JUN 2014Question 1

A. i. Preparing accounting records and financial statements. Valuation services. Taxation services. Internal audit services. IT systems services. Litigation support services. Legal services. Recruiting services. Corporate finance services.

Any two = 2 marks

ii. Self-review threat – the threat that a professional accountant will not appropriately evaluate the results of a previous judgment made or service performed by the professional accountant, or by another individual within the professional accountant’s firm or employing organization, on which the accountant will rely when forming a judgment as part of providing a current service;

Example:- A firm issuing an assurance report on the effectiveness of the operation of financial

systems after designing or implementing the systems.- A firm having prepared the original data used to generate records that arethe subject

matter of the assurance engagement.- A member of the assurance team being, or having recently been, a director or officer of

the client.- A member of the assurance team being, or having recently been, employed by the client

in a position to exert significant influence over the subject matter of the engagement. - The firm performing a service for an assurance client that directly affects the subject

matter information of the assurance engagement

Advocacy threat – the threat that a professional accountant will promote a client’s or employer’s position to the point that the professional accountant’s objectivity is compromised;

Example:- The firm promoting shares in an audit client.- A professional accountant acting as an advocate on behalf of an audit client in litigation or disputes with third parties.

Explanation =1 marks x 2 = 2 marksExample = 1 marks x 2= 2 marks Total = 4 marks

1

Question 2A.

(i)Ethical threat

(ii)Safeguards to reduce threats to an acceptable level

1. A familiarity threat arises where an engagement partner is associated with a client for a long period of time. Azam & Co’s partner has been involved in the audit of Jasa Baik Bhd for six years and hence may not maintain her professional scepticism and objectivity

Azam & Co’s should monitor the relationship between engagement and client staff, and should consider rotating engagement partners when a long association has occurred. In addition, MIA By-Laws (on Professional Ethics, Conduct and Practice) recommends that engagement partners rotate off an audit after five years for listed and public interest entities.Therefore consideration should be given to appointing an alternative audit partner.

2. The engagement partner’s son has accepted a job as a sales manager at Azam & Co. This could represent a self-interest/familiarity threat if the son was involved in the financial statement process.

It is unlikely that as a sales manager the son would be in a position to influence the financial statements and hence additional safeguards would not be necessary.

3. A self-interest threat can arise when an audit firm has a financial interest in the company. In this case the partner’s son will receive shares as part of his remuneration. As the son is an immediate family member of the partner then if he holds the shares it will be as if the partner holds these shares, and this is prohibited.

In this case as holding shares is prohibited by MIA By-Laws (on Professional Ethics, Conduct and Practice) then either the son should refuse the shares or more likely the engagement partner will need to be removed from the audit.

4. Fees based on the outcome or results of work performed are known as contingent fees and are prohibited by MIA By-Laws (on Professional Ethics, Conduct and Practice) . Hence Azam % Co’s request that 20% of the external audit fee is based on profit after tax would represent a contingent fee.

NAB & Co will not be able to accept contingent fees and should communicate to Goofy Co that the external audit fee needs to be based on the time and level of work performed.

1 mark each for ethical threat x4 = 4 marks1 mark each for managing the threat x 4 = 4 marksTotal marks = 8 marks

2

B. Parveen & Co:

i. Advertising is allowed as long as the advertising does not go against any of the fundamental principles contained in MIA By-Laws.

Advertisements should be truthful and not make false claims. For example, it would be inappropriate to claim that Parveen & Co could promise to offer a cheaper audit service than the competitor firm. Equally, it would be inappropriate to make exaggerated claims regarding the experience or the qualifications possessed by the firm’s partners andemployees.

In addition, any advertisement should not make disparaging remarks about any other audit or accountancy firm, for example, it would be inappropriate to state that Peaches & Co offered a higher quality service than any other provider.

