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QUESTION 1

(a) explain and provide example the five (5) main threats to independence and objectivity as
identified in the MIA By-Law (On Professional Conduct and Ethics).
Self Interest This occurs when an auditor has a beneficial interest in a
/financial/conflict of client's performance. Examples include:
interest ● When the auditor or a member of their family owns
shares in a client. They would directly benefit from
increases in client profits and would be reluctant to
raise any concerns that could adversely affect the
performance of the client.
● When a firm is dependent upon one client for a
significant proportion of their total fee income. The
firm may not raise issues with the client for fear of
losing them.
● The acceptance of gifts and hospitality. This could be
perceived as bribery to keep quiet about issues in the
financial statements

Familiarity Occurs when, by virtue of a close relationship with an audit


client, its directors, officers or employees, an audit firm or a
member of the audit team becomes too sympathetic to the
client's interests. EXAMPLE; a member of the audit team
having a close family member who, as a director, officer or
other employee of the audit client, is in a position to exert
direct and significant influence over the subject matter of the
audit engagement
Advocacy threat Occurs when the audit firm, or a member of the audit team,
promotes, or may be perceived to promote, an audit client's
position or opinion. EXAMPLE: Dealing in, or being a promoter
of, shares or other securities in an audit client and
Self-review threat Occurs when the audit firm, or an individual audit team
member, is put in a position of reviewing subject matter for
which the firm or individual was previously responsible, and
which is significant in the context of the audit engagement.
EXAMPLE: performing services for an audit client that directly
affect the subject matter of the current, or a subsequent,
audit engagement
Intimidation threat Occurs when a member of the audit team may be deterred
from acting objectively and exercising professional scepticism
by threats, actual or perceived, from the directors, officers or
employees of an audit client. EXAMPLE: threat of replacement
over a disagreement regarding the application of an
accounting principle
(10 marks)
(b) Each of the following situations involves a possible violation of the MIA By-Laws (On
Professional Conduct and Ethics). Indicate whether the By-Laws are violated and explain
your answers with relevant safeguards available.

(i) Nobita Bhd is your major client. It is listed on a major Stock Exchange. The audit team
consists of eight members, of whom Rafiq is the most senior. Rafiq has just been
loaned to work on temporary at Nobita’s office to assist the client’s staff in managing
their accounting work.
Threats Familiarity and self-review threats
Issue Rafiq may manipulate audit work which was carried out previously by his
team.
safeguards He can only be loaned for 2 to 6 months
He cannot take part in decision making

(3 marks)

(ii) Your longest standing audit client, Kancana Bhd which you have been involved in
auditing for ten years, has offered you a joint venture business to run a seafood
restaurant in your hometown. You are very interested with that business prospect.
Threats Self-interest Familiarity threats
Issue Having long relationship and joint-business with client can cause auditor to
be bias or sympathy when audit is carried out on close-friend’s business.
An auditor would likely to manipulate the audit report due to sympathy or
doing a favor to a close friend (client).
safeguardsYou should be rotated after five years of audit, reduce the magnitude of
relationship with client
If there was no other safeguard available, you should reject the offer

(3 marks)

(iii) Your firm have been requested by one of your clients to identify and recruit a suitable
candidate for its accountant post.
Threats Self-interest threat
Issue Apart from receiving audit fee, the auditor also receive the consultancy fee
for the recruitment. Hence, the auditor involved may be bias when doing
audit on client’s business.
safeguards It is allowable if auditor do not take part in decision making on the
appointment. Hence, auditor role is limited to shortlist candidate only.
The additional role of auditor must be made known to audit committee.

(3 marks)

(iv) In order to increase your firm’s profitability, you have been helping a number of your
non qualified accountant friends in endorsing their audit report as ‘True and Fair’.
Since they are very experienced in their work, you feel that it is unnecessary to take a
thorough examination on the audit procedures undertaken in obtaining evidence.
Threats Self-interest
Issue Auditor violates the ethical code because of financial interest. Signing the
accounts blindly is a sheer negligence.
safeguards Auditor should verify the accounts by assessing all evidence available to
form opinion with accordance to relevant standards e.g. ISA. MFRS/MPERS
When there is no safeguard available, auditor must reject the
offer/arrangement in helping non-qualified accountant.
(3 marks)

(v) You are currently carrying an annual audit on a new client, Harmony Bhd. The
managing director literally admire your auditing skills thus, he has offered you to
provide internal auditing service for the company.
Threats Self-interest and self-review, familiarity
Issue Providing non-assurance (audit) to public listed companies is violating the
principle code of ethic. Auditor enjoys dual fees at the same time may
prompt the intention of manipulating client’s FS to hide weaknesses.
safeguards Only apply to non public listed companies
Since it is an PLC (‘Berhad’) auditor can perform non-assurance service but
the responsibilities of determining the scope of audit and decision making
on setting up good internal control must lie with the management (under
mgt responsibilities)
The dual services must be made known to those charged with governance
(Board and audit committee)

