Sorfina Berhad, a diversified manufacturer has four divisionsthat operate throughout Malaysia. The company has historicallyallowed its divisions to operate autonomously. Corporateintervention occurred only when planned results were not obtained.Corporate management has high integrity, but the board of directorsand audit committee are not very active. Sorfina Berhad has apolicy of hiring competent people. The company has a code ofconduct, but there is little monitoring of compliance by employees.Management is fairly conservative in terms of accounting standardsand practices, but employee compensation packages depend highly onperformance. The company does not have an internal auditdepartment, and it relies on external auditor to review thecontrols in each division. Shahrul is the general manager of theFabricator Division. This division produces a variety ofstandardised parts for small appliances. Shahrul has been thegeneral manager for the last ten years, and each year he has beenable to improve the profitability of the division. He iscompensated based largely on the division’s profitability. Much ofthe improvement in profitability has come through aggressive costcutting, including substantial reduction in control procedures overinventory. During the last year a new competitor has enteredFabricator’s markets and has offered substantial price reductionsin order to gain market share. Shahrul has responded to thecompetitor’s actions by matching the price cuts in the hope ofmaintaining market share. He is very concerned because he cannotsee any other areas where costs can be reduced so that thedivision’s growth and profitability can be maintained. Ifprofitability is not maintained, his salary and bonus will bereduced. BAC5083 AUDITING AND ASSURANCE JULY-SEPT 20FinalAssessmentCONFIDENTIAL Page 6 of 7 2020 Turn Over Shahrul hasdecided that one way to make the division more profitable is tomanipulate inventory because it represents a large amount of thedivision’s balance sheet. He also knows that controls overinventory are weak. He views this inventory manipulation as ashort-run solution to the profit decline due to the competitor’sprice cutting. He is certain that once the competitor stops cuttingprices or goes bankrupt, the misstatement in inventory can becorrected with little impact on the bottom line. Required: (a)Discuss FIVE (5) strengths and FIVE (5) weaknesses of SorfinaBerhad’s internal control. [20 marks] (b) Identify the controlenvironmental factors that causes that Shahrul’s manipulation ofinventory in Sorfina Berhad
b:
The Companies Act 2016 requires a company to appoint an approvedcompany
auditor. The final responsibility of the auditor is to issue awritten report expressing
an opinion on whether the financial statements give a true and fairview.
i. Explain the term 'true' and'fair' view.
ii. Explain THREE (3) rights that enable auditors to carry outtheir duties.
(b) Discuss the differences between errors, frauds, and illegalacts. Give an example of
each.
(c) Discuss THREE (3) reasons why auditors are responsible for"reasonable" but not
"absolute" assurance.
