audit chapter 1

7/27/2019 audit chapter 1

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Chapter 1

An Introduction


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Objectives for Chapter 1

Learn the meaning of auditing

Distinct between accounting & auditing

Understand the relationship between auditing & assurance

engagements Understand the need for auditing

Know the diff types of audits/auditors

Understand the public accounting profession

Identify the organisations that affect financial statementaudits

Know the provisions relating to audit of financial statementsunder the Companies Act, 1965


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Nature of Auditing

The accumulation & evaluation of evidenceabout information to determine & report on the

degree of correspondence between the

information & established criteria.

Auditing should be done by a competent,

independent person.

In Malaysia external audit is mandatory for

all companies Sometimes auditor expresses an opinion on

certain elements in the FS, for other purposes

Sole proprietorships/partnershipsunder

specific circumstances


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Nature of Auditing - Purpose

Obtaining sufficient evidence about the FSconformance with criteria (usually an identified

financial reporting framework)

Auditor to express an opinion as to whether

FS present a true & fair view

FS are responsibility of mgt & mgt makes

certain assertions relating to FS

Auditor evaluates mgt assertions ascertaincorrespondence between assertions &

specified framework


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Nature of Auditing

Subject Matter (Information &established criteria) Information = General purpose historical FS,

income tax returns, computer systems,manufacturing operations

Criteria = MASB, GAAP, Income Tax Act,

absence of input/output errors (for computers)


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Nature of Auditing

Accumulating & evaluatingevidence

Evidence = any info used by the auditor to

determine whether the info being audited isstated in accordance with established criteria

May take diff forms mgt assertions, oral,

written, observations, electronic data Systematic process well-planned approach

Search for & evaluate the relevance & validity

of evidence determine correspondence to

criteria


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Nature of Auditing

Competent, independent person

Qualified to understand criteria used

Competent to know the types/amounts of

evidence to accumulate to reach the proper

conclusion after evidence has been examined

Independent mental attitude - unbiased


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Nature of Auditing Reporting

Communicate results to appropriate parties

Reports differ in nature, but all must inform

readers of the degree of correspondence

between information & established criteria

For statutory audits, via opinion in auditors

report


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Distinction between

Accounting & Auditing Accounting = the recording, classifying &summarising of economic events in a logicalmanner (which creates FS & other financial

info) for mgt decision-making Auditing = determines whether recorded info

properly reflects the economic events thatoccurred during the accounting period.

Does not create FS, but enhances thecredibility of FS/other financial info

Auditor must possess accounting knowledgeas well as the expertise to accumulate/

evaluate audit evidence


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The Need for Auditing

Divorce of ownership & managementNatural conflict of interest

Information asymmetry

Maximisation of self-interest by mgt & owners

Voluminous data

Higher chance of information error

Complex exchange transactions, e.g. MASB

24 Monitoring provisions need auditors to add

credibility to FS


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The Need for Auditing

Creditors/Employees

Prevents mgt from taking borrowedfunds to use for own purposes

Restrictive covenants in loan agreement

that must be complied Sometimes separate audit opinion

required on compliance with debt

covenants Also to monitor activities of employees,

e.g. in adhering to budgets


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Audit of a Company

Example

ExternalAuditor

Competent,independent

person

Examinessupporting records,

observation, mgts assertions

Accumulates andevaluates evidence

Determinescorrespondence

Historical FS

Information

MASB, GAAP,Companies Act 1965

Established criteria

Report on true &fair presentation

Report on results


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Assurance Engagements &

Auditing Assurance engagements = independent

professional services intended to enhance the

credibility of a subject matter that is the

responsibility of another party by evaluatingsubject matter against identified criteria

Accounting professionals have the

skills/competencies & areobjective/independent

Increases confidence of user


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Assurance Engagements &

Auditing (Contd.)

Includes audit of historical FS, but also

covers diff types of activities & events

E.g. reporting on systems/processes,compliance with legislative/contractual

requirements, company financial

forecasts

E.g. results of beauty contests


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Attestation

A type of assurance service

Accounting firm issues a report about

the reliability of an assertion that is the

responsibility of another party.

3 categories:

(a) Audit of historical FS

(b) Review of historical FS

(c) Other


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Types of audits

FS auditsfull set of FS, true & fairview, compliance with MASB standards

& financial reporting framework

Compliance audits compliance withspecific procedures/rules established by

higher mgt or regulatory authority

Operational audits a systematicreview of effectiveness & efficiency of

operating procedures & resource

utilisation


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Types of audits (Contd.)

Forensic auditsto obtain & develop information as legal

evidence or for use by expert witnesses,

in the courts of lawRequires use of critical analyses &

investigative skills, integrated with

accounting knowledge & businessexperience


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Types of auditors

External auditors

Independent, members of public

accounting profession, audit FS of

public/private entities

May conduct compliance, operational &

forensic audits


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Types of auditors (Contd.)

Approved company auditors

A licensed person approved by the MoF

to act as company auditor under Section

8 of CA1965

approval effected via audit licence valid

for 2 years, subject to renewal

Must be registered member of MIA &

have principal residence in Malaysia


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Internal auditors

Employed by entities

Usually certified by IIAMReports directly to BOD/audit committee

Can be involved in all 4 types of audits


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Government auditors

Perform audits for the Office of AuditorGeneral (OAG)

AG is responsible for auditing FS of theFederation & all the States, publicauthorities, statutory bodies

Mainly financial/compliance auditsEnhance accountability of public

expenditure & public funds


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Forensic auditors

Detects, investigates, deters fraud &

white-collar crime.

