Reference no: EM132598498

Question - You are an audit manager of Daniel & Co and are planning the audit of Pintas Jaya Bhd (Pintas) for the year ending 30 June 2019. Pintas is a public company listed on Bursa Malaysia. You have been assigned to audit Pintas for the last two years and this is your third year with Pintas. The recent event at Pintas has made you considering not to continue auditing since your sister has been offered a post as assistant accountant with the company. But Hj Daud, the partner in charge of Pintas insisted you to continue since there is no one capable of auditing Pintas.

The company is a food retailer with a large network of stores across the country and four warehouses. The company has been a client of your firm for several years and the forecast profit before tax is RM20 million. The audit manager has attended a planning meeting with the finance director and has provided you with the following notes of the meeting.

Planning meeting notes - Pintas has an internal audit (IA) department which undertakes controls testing across the network of stores. Each store is visited at least once every 18 months. The audit manager has discussed with the finance director that the external audit team may rely on the controls testing which is undertaken by IA.

During the meeting, the finance director provided some forecast financial information. Revenue for the year is expected to increase by 3% as compared to 2018; the gross margin is expected to increase from 50% to 54%; and the operating margin is predicted to decrease from 20% to 17%. Pintas values inventory in line with industry practice, which is to use selling price less average profit margin. The directors consider this to be a close approximation to cost. The company does not undertake a full year-end inventory count and instead undertakes monthly perpetual inventory counts, each of which covers one-tenth of all lines in stores and the warehouses.

As part of the interim audit which was completed in February, an audit junior attended a perpetual inventory count at one of the warehouses and noted that there were a large number of exceptions where the inventory records showed a higher quantity than the physical inventory which was present in the warehouse. When discussing these exceptions with the financial controller, the audit junior was informed that this had been a recurring issue.

Moreover, the control at the warehouse is lacking since there is only two staff in charge of the warehouse and no supervisor is monitoring their job. You have asked the audit junior to performed more substantive test to identify any fraudulent activities. During the year, IA performed a review of the non-current assets physically present in around one-third of the company's stores. A number of assets which had not been fully depreciated were identified as obsolete by this review. The finance director is not satisfied with the review done by the IA and he insisted that your team should have a relook on this review.

The company launched a significant TV advertising campaign in January 2019 in order to increase revenue. The directors have indicated that at the year-end a current asset of RM600.000 will be recognised, as they believe that the advertisements will help to boost future sales in the next 12 months. The last advertisement will be shown on TV in early June 2019.

Pintas decided to outsource its payroll function to an external service organisation. This service organisation handles all elements of the payroll cycle and sends monthly reports to Pintas which detail wages and salaries and statutory obligations. Pintas maintained its own payroll records until 31 December 2018, at which point all the payroll records were transferred to the service organisation.

Pintas is planning to expand the company by opening three new stores during August 2019 and in order to finance this, in April 2019 the company obtained a RM2.5m bank loan. The loan tenure is for 5 years and Pintas has to pay the monthly instalment of RM65.000. In preparation for the expansion, the company is looking to streamline operations in the warehouses and is planning to make approximately 60 employees redundant after the year end. No decision has been made as to when this will be announced, but it is likely to be in June 2019.

Required -

a. Based on the case above, identify two (2) key audit matters that need to be communicated to those charge with governance of Pintas.

b. Explain the objectives of the auditor to communicate with those charged with governance.

c. Explain the auditor's responsibilities relating to suspected fraud in the warehouse

d. Discuss the ethical issues found in the case above

e. Describe five (5) audit risks and explain the auditor's response to each risk in planning the audit of Pintas.

f. Beside financial statement audit, explain other assurance services that can be provided to Pintas.