Question

In: Accounting

You have been the partner in charge of the audit DamaiJaya Engineering Berhad for many years....

You have been the partner in charge of the audit DamaiJaya Engineering Berhad for many years. You have never given a qualified audit report because the internal control system of the company is satisfactory, the business in which the company engaged was quite stable and the results of compliance and substantive test indicated that the account balances were fairly stated.

In the current year's audit, you assigned a recently recruited member of staff as senior in charge of the job and reporting directly to you. You informed the senior in charge that the time budget should remain the same as in previous years and he agreed that he would try his best to maintain the same audit time frame. An interim audit was conducted and the following issues were reported. The company recently computerised its stock and general ledger system: the chief accountant had resigned and the position was vacant for two months: and a number of errors were detected in the compliance test of the system. The original time budget was not revised despite the above findings. Because of the fight time budget, the computerised system were not tested by the IT auditors. The year-end audit was completed just within the time budget. You were very pleased as this implied effectiveness and efficiency of the audit team.

A few months after the year end, DamaiJaya Engineering Berhad was in financial difficulties. The newly appointed chief accountant fled and took with him RM 2 milion cash. Subsequent investigation revealed that stocks had been overstated because wrong prices had been used in the company system and obsolesces stock was not adequately valued. Sales and debtors were overstated as the Chief accountant had falsified some sales invoices in order to maintain the sales volume at a similar level to previous years. It was also revealed that the audit assistant responsible for auditing stock, who was a fresh graduate, had only tested a few items. Errors in stock pricing revealed from this sample were deemed as immaterial and no detailed work relating to subsequent sales of year and stock was carried out. Further, debtors circularisation was not carried out because of time constraints.

Required:

  1. Outline at least eight (8) deficiencies of the audit related to the above case and provide your justifications. (8 marks, should be 8 points with elaboration)
  2. Explain why adequate planning is essential before commencement of actual audit work.

Solutions

Expert Solution

Following are deficiencies of Auditor, their staff or audit process :

1. The new recruited staff is not being provided enough training : Though senior incharge is appointed for role, he should be provided enough training

2. Appropriate supervision of newly recruited staff : Usually newly recruited person should be under thorough supervions to ensure that they are in position to discharge responsibilities assigned to them and also provide them required support.

3. Inappropriate audit prcess : The test of compliance system showed error in testing no appropriate measure were carried out to test thoroughness

4. Lack of appropriate treatment to risk : The error in compliance system indicates material failure of internal control. The incharge of audit should have informed the management of the company and audit partner to ensure that appropriate action is taekn by management. Reasnable assuarance of financial statement are free from material mis statement was impacted due to this however clean report were issued

5. Stick to time & Cost : The newly recruited person is directed to stick to the time and cost and under this direction he ignored the material risk. There is failure of audit partner in communication that if he find risk, he should bring into notice and just not try to complete the audit under defined time line

6. Lack of appropriate review : The audit partner have not carried out review of audit papers otherwise he would be able to identify the risks of IT systems

7. Lack of detail audit programme : The audit programme helps audit staff to covers all important & material area of audit in systematic way which helps as a guidance and conrol document which seems to be missing here

8. Non-testing of newly implemented IT system : Check of newly implemented IT system is very essential to chek from effectiveness of internal control which is being not carried out due to time constraint.

Requirement of Audit Planning :

Audit planning is required for an Auditor to conduct an effective and efficient audit. Audit planning is an important area of the audit at the beginning of audit process to ensure that appropriate attention is devoted to important areas, potential problems are promptly identified, work is completed expeditiously and work is properly coordinated.

Audit planning is important because auditors should plan the audit to reduce audit risk. The auditor should plan the nature, timing, the extent of direction and supervision of the engagement team members, and review of the work

This is not a simple process. It requires consideration of client industry and regulatory factors, client operations and administration, availability and assignment of firm resources, engagement timing, and much more. The hard work of proper planning may not only enable more efficient audit execution, but it also provides auditors with important risk management techniques


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