auditing and assurance service in malaysia PDF

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Assignment Audit 1 SHAC 2173 – 2019/20320 (02) The audit of payroll and personnel cycle aims to assess whether the account balances are fairly stated in accordance to the generally accepted accounting principles. Among typical questions that might appear on an internal control questionnaire for payr...

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Assignment Audit 1 SHAC 2173 – 2019/20320 (02)

1.

The audit of payroll and personnel cycle aims to assess whether the account balances are fairly stated in accordance to the generally accepted accounting principles. Among typical questions that might appear on an internal control questionnaire for payroll activities includes whether there is adequate separation of duties between employees who maintain human resources records and employees who approve payroll disbursements, and between personnel who maintain timekeeping or attendance records for employees and employees who distribute payroll cheques.

(a) (b)

Explain the purpose of each of the above controls. (4 marks) Assuming the operating effectiveness of each of the above controls is found to be inadequate, describe how the auditors might alter their substantive procedures to compensate the increased level of control risk. (6 marks)

(c) There is a need to extend the procedures in the audit of payroll because it significantly affects the valuation of inventory and auditor put high concern about the possibility of material fraudelent transactions. Discuss. (d)

(6 marks) Explain two supporting documents and records which an auditor needs to examine during the payroll audit. (4 marks)

2.

Razzmatazz Couture, owned by Aliza Othman, is a retail store established since 1999, selling women’s clothing and accessories. Items are sold on cash basis using store’s own billing. Only a central cash register is used which is operated by the store supervisor who has been employed for 10 years. Sales clerk prepares sales invoice in triplicate copies. The first and second copy is given to the cashier, while the third copy is retained by the salesclerk in the sales book. If it is a cash sale, a customer pays the sales clerk who marks all the three copies as ‘paid’ and handover the money to the cashier with the invoice copies. All clothing purchased is put into boxes by the supervisor after comparing the clothing to the description on the invoice and price on the sales tag. She also re-checks the clerk’s calculation.

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At the end of the day, the supervisor recaps the sales and cash, and compares the totals to the cash register tape. The supervisor deposits cash at the end of the day in the bank’s lockbox. The cashier’s copies of invoices are sent to the accounts receivable clerk together with a summary of the day’s receipts. The bank mails the deposit slip directly to the accounts receivable clerk. Milla, the accountant of Razzmatazz, does not handle cash. On a daily basis, she receives the supervisor’s summary and the clerks’s daily summary form, and key in the invoice information into the computer system. The computer updates the accounts receivable, sales, inventory and general ledger master file.

The mail from the bank is opened each morning by a secretary in the owner’s office. All correspondents and complaints are given to the owner. The secretary prepares a prelist of cash receipts, deposit slip and cash receipts, which then are given to Milla. Again, Milla records the cash receipts and update accounts receivable by computer. She compares the deposit slip received from the bank for cash sales to the cash receipts journals. Due to the high importance in inventory control, Milla print out the inventory perpetual totals at every month end. The sales clerk count all inventory after business hour on the last day of each month for comparison with the perpetual records.

(a)

Identify and explain two strengths and two deficiencies of the internal control procedures related to the sales invoices and cash receipts. (8 marks)

(b)

For each deficiency in (a), provide recommendations for improvement. (8 marks)

(c)

(d) (e)

Explain two types of evidences that an auditor could use in performing test of sales and cash transaction. (6 marks) Discuss two existing controls in the sales transaction-related audit objectives. (8 marks) ISA 501 on Audit Evidence state that an auditor should perform a physical observation test of inventory and it is essential that the auditor be present while the physical stock count is taking place. Discuss the importance of performing physical test on inventory in Razzmatazz. (10 marks)

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3. Starfish Sdn. Bhd. (SSB) has previously sold aquarium accessories directly to consumers through its retail stores. Due to competitive pressure, SSB installed an Internet-based sales system that allows customers to place order through the company’s web site. The company hired an outside web site design consultant to create the sales system because the company’s IT personnel lack the necessary experience. Customers use the link to the inventory listing on the web site to view product descriptions and prices. The inventory t listing is updated weekly. To get the system online quickly, management decided not to link the order system to the sales and inventory accounting systems. Customers submit orders for products through online system and provide credit card information for payment. Each day, accounting department clerks print submitted orders from the online system. After credit authorisation is verified with the credit card agency, the accounting department enters the sale into the sales journal. After that, the accounting department sends a copy of order to warehouse personnel who process the shipment. The inventory system is updated based on the bills of lading information forwarded to accounting after shipment. Customers may return goods for full refund if returned within 30 days of submitting the order online. The company agrees to refund shipping costs incurred by the customer for returned goods. Required: (a) Describe three deficiencies in SSB online sales system that may lead to material misstatements in the financial statements. (6 marks) (b) Explain two recommendations to SSB in the manual procedures that could improve and minimise risks, without having to reprogram the current online system. (4 marks) (c) Discuss customer concerns about doing business online with SSB. Recommend a type of control that could be implemented to address the concern. (6 marks) (d) Risks in online system may also create opportunity to fraud and this is a concern to the external auditors. Explain what the auditor can do to test the reliability of the online systems’ internal control. (4 marks)

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