the company’s
objectives.

vii. A process designed to provide reasonable assurance regarding the

achievement of management’s objectives in the following categories: (1)
reliability of financial reporting, (2) effectiveness and efficiency of operations,
and (3) compliance with applicable laws and regulations.

viii. The machineries in plants should be kept and locked properly. Only
authorized staff are allowed to access the plant area.

ix. A supervisor of a company verifies the accuracy of a retail clerk’s cash

drawer at the end of the day.

x. A company uses pre-numbering originating documents for all the

transactions. As the result, any missing number can be explained.

xi. A company has documented the process of internal control using sign,
symbols and arrows indicating the beginning until the end of the process.

7 2023/B/PAT3023
 CONFIDENTIAL
OCT2023/B/PAT3023

4. (15 points)

A. Explain ANY TWO (2) circumstances that the auditor may issue unqualified audit
report with explanatory paragraph. (4 points)

B. Assume that you are the external auditor for the following clients:

i. Paribas Sdn Bhd:

The directors of Paribas Sdn Bhd have decided not to provide depreciation on
buildings of RM100,000 in the financial statements, although Malaysian
Accounting Standards suggest that depreciation should be provided. The
materiality level for this financial statement item was determined to be
RM85,000. However, the overall financial statements still reflect a true and fair
view.

ii. BTL Cement Sdn Bhd:

BTL Cement Sdn Bhd applied effective internal controls, and the auditors found
no significant issues during the audit and its financial statements have been
prepared in accordance with approved accounting standards.

iii. Brakes Co.:

Right after the year end, a fire broke out at the warehouse of Brakes Co. causing
records related to inventory held there were destroyed. As a result, auditors were
unable to determine if adjustments would be necessary on the closing inventory
and cost of sales. Closing inventory in the financial statements have been
recorded at RM1,054,000 and the materiality level is determined to be
RM750,000. After the completion of audit work, the auditors still did not obtain
enough evidence for audit opinion.

iv. Cosco Sdn Bhd:

Cosco Sdn Bhd has neglected to include a Statement of Profit or Loss in its
financial statements. In addition, major parts of the Statement of Financial
Position are significantly misstated.

8 2023/B/PAT3023
 CONFIDENTIAL
OCT2023/B/PAT3023

Required:
a. Classify the type of audit report for each of the above clients. (4 points)

b. Interpret the relevant conditions for each of the audit report according to the above
situations. (7 points)

END OF QUESTION PAPER

9 2023/B/PAT3023