(3 marks)

25 MARKS
QUESTION 2

(a) You are an audit manager in Deanna & Co, a firm of Chartered Accountant. You are set to
audit a client called Borneo Finance Sdn. Bhd. which is a money lender institution.
Borneo Finance has grown rapidly over the past few years, and is now one of your firm’s
most valuable clients. The company has been an audit client for eight years with you
being the auditor in-charge. For the past three years, you have been providing
management consultancy advice that generating a fee in which constitutes 20 percent of
annual total income. The client has been satisfied with the consultancy service performed
seeing that it has helped the company improving its revenue tremendously. Thus, the
management is rewarding you with a loan package which the interest is below normal
commercial rate. The management is also considering expanding its business across
Peninsular Malaysia. They hope that you could play an important role in securing more
customers for them and in return, you will be given a lucrative commission for each
customer you introduced.

Required:

explain five (5) threat to independence arising from the above situation and provide the
best safeguard for each of the identified issue using the format below.

Threat Safeguard
Eight years of being in charge – familiarity Rotate person in charge once every five
and self interest treats – this may lead to years. Get additional independent
bias judgment on client’s accounts. accountant to review auditor’s work.
Providing non-assurance services apart Need to inform audit committee on the dual
from audit can lead to financial interest and tasks. After two years of service, the non-
advocacy threats. The fact that auditor assurance services must be withdrawn.
receives 20 percent of total income fee and
has been providing such serve more than
TWO years can lead to impairment of
independence.
Being advisor and auditor for the same Auditor role as advisor must be tightly
company also promotes advocacy treats. scrutinized/monitored by audit committee.
auditor may undermine his/her
Need additional accountant to review work.
independence to underpin client’s interest both clients and audit firm must have
for money. effective quality controls to counter the
threats. Limit the advisory service to TW
years only.
management is rewarding you with a loan Reject the offer. Offer can be considered if
package which the interest is below normal auditor is given the normal commercial rate
commercial rate – financial/self interest same as others.
threats. This will promote bias judgment on
client’s FS.
Help client’s secure customer can lead to When element of contingent fees exist –
financial interest (contingent fees) auditor need to reject the offer as there are
no safeguards available for this kind of
threat.
(10 marks)
(b) Sendra & Co, chartered accountants were asked by Souvenix Bhd., a leading supplier of
technology in oil and gas industry, to audit the financial statements of the company for the
year ended 31 December 2012. Sendra explained to the company the need to make
inquiry of the existing auditor and requested permission to do so. The management of
Souvenix Bhd. agreed to fulfill Sendra’s request and thus authorized the existing auditors
to respond to her inquiries. After obtaining satisfactory replies from the existing auditor,
Sendra is ready to draft an engagement letter. She is however concerned about whether
she has the competency and adequate resources to carry out the audit work as she never
explored in this kind of audit engagement before.

Required:

(i) explain three (3) key information that Sendra should obtain from existing auditor.
To find out whether fee has been served promptly because auditors 2
do not want to experience such situation.
To find out whether there was any disagreement exists between the 2
existing auditors and management. If such situation exists,
successor must study the matter and if there was no safeguard, then
need to reject.
Find out the business’s background, its state of internal control, and 2
the risks surrounding the business.
Total 6 marks

(ii) discuss on whether Sendra should accept the engagement.


It depends, if Sendra accept the engagement, she may need to seek 2
expert’s view, assistance to execute the audit.
At the same time, she and her team may also need to undergo 2
training, workshop on the related field to improve the understanding
in that field.
She must also ensure that he has all the necessary resources to 2
perform the task etc. skilled staff, time
If she does not wish to comply all the above then she may just reject 2
the offer.
Total 4 marks
(iii) briefly explain five (5) information included in the engagement letter.
1. Management and auditors’ responsibility respectively. I.e. 1
management responsible to have internal control in place and not
the auditor.
2. Auditors’ responsibility is to form an opinion whether FS is true 1
and false.
3. Matters pertaining to audit fee, example the basis of fees (how 1
the fees derived)
4. A disclaimer: Describing the limits of the audit. Typically this 1
expresses that an audit is not designed to detect all forms of
fraud or illegal acts; rather, an audit checks the financial position
of a client with reference to generally accepted accounting
principles.
5. The objective and scope of the audit; and also what standard did 1
the auditor is based on to verify the FS. Example: International
standard of auditing (ISA), MFRS (for public listed) and MPERS
(for private small and medium enterprises)

Total 5 marks

25 MARKS
TOTAL 50 MARKS