Any advertisements should also be in compliance with any local rules and regulations. For example, in some jurisdictions it is prohibited for professionals such as auditors to advertise on television, and most jurisdictions will have some kind of regulatory authority, such as the Advertising Standards Authority in Malaysia, which imposes rules on advertising to ensure it is not misleading and is in good taste.

ii. Lowballinga. Lowballing is a term used to describe a situation where an audit firm submits a

tender to provide an audit service at a very low fee, with the objective of under-cutting competitors’ prices in order to win the tender.

b. The By-laws on Professional Ethics, Conduct and Practice do not encourage professional accountants to charge low fee in order to obtain new client. Since, the objective of charging low fees is to win the tender; the audit firm will hope to recover the low fees quoted in the tender either by increasing the audit fee in the future, or by providing some lucrative non-audit services.The problem is that when low fees are charged for the audit, the quality of the audit work performed may suffer, as the temptation will be to cut back on audit work in order to reduce costs. It could be perceived that the auditor is not acting with due care and competence if not enough time is spent on audit work due to the low fee attached to the audit work.This perception is damaging to the firm concerned, and to the profession as a whole.IFAC’s Code does not prohibit this practice, but it does state that when a firm obtains an audit appointment at a significantly lower fee than that quoted by competitors or the predecessor audit firm, the firm should be able to demonstrate that appropriate time and qualified staff are assigned to the audit, and that all applicable standards are being adhered to.

3

C. i. Privity of contract

Refers to a contractual or fiduciary relationship of auditor and the party of the contract.(2 marks)

ii. Ordinary negligence – an absence of reasonable or due care in the conduct of an assignment

(2 marks)

iii. Professional indemnity insurance (PII) is an insurance policies that provide cover for practitioners against claims for professional negligence. The purpose of PII is to ensure that practitioners have the means to meet any claims of this nature (2 marks)

Question 3b

1. discuss among the audit team members the risks of material misstatement due to fraud such as share insights about the entity and its environment and the entity’s business risks

2. inquire management and others about their views on the risks of fraud and how it is addressed i.e auditor should inquire management’s knowledge of fraud in the entity.

3. Consider any unusual or unexpected relationships that have been identified in performing analytical procedures in planning the audit.

4. Understand the client’s period-end closing process and investigate unexpected period-end adjustment

(2 marks each with explanation x 4 = 8 marks)

Question 5d

The elements that AEM Bank must proved that defendant is liable to third party due to negligence and fraud. (Indicate a law case if necessary)

1. Duty of care: The auditor owed a duty of due care to the plaintiff .(cited 1 case)(1.5 marks)

2. Breach of duty of care: The auditor has failure to act in accordance with due care. The standard of care is that of the reasonable skill and care of another person carry in the same assignment. .(cited 1 case)

(1.5 marks)

3. Casual relationship: There is casual relationship or connection between the auditor’s negligence and the plaintiff damage. .(cited 1 case)

(1.5 marks)

4. Damage: The plaintiff suffered actual loss or damage(1.5 marks)

(Each 4 points with explanation x 1.5marks = 6 marks)

4

JUNE 2013

Question 1A.

A professional accountant shall comply with the following fundamental principles:

(a) Integrity - to be straightforward and honest in all professional and business relationships.

(b) Objectivity - to not allow bias, conflict of interest or undue influence of others to override professional or business judgments.

(c) Professional Competence and Due Care - to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional services based on current developments in practice, legislation and techniques and act diligently and in accordance with applicable technical and professional standards.

(d) Confidentiality – to respect the confidentiality of information acquired as a result of professional and business relationships and, therefore, not discloses any such information to third parties without proper and specific authority, unless there is a legal or professional right or duty to disclose, nor use the information for the personal advantage of the professional accountant or third parties.

(e) Professional Behaviour – to comply with relevant laws and regulations and should avoid any action that discredits the profession.

(Any 2 x 1.5 marks = 3 marks)

B.

Definition of auditing and assurance engagementAuditing (broadly defined) is a systematic process of (1) objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and (2) communicating the results to interested users.

An assurance engagement is an engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria.

(1.5 marks for each explanation = 3 marks)

C.

