Question

Sorfina Berhad, a diversified manufacturer has four divisions that operate throughout Malaysia. The company has historically allowed its divisions to operate autonomously. Corporate intervention occurred only when planned results were not obtained. Corporate management has high integrity, but the board of directors and audit committee are not very active. Sorfina Berhad has a policy of hiring competent people. The company has a code of conduct, but there is little monitoring of compliance by employees. Management is fairly conservative in terms of accounting standards and practices, but employee compensation packages depend highly on performance. The company does not have an internal audit department, and it relies on external auditor to review the controls in each division. Shahrul is the general manager of the Fabricator Division. This division produces a variety of standardised parts for small appliances. Shahrul has been the general manager for the last ten years, and each year he has been able to improve the profitability of the division. He is compensated based largely on the division’s profitability. Much of the improvement in profitability has come through aggressive cost cutting, including substantial reduction in control procedures over inventory. During the last year a new competitor has entered Fabricator’s markets and has offered substantial price reductions in order to gain market share. Shahrul has responded to the competitor’s actions by matching the price cuts in the hope of maintaining market share. He is very concerned because he cannot see any other areas where costs can be reduced so that the division’s growth and profitability can be maintained. If profitability is not maintained, his salary and bonus will be reduced. BAC5083 AUDITING AND ASSURANCE JULY-SEPT 20Final AssessmentCONFIDENTIAL Page 6 of 7 2020 Turn Over Shahrul has decided that one way to make the division more profitable is to manipulate inventory because it represents a large amount of the division’s balance sheet. He also knows that controls over inventory are weak. He views this inventory manipulation as a short-run solution to the profit decline due to the competitor’s price cutting. He is certain that once the competitor stops cutting prices or goes bankrupt, the misstatement in inventory can be corrected with little impact on the bottom line. Required: (a) Discuss FIVE (5) strengths and FIVE (5) weaknesses of Sorfina Berhad’s internal control. [20 marks] (b) Identify the control environmental factors that causes that Shahrul’s manipulation of inventory in Sorfina Berhad

b:

The Companies Act 2016 requires a company to appoint an approved company
auditor. The final responsibility of the auditor is to issue a written report expressing
an opinion on whether the financial statements give a true and fair view.
i. Explain the term 'true' and 'fair' view.

ii. Explain THREE (3) rights that enable auditors to carry out their duties.

(b) Discuss the differences between errors, frauds, and illegal acts. Give an example of
each.

(c) Discuss THREE (3) reasons why auditors are responsible for "reasonable" but not
"absolute" assurance.

Answer 1

Answer b)

i) True and fair view in auditing means that the financial statements are free from material misstatements and faithfully represent the financial performance and position of the entity. This is an responsibility of an auditor to exress an opinion on true and fair view of financial statement.

ii) Folowing are the rights of an auditor.

Right to inspect/ access books of accounts. Auditor have a right to access or inspect books of accounts, vouchers, ledgers and other financial information of the entity during the audit period.

Right to ask for information from employees and managment. Auditor have right to ask for information which is necessary in performing duties, from management and other employees.

Right to participate in general meeting. Auditor have right to take part in general meeting of the company. Auditor can speak on the matters which is relevant with his work.

Right to remuneration. Auditor have right to get remuneration form the company. Audit fees is mutually decided at the signing engagement letter. Auditor have right to get paid for his audit work.

Right to take legal and technical advice from an expert. Auditor have right to take legal and technical advice from expert. Auditor can take expert's  advice on other than accounting aspects.

Difference between fraud, error and illegal acts:

Fraud refers to an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage.

The distinguishing factor between fraud and error is whether the underlying action that results in the misstatement in the financial statements is intentional or unintentional. Unlike error, fraud is intentional and usually involves deliberate concealment of the facts. Error refers to an unintentional misstatement in the financial statements, including the omission of an amount or disclosure.

An act in violation of a law in the jurisdiction in which it is committed. Examples of illegal acts include theft, or the unauthorized taking ofProperty, perjury, or lying under oath, and murder. The criminality of some illegal acts (notably fraud, theft and others) helps to ensure smooth operation of businesses.

iii

The audit professions contend that an audit conducted in accordance with Generally Accepted Auditing Standards (GAAS) provides reasonable assurance, but not “absolute” assurance, that the assessed financial statements are free of material mis-statements.

The reason why auditor is responsible for reasonable assurance rather than absolute assurance, is not because there are limitations and these limitations restricts the auditor to obtain only reasonable assurance and even with such limitations and restrictions auditor tries his best to provide some level of assurance to the users to reinforce their confidence in the financial statements.

Such limitations that restricts the auditor to gain absolute assurance are known as Inherent limitations of an Audit.

Persuasive evidence instead of conclusive evidence

Use of judgement in establishing estimates for reporting purposes

Use of sampling techniques by the auditor in conducting different audit procedures.