AUDB323, Semester 2, 2013-2014, Sections 1AM, 1BM, 2AM and 2BMGroup Assignment (15%) (Bonus marks will be given for originality of answers!)

Submission Date: by 27 December 2013 (Fri)

Instruction: Answer ALL THREE (3) questions.

Question 1Mr Ong is the audit manager in charge of the audit of the financial statements of XYZ Bhd, a medium-size trading company that sells a wide variety of household goods to the general public. He plans to bring you along to help him with the audit of XYZ’s sales and collections cycle.

To test your knowledge, Mr Ong has asked you to answer the following questions related to the sales and collection cycle:

1-1 FRS118 requires that revenue from the sales of goods is to be recognised when certain conditions have been satisfied. What are these conditions?

1-2 Describe the credit function’s duties for monitoring receipts from customers and handling bad debts.

1-3 When an entity does not adequately segregate duties, the possibility of cash being stolen before it is recorded is increased. If the auditor suspects this type of defalcation is possible, what type of audit procedures can he or she use to test this possibility?

1-4 List FOUR (4) analytical procedures that can be used to test sales and accounts receivables. What potential misstatements are indicated by each of these analytical procedures?

1-5 Describe how the auditor verifies the accuracy of the aged trial balance (i.e., aged debtors listing).

1-6 Distinguish between positive and negative confirmations. Under what circumstances would positive confirmations be more appropriate than negative confirmations?

1-7 List and discuss THREE (3) factors that may affect the reliability of confirmations of accounts receivables.

1-8 The receipient to a positive confirmation request replied stating that the amount owing as at the year-end should be RM500 (as per the receipient’s records) and not RM750 (as per the client’s records). State and describe FOUR (4) possible reasons that could give rise to this difference.

Required:Answer the questions posed by Mr Ong above.

Question 2You are the audit senior in charge of the audit of the financial statementas of PQR Bhd, a medium-size manufacturing company that produces a wide range of industrial products. A young and relatively inexperienced audit trainee from UNITEN has been assigned by the audit manager to assist you with the audit of the acquisitions and payments cycle.

The audit trainee is eager to carry out the tasks that you will assign her to perform and has asked you the following questions regarding the acquisitions and payments cycle:

2-1 What major types of transactions occur in the acquisitions and payments cycle? What financial statement accounts are affected by each type of transaction?2-2 Briefly describe each of the following documents or records: purchase requisition, purchase order, receiving report, supplier invoice, and voucher. Why would an entity combine all documents related to a purchase transaction into a “voucher package”?

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2-3 List the key segregation of duties in the acquisitions and payments cycle. What errors or fraud can occur if such duties are not segregated?2-4 What control procedures typically ensure that the occurrence (existence) and completeness assertions are met for a purchase transaction? What tests of controls are performed for each of these assertions?2-5 List THREE (3) analytical procedures that can test accounts payable. What potential errors or fraud can be identified by each analytical procedure?2-6 List the procedures an auditor might use to search for unrecorded liabilities.2-7 What are the differences between accounts receivable and accounts payable confirmations?

Required:Answer the audit trainee’s questions above.

Question 3Often, an important aspect of an auditor’s audit of financial statements is observation of the taking of physical inventory at the client’s year-end. Halim & Co are the auditors for Persada Impian Bhd, a manufacturer of a variety of standardized parts for small appliances. Encik Zaki, has been its general manager for the last five years, and each year he has been able to improve the profitability of the company. His annual compensation is based largely on the company’s profitability. Much of the improvement in profitability has come through aggressive cost cutting, including a substantial reduction in control procedures over inventory. Last year, a new competitor has entered Persada Impian’s market by offering substantial price cuts in order to gain a share of the market. Encik Zaki is concerned that if he is unable to maintain profitability this year, his salary and bonus will be reduced. Encik Zaki decided that the easiest way to make Persada Impian appear more profitable was through manipulating the inventory, which was the largest asset on the books. He also knows that controls over inventory are weak. Encik Zaki found that by increasing inventory by 2 percent, income could be increased by 5 percent. With the weakness in inventory control, he felt it would be easy to overstate inventory. Employees count the goods using count sheets, and Encik Zaki was able to add two fictitious sheets during the physical inventory, even though the auditors were present and were observing the inventory. A significant amount of inventory was stored in racks that filled the warehouse. Because of their height and the difficulty of test counting them, Encik Zaki was able to cover an overstatement of inventory in the upper racks. After the count was completed, Encik Zaki added four additional count sheets that added RM350,000, or 8.6 percent, to the stated inventory. Encik Zaki notified the auditors of the “omission” of the sheets and convinced them that they represented overlooked legitimate inventory. The auditors traced the items on these additional sheets to purchase invoices to verify their existence and approved the addition of the RM350,000 to the inventory. They did not notify management about the added sheets. In addition, Encik Zaki altered other count sheets before sending them to the auditors by changing unit designations (for example, ten pieces became ten dozens), increasing quantities, and adding fictitious line items to completed count sheets. These other fictitious changes added an additional RM175,000 to the inflated inventory. None of them was detected by the auditors.

Required:a) What are the general objectives or purposes of the auditor’s observation of the taking of the

year-end physical inventory?b) Why does inventory represent one of the more complex parts of the audit?

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c) List the audit procedures that the auditor would carry out before attending a year-end physical inventory.

d) Describe the audit procedures that the auditor would carry out in order to identify slow moving, obsolete, defective and damaged stocks (SMODS) as well as to determine their proper net realizable value.

e) Referring to the above case of Persada Impian Bhd, what audit procedures did the auditors, Halim & Co., apparently not follow that should have detected Encik Zaki’s fraudulent increase of the year-end physical inventory?

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