OUM Business School

JANUARY / 2019

BBAA3103

Accounting Information Systems I

MATRICULATION NO : 950101125849001
IDENTITY CARD NO. : 950101125849
TELEPHONE NO. : 0168226118
E-MAIL : lokkiong@yahoo.com
LEARNING CENTRE : Sabah Learning Centre

The auditing is a professional profession which renders to the public services to

the business entities. There are various groups, such as the stockholders, the creditors, the
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government agencies and the investment bankers that have an interest on the performance
of the business entities. Hence, we should be aware the users in the evaluating the quality
of the accounting information communicated to them.
In Malaysia, the companies are incorporated under the Companies Act 195. The
Act enables the company to exist as a legal entity separate and the distinct from the actual
owners (the shareholders) who provide the resources or the capital. The owners, as a
body, the delegate of the power to the management (the board of directors) who run the
corporation on a day-to-day basis. The shareholders generally have no direct control over
the decisions made by the directors as long as they act in the good faith and in accordance
with the requirements of the Companies Act 1965. The directors discharge their
stewardship functions by the preparing the annual report, which includes the financial
statements that show the financial position of the company.

An audit increases the credibility and reliability of the financial statements

prepared by the management. This topic introduces the basic of the syllabus, the audit
and the assurance services.

For your knowledge, the accounting is the language of the business. It is the
method companies use to communicate of the financial information to their shareholder
and to the public. The information is important for making decisions. You have probably
bought a latte in, or at least walked by, one of Starbucks’ 7,000 coffee stores throughout
the world. Did you know that you could also buy a share from Starbucks stock, making
you part owner of Starbucks? To buy a latte, you want to know about the financial
condition and prospects of Starbucks Corporation. You would want to own part of
Starbucks only if you think it will continue to be successful.

The Starbucks first issued the shares stock to the public in 1992. If you had bought shares
at the time, today your investmen would worth twenty dollar for every one dollar you
invested. Will the Starbucks continue to be a good investment? No one can predict with
certainty the financial prospects of the Starbucks. However, the financial statements
prepared by the Starbucks management can give you clues.

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In 2003 year, the Starbucks’ annual report indicated its total revenues were 4.1 billion
dollar and net income that Starbucks made was four hundred thirty six million.

Auditing defined
Assurance services generally refer to the independent professional services that improve
the quality of the information for the decision makers. The assurance services can be
performed by the auditors or by the others professionals. An assurance engagement
involves the evaluation of a subject matter against the established criteria to determine
the conformity of the subject matter with these criteria. One of the category of assurance
services provided by the accounting firms is attestation services.
The attestation services can be divided into four categories as mentioned below:
a) Audit of historical financial statements
b) The effectiveness of the internal control system over financial reporting
c) The review of historical financial statements
d) Other attestation services which may be applied to broader range of subject
matter.
The auditing is an attest function involving the objective examination of financial
statements prepared by the management. The auditing of a financial statements is an
independent services to enable the auditors to express the opinion whether the financial
statements give the true and fair view of the entity’s affairs and have been properly
prepared. The most common definitions of the true and fair view are as follows:

The true view is information on the financial statements based on the facts and not myths.
In the addition, the information conforms to required standards and law. For example,
form the financial statements which have been correctly extracted from the books and
accounting records.

The auditing is defined as a systematic process of the objectively, obtaining and

evaluating the evidence regarding assertions about the economic actions and the events to
ascertain the degree of the correspondence between those assertions and established

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criteria and communicating the results to interested users.

The importance parts of his definition is shown as below.

The audits are structured activities that follow a
Systematic process
logical sequence.
Objectivity The essentially it means freedom form bias.
The independent examination of the underlying
Obtaining and evaluating evidence
support for the assertions or representations.
Assertions about economic actions The description of the subject matter that is
and events audited.
The audit establishes the conformity of assertions
Degree of correspondence
with specified criteria
The results of the need to be communicated to
Communicating results
interested parties.

