TUTORIAL 1 - PRACTICE QUESTIONS QUESTION 1 Financial statements audited by a qualified auditor would normally be regarded as being more reliable than unaudited statements. This is because the financial statements users are aware that the auditor possesses expertise and they are also assumed to be independent. Nevertheless, the role of an audit today has been extended beyond the statutory financial statements audit. Required: a) Indicate the type of audit (other than statutory audit) and give example of each. (4 marks) The two type of audit are operational audit and compliance audit. The operational audits evaluate the efficiency and effectiveness of any part of organizations operational procedures and methods. Example is evaluate the efficiency and accuracy of processing payroll transaction in newly installed computer system. Information is number of payroll transactions in a month. Established criteria is company standard for efficiency and effectiveness in payroll department. Available evidence is payroll documents and error reports. compliance audit determine whether the auditee following the rules an regulations set by the higher authorities. For example, determine whether bank requirements for loan continuation have been met. Information will be the company records. Loan agreement provisions will be established criteria and available evidence is the financial statements and calculation by the auditor. b) Describe the functions played by Malaysian Institute of Accountants (MIA) in developing qualified accountants and auditors in the country. (6 marks) Malaysian institute of accountants ( MIA )is the national accountancy body that governs, advance, support and enhances the reputation and interest of the industry. It is to enhance the market demand, accountancy professionals should improve their competency and become an independent person. MIA connects its membership to a range of resources, events and professional development and networking opportunities which is essential in developing qualified accountants and auditors in the country. c) Justify your answer whether the people below are suitable to be appointed as an external auditor of Ilmuan Berhad (IB), a company listed in the Bursa Malaysia. i. A member of ACCA who is currently a chief financial officer in IB. - NO, he is not suitable to be appointed as an auditor of Ilmuan Berhad ( IB ) because he might use his position as a chief financial officer as an advantage. ii. A shareholder owning 10% of the ordinary shares in IB. - NO, because if the person to be appointed holds even a single share, he is not eligible to be be appointed as an auditor. iii. A member of ICAEW, a partner in a Chartered Accountant (CA) firm. - YES, because if the person is specialize in audit and assurance and also chartered accountants which include ICAEW qualified to be an external auditor. iv. A Japanese director, who is empowered by the Japanese Law to audit public companies in Japan. - NO, because approved auditor in Malaysia are eligible to be an external auditor which can be questioned his competence and knowledge as well. v. The sales director, whom his wife is a newly appointed Chief Internal Auditor (CIA) in IB. (5 marks) - NO, he is not suitable to be appointed as external auditor because his spouse has the position in Ilmuan Berhad as Chief Internal Auditor. d) Accounting and auditing are sometimes being interchangeable used. Distinguish between accounting and auditing. (5 marks) - Accounting is the identify, classifying, recording and summarizing of economic events with the goal of providing financial statements for decision making. Accountants must have diligent understanding of the principles, and regulations that provide as the foundation of preparing the accounting information. On the other hand, auditors focus on determining whether the recorded information clearly represent the economic events that took place during accounting period which define the auditing. Auditors must have a tough understanding of those accounting standards in order to evaluate whether the accounting information is properly needed. Auditors need to evaluate the financial statements whether it is true and fairly represented. e) In becoming an auditor, people from other background are welcomed and seen to have joined this profession. However, the industry still observed that more than half of auditors come from the accounting background. Justify this observation. (5 marks) - Being an auditor is to make sure the information reported on the financial statement is true and fair based statement. So, accounting background is compulsory background that should be observed. Moreover, people is with accounting background have more experience which include with analytical skills and attention to detail. For example, the person need a degree in accounting or related field study as an auditor which require experience to review the financial statements to ensure that companies comply with government rules and regulations. Question 2 a) Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria. Auditing should be done by independent and competent person.Discuss THREE (3) reasons why accounting graduates need to have three years of experience in accounting or auditing field to become a proficient auditor. (10 marks) Accounting graduates need to have 3 years of experience in accounting or auditing field to become a proficient auditors. It is because auditors’ unique knowledge, experiences, capabilities which lead to the enhancement of auditor’s abilities to process relevant information and provide decision making efficiently and effectively. Accounting need three years of experience because an auditor need to be certified because they oversee the financial statements and procedures which consist of complicate cash inflow and outflow. Moreover, an auditor examines financial statements to assure that organizations and business adhere to the legal requirements which they require plenty of analytical skills that can obtain from working experience. In conclusion, they should have professionalism and high communication skills which require of experience. Be it accounting or auditing field, communication is the skill that highly recognized as it helped to communicate with our customers. b) Over the years, the auditing field had observed many auditing standards being reviewed and modified. In certain cases, practitioners have suggested and demanded for new auditing standards, and these were officially introduced. Discuss TWO (2) main reasons why auditing standards have gone through these modification and review. (10 marks) Two main reasons why auditing standards have gone through these modifications and review are the minimum guidance provided by auditing standards to the author in determining the scope of audit steps and procedures that should be used to achieve objectives. First and foremost, it is to ensure that there is no material misstatement. These changes and reviews were made as a result of these circumstances. Next is there are some improvements that have required for the auditing standards to go through these modification and review. Followed by the technologies advancement and it has been changed over the years. The audit standards have been modified in order to keep pace with technological advancements. Finally, the way business is conducted has changed over the years, which has an impact on audit standards and necessitates their modification and review. c) Internal and external audit focus on the collection of evidence to evaluate certain economic events. Distinguish these two types of audit. (5 marks) Internal audit mainly determined by the management. It’s mainly to detect and prevent any errors and frauds. Internal audit conduct for any time of duration. On the other hand, external audit determined by relevant law. Its shows fair and true view of accounting record and also it is only for specific period of time. These external audits reports will submit to shareholders while internal audit’s report will submit to the management. Internal Determined by Management Detect and prevent any errors and frauds Any time of duration Audit Who What When External Determined by Relevant law Shows fair and true view of accounting records Specific Question 3 Auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and establish criteria and communicating results to interested parties. Required Identify any four (4) components of the financial statements that are required to be audited and examined by the auditor. (4 marks) i. ii. iii. iv. Statements of financial position Statements of profit or loss and other comprehensive income Statements of changes in equity Statements of cash flows