Practice Review is the process whereby the standard and procedures of an audit firm is being assessed by an independent body of auditors appointed by MIA together with representatives of MIA itself (/). It helps to instill confidence of the public and investors by ensuring all members in public practice maintain and observe the relevant professional standards (/)

5

Peer review means that an action of an individual person may be looked at again by someone of similar competence in that activity (/). More formally it is a process of self-regulation by a profession or a process of evaluation involving qualified individuals within the relevant field (/). Peer review methods are employed to maintain standards, improve performance and provide credibility

(2 marks each = 4 marks)

Question 2A.

Issue Threat to independence Recommendation

Rotation of audit partner

Mr Sam has been the audit partner for the past five years

This may give rise to familiarity threat

Should rotate audit partner especially if U-Dee is to be listed in Bursa

Provision of non-audit service

Sam & Co is providng both audit and non-audit services, ie preparation of financial statements for U-Dee. This may give rise to self-review threat.

Sam & Co should not continue in providing such services.

Unpaid taxation fees due to Sam & Co

Fees outstanding on provision of taxation services may be construed as a loan to the audit client. Such outstanding loan may affect independence

Sam & Co should suggest full payment of the oustanding taxation fees.

(3 marks each for issue identified and explained; and recommendation provided)(3 x 3 marks = 9 marks)

B.

Auditors owe a duty of care to clients because they hold themselves out to have special skills. When performing the duties of an auditor, all reasonable care and skill that could be expected of a professional should be used. For example, refer to Kingston Cotton Mills, London General Bank and Pacific Acceptance. Moffitt J gave the following comments with respect to the duty of care in the Pacific Acceptance case:

It is beyond question that when an auditor, professing as he does to possess the requisite skills, enters into such a contract to perform certain tasks as auditor, he promises to perform such

6

tasks using that degree of skill and care as is reasonable in the circumstances as they then exist. That is the limit of his promise. That is the bare legal obligation and in the end the court must come back in any case to the legal proposition and apply it to the court’s view on the facts found. (Explanation = 3 marks)

The idea of reasonable care should then be applied to the case of Teduhan Ilmu in the following way.

1 Do the auditors have the necessary skills to audit the company? The fact that Teduhan Ilmu is both the largest and most complex client of the auditing firm

does not necessarily imply that the firm was not sufficiently skilled to perform the audit. Every auditing firm will have a client that is the largest or most complex. The courts would need to look at the specific performance of the audit, such as the skills and experience of individuals assigned to the audit team as well as those involved in the review of the new system and its implementation (including such factors as their relevant experience and qualifications, especially given the IT environment), the skills and experience of the audit partner, the use of experts, quality control of the audit such as staff supervision, review procedures and so on.

2 Engagement of expertThe firm considered it necessary to engage an expert in the first year of the computer system being operational. This might have been appropriate, but raises questions about the firm’s ability to perform the IT section of the audit in subsequent years. The audit software has been developed for them by the expert, but what about the impact on the effectiveness of that audit software if the client has changed parts of the system since that first year? Does the firm have the necessary skills to change the audit software to incorporate those client-system changes?

3 Responsibility on audit opinionFurther, even where an expert is used, the auditor still need to have sufficient knowledge of the area being reviewed by the expert to form the overall auditor’s opinion, which remains the sole responsibility of the auditor (ASA 620.3/ISA 620.3).

4 Reliance on internal auditCan the auditor rely on the tests of the program performed by the internal audit? The auditor needs to perform their own tests to establish how long the programming problem has existed and whether the financial effect is material.

5 Was the audit evidence obtained by the auditor sufficient and appropriate? Did the auditor document all relevant procedures, including following up any errors noted? Were the audit procedures appropriate, given the nature of the system, the expert’s findings and increased risk occasioned by the introduction of a new and complex system? Has the specialised audit software been updated for any changes to the software program?

