CW A.Answer TARC (PA) May 2015. For education purpose only.

1. Explain to Mr. Yap the difference of accounting and auditing.
Accounting is the recording, classifying and summarizing of transactions in a systematic
manner for the purpose of providing financial information for decision making.
Auditing is a process of reviewing the transactions and balances of accounting records to
project a true and fair view of the financial position of the company.
Comment on whether Jack is justified to comply with Mr.Yap’s request for an
auditors’ report.
Jack is not qualified to comply the Mr.Yap’s request for an auditors’ report. Although, he
has possessed the membership of the Malaysian Institute of Accountants (MIA) and the
ACCA membership, he can only prepare the audit report but not sign for it. Thus, Jack
has to get an audit license with the requirements of owning a valid Practising Certificate
issued by MIA and at least 5 years sufficient of audit experience in a certificate public
accounting firm.
If Top Enterprise had requested an audit to be performed by CTT Associates, can
CTT Associates assigns Jack to perform the audit? Explain.
If Top Enterprise had requested an audit to be performed by CTT Associates, CTT
Associates cannot assign Jack to perform the audit work. This is because Jack had
prepared the financial statements for Top Enterprise. If he does perform the audit work,
this is a self-review threat that Jack, the auditor, put himself in a position of reviewing the
subject that previously he responsible.
Jack is also the ex-employee of CTT Enterprise. So, he cannot perform the audit work as
this may cause familiarity threat to be occur.

2. In conclusion, to avoid conflict of interest, CTT Associates should not assign Jack to
perform the audit work for Top Enterprise so that the financial statements show true and
fair view.
Explain to Mr. Yap, the implications, once he changed the company status to a
private limited company.
Mr. Yap want to change his company status to a private limited company because this
form of business have more benefits than the sole proprietorship. In a private limited
company, liabilities will become limited. It can also enjoy corporate tax incentive,
expand the business and it have perpetual life.
Firstly, limited liability is the company’s debt but not personal`s debt. If Mr. Yap`s
company has owing debt or facing bankruptcy problem, he is not necessary to sell his
own asset and pay out all the debts. The personal assets of shareholders will not be at risk
of being seized by creditors.
Private limited company can also enjoy corporate tax incentive. Company tax is based on
the tax rates. Usually, private limited company tax rate is 20% to 25% and sole
proprietorship is based on personal tax rate which is 2% to 26%. If his company is
resident company and the company paid-up capital are not exceeding RM2.5 million, first
RM500,000 income will be taxed by 20% and the remainder will be taxed by 25%. If
resident company paid-up capital are exceeding RM2.5 million or it is a non-resident
company, it will be taxed by 25%. Sole proprietorship is based on personal tax rate. For
resident individual, the chargeable income is RM5,000. Shall it lower than RM5,000, it
will not be taxed. When a person’s chargeable income is RM 5,001 to RM15,000, he or
she will be taxed 2%, while chargeable income up to RM100,000 will be taxed by 26%.
Other than that, non-resident individual is taxed by 26%. That is why Mr. Yap wants to
convert his company to private limited company.
By expanding the business to the form of private limited company, Mr. Yap can sell his
company shares by inviting other parties to join his company as the company
shareholders. By doing this, the company gains more capital from selling share and
reduce the risk of bankruptcy. So, he will be having a lot of money to run and earn more

3. profit in the form of dividends. It is also a way to invite expertise in different fields to
join a part of the company and have a greater management over the company.
Furthermore, Mr. Yap`s company will not be easily shutdown when he leave the
company. This is because private limited company have continuity of existence that the
business will not be affected by the status of the owner. Someone will lead the company
and continue to run the business although Mr. Yap leave the company. His business
might not be easily fall down, except his company is facing bankruptcy problem.
As a conclusion, Mr. Yap may convert his company to private limited company because
it has many benefits to his company. Those benefits can help to gain more profit for his
company.
Explain to Mr. Yap benefits and limitations of a financial statement audit.
First and foremost, the benefits of a financial statement audit to Mr. Yap is to understand
the company’s natural of business and internal controls. Mr. Yap may be aware of and
recommend ways that the entity can improve its internal controls over financial reporting
or profitability.
Besides that, performing financial statement audit can detect and prevent fraud. This can
be done by performing certain procedures regarding a company’s policies and procedures.
Any suggestions of ways to improve the detection and prevention of fraud would be
recommended.
Financial statement audit also lends credibility to financial statements of a company.
Financial statements that have been audited and verified by an external auditor are
considered more reliable in the business marketplace than those that have not. This is
because an external auditor provides a true and fair view on a company’s financial
statements.

4. However, there are some limitations of financial statement audit. Inherent limitations of
internal control system would be one of them. Auditor relies on the internal control if
they are effective. But, internal control of the company has its inherent limitations
somehow such as human error. Therefore, the auditor cannot give absolute assurance but
only reasonable assurance.
In addition, the use of professional judgment is one of the limitations of performing
financial statement audit. Auditing involves the use of judgment in the identification of
audit risks, selection of appropriate auditing procedures and the interpretation of audit
evidence. Although auditing standards provide guidelines to assist auditors in forming
sound professional judgments, it is inevitable that an auditor may at times misjudge a
situation which may cause the auditor to overlook a misstatement in the financial
statement.
Last but not least, the limitation of a financial statement to Mr. Yap is management
representations. External evidence is considered to be more reliable form of audit
evidence than internal evidence produced by the management in order to assess the
reasonableness of the matters concerning financial statements. This is particularly the
case in matters that involve the use of judgment by the management as it is usually
difficult to coordinate management representations about the appropriateness of their
judgments with external evidence.