Employed by entities, govt agencies,

public accounting firms,

consulting/investigative services firms

In US, Association of Certified Fraud

Examiners offers a certification program


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The Public Accounting

Profession Latest issues

Litigation

- Reduction of exposure/limitation of

liability- Expectation gap

Expanded services

- forensic auditing, fraud investigation,internal controls


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The Public Accounting Profession

Latest issues (Contd.)

Globalisation

- Delivery of diff services worldwide to

clients, leading to mergers among majoraudit firms

- Also, international affiliations to service

clients foreign operations- Diversity of accounting standards

harmonisation


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The Public Accounting Profession

Latest issues (Contd.)

Mergers

- Amongst major firms, e.g. Deloitte +

Touche Ross, Ernst & Whinney + ArthurYoung & Co., Coopers & Lybrand +

Price Waterhouse

- To cope with increased competition forclients, expected efficiencies of scale,

need to service international clients


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Public Accounting Firms

Proprietorships/partnerships nolimited liability lends credibility to

services

US limited liability partnership (LLP) Big 4 : E&Y, Deloitte, KPMG, PWC

Audit teams & duties: partner, manager,

senior, assistants Types of services: accounting, tax,

management advisory


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Organisations that affect financial

reporting & audits

Malaysian Institute of Accountants (MIA) National accounting body

Regulatory body over accounting profession

Main functions:(a) Determine qualifications of persons for memberadmissions

(b) Establish standards & rules

(c) Training/education(d) Approve/regulate/supervise the conduct of MIA

Qualifying Exam

(e) Promote interests of accounting profession inMsia


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reporting & audits (Contd.)

Malaysian Institute of Accountants (MIA)(Contd.)

MIA Council: AG of Msia, MICPA

President + Presidents of 3 local branchesof accounting bodies, appointed membersof higher ed institutions, etc

Empowered to establish various

Committees of Council for effectiveoperations, e.g. accounting standards,emerging issues


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Types of MIA membership:

Chartered Accountant, LicensedAccountant, Associate Member

Eligibility for admission: academic/prof

qualification

Supports work of International Federation

of Accountants, including adopting ISAs

O ff f


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Issued By-laws (On professional conduct &ethics)

Financial Statements review

Investigation & disciplinary

MIA practice review

Supports accounting research Provides continuing education

programmes/seminars

Publishes Accountants Today

O i i h ff fi i l


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Malaysian Accounting Standards Board(MASB)

Independent standard-setting authority

Functions:

(a) Issuing new a/c standards as approved

(b) Reviewing/revising existing a/c standards &adopt them as approved a/c standards

(c) Issuing of Statements of Principles & TechnicalReleases

(d) Sponsoring/undertaking development of a/cstandards

O i ti th t ff t fi i l


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Malaysian Accounting Standards Board(MASB)

Functions (Contd.)

(d) Conducting consultation to determine a/cconcepts & principles

(e) Developing conceptual framework for a/cstandards

Follows due process procedure:Discussion Paper, Draft SOP, MASBExposure Draft



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Companies Commission of Msia (CCM)

Statutory body established under

Companies Commission of Msia Act 2001

Function: administration & enforcement ofCA1965, Trust Companies Act 1949,

Registration of Businesses Act 1956

Also regulates proper conduct of corporateofficers & good corporate governance



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Securities Commission (SC) SC :central authority fpr regulating securities &

futures industry

Functions:

(a) Regulating securities/futures contracts

(b) Registering authority for prospectuses/approvingauthority for bond issues

(c) Regulating take-over & mergers & unit trustschemes

(d) Supervising/monitoring activities of stockexchanges, clearing houses, central depositories



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Securities Commission (SC) (Contd.) Functions (Contd.)

(e) Licensing/supervising licensed persons providedunder any securities laws

(f) Suppressing illegal/dishonourable/improperpractices in securities dealings/trading

(g) Encouraging self-regulation & ensuring proper

conduct of market institutions & licensed persons Responsible for maintaining investor confidence

by ensuring adequate protection, by ensuringreliable info for making investment decisions



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Bursa Malaysia

Regulatory organisation which governs the

conduct of stock-broking companies &

listed companies. KLSE Listing Requirements: Listing

requirements/disclosure standards,

provisions for director responsibilities,duties of external auditors


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Provisions under CA1965

- FS are responsibility of directors

- FS must be audited

- Appointment of auditors:

At every AGM, until next AGM

Appointed by shareholders

Only approved company auditors

Consent in writing prior to appointment

May resign at AGM


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Provisions under CA1965 (Contd.)

- Disqualification of auditors, if: Indebted to company/related company for

>RM2,500

Officer/partner/employer/employee of officer of

company Shareholder of a company whose employee is

officer of the company

Responsible for keeping register of

members/debenture-holders of company Partner/employer/employee of personresponsible for keeping register ofmembers/debenture-holders of company


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- Duties of auditors: To state, in his opinion: whether FS have been properly drawn up in

accordance with the provisions of the CA65 &

applicable approved accounting standards, so as

to give a true & fair view of the companys state

of affairs & result of operations, & matters

required by s.169 to be dealt with in the FS

Whether the accounting & other records & theregisters required by the Act to be kept, have

been properly kept in accordance with the Act


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- Powers of auditors: Right of access at all reasonable times to

the accounting & other records of the

company & related companies Entitled to obtain from officers of the

company & related companies information& explanations that he requires for the

purposes of the audit For audit of consolidated FS, has the right

to request info from auditors of subsidiaries

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