(Any 4 issues x 2 marks = 8 marks)Total = 11 marks

Question 3

7

A.

i. The objective of a quality assurance review:a. to determine whether the member is subject to an adequate system of quality control, is in

compliance with such systemb. adherence to professional standards and applicable legal and regulatory requirements in

performing engagements.(1 mark each x 2 =2 marks)

ii. The objectives of the auditor to communicate with those with governance are:

(a)To communicate clearly with those charged with governance the responsibilities of the auditor in relation to the financial statement audit, and an overview of the planned scope and timing of the audit;

(b)To obtain from those charged with governance information relevant to the audit;(c)To provide those charged with governance with timely observations arising from the

audit that are significant and relevant to their responsibility to oversee the financial reporting process; and

(d)To promote effective two-way communication between the auditor and those charged with governance

(Any 3 x 2 marks = 6 marks)

Question 5

a. Fraudulent financial reporting involves intentional misstatements including omission of amounts or disclosures in FS to deceive financial users.

It can be caused by the efforts of management to manage earnings in order to deceive FS users by influencing their perception as to the entity’s performance and profitability.

(2 marks)

b. Fraud

Fraud Diamond Examples

Opportunity Company’s directors arranged meetings with the senior officers of the company without the knowledge of the CEOShaniza the project controller is Dato Malik’ niece.

Pressure/Incentive - Lack of communication among the board with the external auditor lead to the Board fail to identify the problem in GCB.- CEO threatened to replace the existing auditor it the issue is highlighted in the auditor’s report

Rationalization There are overdue amount receivable from few companies

8

but no further action has been taken by management since these companies has been sponsoring many events organized by the companyExternal auditor agreed to the management request since GCB is one of the external auditor main client.

Capability Dato Malik is the company director cum project managerIt has been the company’s policy that any withdrawal regardless of amount to be signed by the finance manager

(1.5 marks x 4 = 6 marks)c. Indicators of fraudulent reporting

Red flags/indication of fraud in the case

(1 mark each)

Implication if ‘red flags’ are not addressed

(1 mark each)

1.

The existence of close family relationship between the director in charge for a project (Dato’ Malik) and the project controller, Miss Shaniza.

Close relationship between the director in charge and the project controller may cause conflict of interest where the personal interest supersedes the stakeholders’ interest in general.

2.

Expenses incurred by the BOD and their family members have been charged as part of the company’s expenses.

BOD will continuously take advantage of their position to use the company’s money to pay for his expenses.

3.

The CEO and BOD reluctant to increase the provision for doubtful debt (PFDD) as not to decrease the company’s profit.

There is a possibility that receivables of the company will not be able to pay the debt in future. The attitude of CEO and BOD which colluded with the external auditor to hide the actual PFDD may also lead to other fraud in the company undetected.

4.

Withdrawals of the company controlled by only by the finance manager who rarely takes his annual leave.

There is a possibility that he manipulates his position to withdraw the company’s money for his own purpose.

5.

Junior staffs in accounting department are mostly lack of experience and not aware of the accounting procedures and principles.

There could be many irregularities conducted by the senior accounting staffs not tackled by the junior staffs or they are not dare to voice out to the management.

6.

Some of the directors are given company’s projects to handle.

The situation may create conflict of interest as the directors tend to increase

9

the cost for a project and act in their interest rather than the interest of the shareholders.

7.

Directors of the company are paid three times greater than other directors in the same industry.

The situation can lead to manipulation of power where the BOD has taken advantage to obtain more payment for their role in the company at the expense of the shareholders interest.

8.

The project controller, Miss Shaniza realized that the project handled by his uncle, Dato’ Malik does not meet the company’s and authorities’ standards.

Any project which is not following specification might cause harm to the public and such situation will be tarnishing the company’s image.

(6 points x 2 marks = 12 marks)

d. Ethical issues raised and leading to threats (violation of the MIA By-Laws)

Agreed to management request of not increasing the allowance for doubtful debt – intimidation threat and hence affects the auditor’s objectivity.

Significant amount of audit fee – self-interest threat due to GCB’s audit fee which constitute 20% of the auditor’s annual earnings and hence objectivity.

