BAC3624 Advanced Auditing Tutorial 5

Question 1

Described below are situations which have arisen at four unrelated clients of your
firm.

Fabulous Sdn Bhd (FAB)

Your firm is the external auditor of FAB for the year ended 30 June 2018. FAB’s
financial statements show revenue of RM54.8 million, of which RM1.1 million
relates to cash sales. During the audit, your firm identified that FAB had no
system of internal control over cash sales. No other audit procedures were
available to obtain assurance over cash sales. FAB’s profit before tax is RM9.5
million.

Bravo Sdn Bhd (BRAVO)

Your firm is the external auditor of BRAVO. The financial statements include a
note relating to a significant uncertainty over going concern. The uncertainty has
arisen because a major customer has threatened to terminate its contract early
due to BRAVO failing to comply with service levels required by the contract. Your
firm has concluded that the note included in the financial statements is
appropriate and adequate.

Wonderful Sdn Bhd (WON)

During the external audit of WON for the year ended 31 December 2017 you
discover a letter dated 1 February 2018 from Stardusk Sdn Bhd (STAR), a
customer of WON. The letter informs WON that STAR is under a liquidation
process and that the amounts due to WON of RM750,000 will not be paid. The
directors refuse to make an allowance against this because the liquidation
process in not yet completed. WON’s draft financial statements for the year
ended 31 December 2017 show profit before tax of RM19.3 million and total
assets of RM177.6 million.

Required:
For each of the situations above, state, with reasons, the implications for your
firm’s audit reports.

(9 marks)
BAC3624 Advanced Auditing Tutorial 5

Question 2

Azman Yusof & Co, a medium sized audit firm was engaged to audit Diddy
Supply Sdn Bhd. A significant part of the audit entailed verifying the physical
count, cost and summarization of inventory. Inventory was highly significant to
the financial statements and Azman knew the inventory was pledged as collateral
for a large loan to National Bank. In reviewing Diddy’s inventory count
procedures, Azman told the Managing Director that he believed the method of
counting inventory at different locations on different days was highly undesirable.
The MD stated that it was impractical to count all inventory on the same day
because of personnel shortages. After considerable discussion, Azman agreen to
permit the practice if the MD would sign a statement that no other method was
practical. The audit firm had at least one person at each site to audit the
inventory count procedures and actual count. There were more than 40 locations.

Eighteen months later, Azman found out that the worst had happened.
Management below the MD’s level had conspired to materially overstate
inventory as a means of covering up obsolete inventory and inventory losses
resulting from mismanagement. The misstatement occurred by physically
transporting inventory at night to other locations after it had been counted in a
given location. The accounting records were inadequate to uncover these illegal
transfers.

Both Diddy and National Bank sued Azman Yusof & Co.

Required:
(a) What defense should Azman Yusof & Co use in the suit by Diddy?
(b) What defence should Azman Yusof & Co use in the suit by National Bank?
(c) Is Azman likely to be successful in his defences?
Provide reasons for all anwers.