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 [Link] 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 Audit External

Determined by Who Determined by Relevant
Management law
Detect and prevent What Shows fair and true view
any errors and frauds of accounting records
Any time of duration When 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. Statements of financial position

ii. Statements of profit or loss and other comprehensive income
iii. Statements of changes in equity
iv. Statements of cash flows