(4 marks)

e. Several measures that can be taken by Zubair:

i) Discuss the management whom he most trusted and believed not being part of the management who take advantage of their position and work according to their interest.

ii) Report to the members of BOD who have strong values and oppose to the misconduct by other directors.

iii) Report to the authorities such as MIA on external auditor’s action to collude with the management or SC for the misconduct of the directors (eg: Dato’ Malik).

iv) Report to the authorities for the fraud perpetrated by the finance manager.

(Any 3 measures with explanation x 2 marks = 6 marks)(Total: 30 marks)

10

APR 2011

Question 1

Part A

a) Integrity requires members to be sincere, honest and straightforward in his professional and business relationships.

b) Members are required to maintain professional knowledge and skill at the level required to ensure competent services are provided and to act diligently in accordance with technical and professional standards.

c) Members should comply with relevant laws and regulations and should avoid any action that discredits the profession.

(3 x 2 marks = 6 marks)

Part B

(a) Circumstances that have potential threats to auditor’s independence when accepting audit engagement:

1. Self - interest threat The auditor having close business relationship with the audit client, the audit firm has a financial interest in audit client’s affair, receiving gifts and hospitality from audit client

2. Self- review threat The audit firm, being the auditor, is also involved in the preparation of accounting records and financial statements of the audit client

3. Familiarity threatThe audit firm’s long association with the audit client may be over influencing the auditor’s professional judgement with regards to the audit

4. Intimidation threatThe audit firm may be intimated by threats that they may be sued by the audit clien or may be sued by the audit client or loss of audit engagement

5. Advocacy threatThe audit firm is promoting the shares of a listed audit client

(any 4 x 1 mark = 4 marks)

11

(b) Reasons why the situations could create threats to auditor independence are:

1. Direct financial interests in an audit client by the partner in charge may create self-interest threat.Safeguards:

Dispose of the direct financial interest prior to the individual becoming a member of the assurance team;

Remove the member of the assurance team from the assurance engagement (if possible).

2. A close business relationship between the audit firm and the assurance client or its management which involves a commercial or common financial interest may create self-interest and intimidation threats.Safeguards

Terminate the business relationship; Reduce the magnitude of the relationship so that the financial interest is immaterial

and the relationship is clearly insignificant; or Refuse to perform the assurance engagement.

3. Family and personal relationships between a member of the audit / assurance team and a director, an officer or certain employees, depending on their role in management decisions, of the audit / assurance client, may create self-interest, familiarity or intimidation threats.Safeguards

Removing the individual from the assurance team; Where possible, structuring the responsibilities of the assurance team so that the

professional does not deal with matters that are within the responsibility of the immediate family member; or

Policies and procedures to empower staff to communicate to senior levels within the firm any issue of independence and objectivity that concerns them.

4. The provision of services by the staff of audit firm to a financial statement audit client that involves the design and implementation of financial information technology systems that are used to generate information forming part of a client’s financial statements may create a self-review threat.Safeguards

The staff providing the assistance should not be given audit responsibility for any function or activity that they performed or supervised during their temporary staff assignment; and

The financial statement audit client should acknowledge its responsibility for directing and supervising the activities of firm, or network firm, personnel.

12

5. The provision of services by the audit firm to a financial statement audit client that involves the design and implementation of financial information technology systems that are used to generate information forming part of a client’s financial statements may create a self-review threat.Safeguards

The audit client acknowledges its responsibility for establishing and monitoring a system of internal controls;

The audit client designates a competent employee, preferably within senior management, with the responsibility to make all management decisions with respect to the design and implementation of the hardware or software system;

The audit client makes all management decisions with respect to the design and implementation process;

The audit client evaluates the adequacy and results of the design and implementation of the system; and

The audit client is responsible for the operation of the system (hardware or software) and the data used or generated by the system.

(1 mark for explanation + 1 mark for the identified safeguard measure x 5 = 10 marks)

(Total: 20 marks)

Question 2

Part A

Two (2) of the auditor’s liabilities under Statutory Law are:

1. Companies Act 1965: Duty to report company’s financial statement (CA 1965) and become “whistle blower”, i.e. to report a breach or non-compliance with any provision of the Company Acts.

