How can the Malaysia's General Election 2013 help you in your Audit Exams?

 - relevant to F8 and P7 Candidates. Also may be relevant to the 13.5 million Malaysian voters.

Exam Note: There are 3 articles in 2013 thusfar, on Audit. The emphasis on matters and Other Matters Paragraph were highlighted. Seldom tested topic on Culture Controls are also out. You should be familiar with these as they appear to be very high risk exam questions this coming June 2013 exams. 

Election fever is peaking. Both sides, government and opposition promised a Better Malaysia. Which sides would you vote? Before I embark on this hot topic, a disclaimer of liability is - in no way am I advocating sides. I am Neutral, politically speaking. I mean, I tried to apply membership with UMNO and PAS. Both rejected me for reasons I am still unsure about (tongue in the cheek). SO this is a neutral article but hopefully enjoyable in relations to applying audit principles related to F8 (AA) and P7 (AAA) of ACCA.

Pic 01: The Government claimed they have kept their Promises, have they?

Investors make decisions but they should rely on External Auditor’s Report. Thus the ACCA’s 2 audit subjects are highly relevant. Let us perform an audit on Government’s Financial Statement and focusing on the Statement of Financial Position (short as SOFP).

Remember to apply your audit knowledge.

Pic 02: The opposition are filled with many talents who 'audited' the Executive Government's Financial Figures

A. Year 2011 – if Government Economic Report is audited

On Audit Evidences, do you take Management’s Targeted figures or Actual Figures as inputs to Financial Statements? Say the management has a target to achieve Rm100 million but the actual figures turn out to be RM7 million.  A difference of 93%. I hope your answer is always ACTUAL Figures! Financial Statements reflect only Actual figures.

I got news for you. Malaysian government reported that the promised investment for 2011 is RM179 billion but the actual sum invested is RM12.9 billion, which is mere 7% of the Targeted Figure. It goes on to say that it has successfully transformed the country with “Promises Delivered” or in Bahasa is “Janji Ditepati”. They should hire ACCA graduates working in Audit Firm to audit the figures for credibility.

EXAM QUESTION: What is the impact on Audit Report, 2011?

Impact on 2011 Audit Report: Issue Modified Audited Report with Basis for Qualified Report that the investment figure is materially misstated by 93% or RM166.1 billion. The actual amount should be RM12.9billion but the management of Malaysian Government has taken RM179billion.

The Audit Report’s second paragraph is “EXCEPT FOR” the material figure investment stated above the Financial Statements are fairly stated. 

OTHER MATTER PARAGRAPHS
External Auditors need to highlight that the Executive Director's Statement ( I think you know who ) is inconsistent with the Financial Statement's content. The Executive Director mentioned that the entity has achieved its promise on delivering investment of RM179 billion in 2011 but this is not consistent with our findings.  
(please see ISA 706)

B. Year 2012 – if Government Economic Report is audited

Pic 03: It is a Fantasy Figure. Don't worry, so long as you are my  Dream world, you can believe me.

The government of the day continued to trumpet their achievement that in year 2012, the country has promised investment of RM32.1 billion. Not really impressive as this means a drop of RM146.9 billion compared to Year 2011. This time, it gets better, the government omitted the actual investment figures.

EXAM QUESTION: What should Auditors do at the final stage of audit review?

As Auditors, you need to perform additional audit procedures to verify the figure using Tests of Details or Substantive Analytical Procedures. SO you need to find corroborative evidences. The following are the sources of information :

1)     Malaysian Investment and Trade Investment (MITI)

2)     2^nd Finance Minister Tan Sri Yaakob

3)     Economic Transformation Program Think Tank

EXAM QUESTION: Can you rely on the above information sources as evidences?

I hope your answer is no, because No. 1 above is controlled and influenced by the government. No.2 is the internal Executive Director of entity. No. 3 is the ‘middle management’ of Government who are accustomed to take instructions from Executive Directors. They ethically lacked independence and objectivity.

Thus all 3 sources are weak evidences. The next step for auditors is to issue a Letter to Management requiring them to give evidences on the Promised Investment for 2012. However, according to ISA 580 any evidences from management as the SOLE Evidence is insufficient for External Auditors. Thus they are unable to obtain corroborative evidence.

EXAM QUESTION: What is the impact on Audit Report, 2012?

Impact on Audit Report, 2012

Basis for Qualified Opinion

We are “UNABLE TO OBTAIN” sufficient audit evidences related to the investment that Malaysia received for the year 2012. The management in the Malaysian Government stated that the amount is RM32.1 billion but we don’t have any evidences relating to this.

Qualified Opinion

We issue a Modified Audit Report and qualified opinion that “EXCEPT FOR” the matter discussed above, the financial statement is fairly stated for the year 2012. 

OTHER MATTER PARAGRAPHS
External Auditors need to highlight that the Executive Director's Statement is inconsistent with the Financial Statement's content. The Executive Director mentioned that the entity has achieved its promise on delivering investment of RM32,1 billion in 2012 but this is not verifiable as we have insufficient evidences to corroborate it. (please see ISA 706)  

Pic 04: I trusted you!

CONCLUSION

If the entity has 2 years of Modified Audit Report with “EXCEPT FOR” Audit opinion highlighting  material misstatements, what should investors do? In this case, the investors are voters. The logical cold answer is investors would demand a change of existing management.

Would they? Difficult to judge. This is because many evidences suggest that investors will continue to buy in company’s shares on Stock Market even though the External Auditors gave a qualified opinion that the company is no longer a Going Concern! Case in point – Transmile Berhad, Silver Bird Berhad, Megan Media Berhad, Ekran Berhad and PMI Berhad to name a few. 

The famous researcher Robert J. Shiller said this is “irrational exuburence”. Yes, no doubt that many investors/voters will still vote for existing management – government of the day until the entity becomes the next Cypress, Spain, Iceland and Portugal with government who bankrupted their country.Widely expected the power of the day will be given new mandate.

What should you do as ACCA candidates? Perhaps, if time permits, that is my next topic. 

Sources: 
Refsa,  2013, http://refsa.org/focus-papers/infographics/do-you-feel-50-richer/ , Visited on: 8th April