The recent amendment to Section 174 of the Companies Act 1965, which inserted subsection 8A states that, an auditor who fails to inform the CCM on any serious offence involving fraud or dishonesty is being or has been committed against the company or this Act by officers of the company, can be fined up to a maximum of RM250,000 or imprisonment up to seven (7) years or both. Hence, auditors are expected to be alert of any error and fraud cases that could have been committed by their client.

2. Securities Industries Act 1983: (governed the trading of securities on the stock exchange). The auditors need to report breach of securities law to authorities such as Securities Commission.

3. BAFIA 1989: (licensing and regulation of banking institution). Any violation of BAFIA by the bankers, the auditor needs to report to the central bank (Bank Negara) immediately.

4. AMLA 2001: (dealing with law and penalties of money laundering and measure for preventing such activities). AMLA imposes a legal duty on a reporting institution including auditor to report unlawful transaction to the Financial Intelligent Unit of Bank Negara.

13

5. SCA 1993: (establish Securities Commission as approving and registering body for prospectus issued in connection with public securities offering). The auditor is responsible to report non-compliance of the Act by the company or “borrower” in the case of issuing debenture

(any 2 x 2 marks = 4 marks)

Part B

(a) In this case, it is stated that the firm has performed several audit procedures to determine whether the management of Total Wellness’s claim on the advice of the legal advisor and pharmaceutical expert was valid (√). However, the depth of such procedures could be questioned (√) as to whether the legal advisor and the pharmaceutical expert have provided substantial or concrete justification (√)as why there is no valid ground to such claim by their overseas partner (cum distributor). Based on the facts given, the audit firm should have performed more substantive tests to verify the client’s claim (√). Thus, it would be probable that Hassan and Co to be liable for being negligent.

( 4 (√) x 1 mark = 4 marks)

(b) To owe duty of care, the following would have to be established: (√)(√) The financial statement was prepared on the basis that it would be conveyed to a third

party; The financial statement would be conveyed for a purpose that was likely to be relied

upon by that third party. The third party would be likely to act in reliance on the report, thus running the risk of

suffering the loss if the statement was negligently prepared.

This called for the ‘Test of Proximity’. i.e. testing to identify the primary, foreseen relationship and the foreseeable third party relationship. Arguments should be supported with relevant legal cases. (√). In the light of the case in question, it would be unlikely that the investor would be successful in their lawsuit against the audit firm as the financial statement was not presented purposely to attract more investors. (√) 4 (√) x 1 mark = 4 marks)

Part C

(a) By Your Firm:1. A member who is being asked to act by a prospective client should explain to the

prospective client that he has a professional duty, if ask to act, to communicate with the existing auditor.

2. A member should request permission from the prospective client to give written authority to the existing auditor to discuss the client’s affairs with the member. If the prospective client refuses to give the existing auditor permission to discuss the client’s affairs with the proposed auditor, the proposed auditor should not accept such appointment.

14

3. If permission is granted, the member should then write to the existing auditor seeking information which could influence his decision as to whether or not he may properly accept appointment.

4. If the existing auditor fails to respond within a reasonable time, the propective auditor should contact the existing auditor by other means, e.g telephone etc.

5. Once the prospective auditor has received confirmation that there are no reasons not to act, or has become satisfied that he can properly act, and is prepared to accept appointment, he should inform the client.

(4 x 1 mark = 4 marks)

(b) By Rashid & Co:

1. The existing auditor should obtain a written authority from the client to communicate with the prospective auditor.

2. The existing auditor should quickly answer the communication from the prospective auditor.

3. If there is such matter, he should inform the prospective successor of those factors within his knowledge of which, in his opinion, the latter should be aware. It is not sufficient to state that unspecified factors exist.

4. If client refuses to give the existing auditor permission to discuss the client’s affairs with the proposed successor, the existing auditor should report the fact to the prospective auditor.

(4 x 1 mark = 4 marks)(Total: 20 marks)

15