In the performing an audit of financial statements, the auditors should carefully carry out
audit procedures designed to accumulate the sufficient competence and appropriate
evidence, in accordance with Auditing Standards to determine with the reasonable
assurance whether the financial statements are free from the material misstatements. The
standards stated clearly that the auditors need only provide ‘the reasonable assurance’ and
not ‘the absolute assurance’ on the preparation and presentation of the financial
statements.
This means that auditors` opinion do not certify a set of financial statements to be
completely correct. This would be impossible because of the inherent limitations of
accounting and the internal control system, the possibility of collusion or
misrepresentation for fraudulent purposes, the most audit evidence being persuasive
rather than conclusive.

The audit objectives of the financial statements

The primary audit objective is “to form and express an independent expert opinion based
on the audit work performed, that the financial statements which are to be relied upon by
the users (like the shareholders, the creditors, the investors, and etc.) are free from the
material misstatements and in compliance with laws and regulations “. Hence, the audit

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objectives are as follows:
 To ensure the compliance with the accounting standard, the Financial Reporting
Act 1997 established the Financial Reporting Foundation (FRF) and the
Malaysian Accounting Standard Board (MASB)
 To ensure the company affairs are regulated by the Companies Act 1965
 To detect the material misstatements caused by the fraud and error
The demand for auditing
The development of the corporate form of business (for an example is Company) and the
expanding world economy over the years have given rise to an explosion in the demand
for assurance provided by the auditors. The corporations require a large scale of
financing, thus, more of the companies met this need through the sale of shares to the
public. This marked a shift towards an outside ownership. A company is collectively
owned by a number of individual shareholder who have no relationship but a legal status
to act as a single artificial person.

Therefore, the shareholders need to be informed about the performance of the company
through a set of audited financial statements. In addition, there are other conditions that
create a demand for an independent audit such as:
a) The conflict of interest
The users (stakeholders) concerned with the possibility of bias in the information
provided to them when there is an actual or potential conflict of interest between
the user and the provider of the information.
b) Complexity
As the information communicated has become more complex, the users of
information have found it more difficult or even more impossible to obtain direct
assurance as to be the quality of the information received.
c) Remoteness
This is caused by the separation of the user of the information and the the
information source prevents the user from directly assessing the quality of the
information received.
d) Consequence

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 When the information is used as the input for decisions of significant
consequence, he users are concerned with the possibility of biased, misleading,
irrelevant or incomplete information.
Accounting versus auditing
The distinction between accounting and auditing
The distinction between accounting and auditing is as stated below:
 Accounting
It is a process of recording, classifying and summarizing economic events in a
logical manner for the purpose of providing financial information for decision
making by the various users of financial statements.
 Auditing
It is a process of enhancing the credibility of financial statements. The auditor
must thoroughly understand the accounting principles and the rules as the criteria
for evaluating whether the accounting information is properly recorded and
properly reflects the economic events that occurred during the accounting period.

Accounting and auditing standards and procedures are interrelated and integrated. The
conformance of financial statements to be the application of generally accepted
accounting principles must be determined through auditing produres.

Audit evidence
As mentioned earlier, one of the important reason auditors give much attention to
planning is to enable them to obtain sufficient appropriate evidence to support their
opinion. Therefore to facilitate more understanding on the importance of evidence in an
audit, the following sections will be discussed in the detail. They are the nature, the
definition and evidence decision. Then, we will also identify the seven types of the audit
evidence.

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 Nature of
Evidence

Introduction to Definition of
Audit Audit
Evidence Evidence

Audit
Evidence
Evaluation of Audit
Audit Evidence
Evidence Decision

Persuasiveness
Types of Audit
of Audit
Produces
Evidence

Seven types of audit evidence

Introduction to Audit Evidence

The underpinning of any audit is the evidence gathered and evaluated by the auditor. The
auditor must have the skills and knowledge to acquire and accumulate sufficient
appropriate audit evidence to meet the standard of the profession. Obtaining sufficient
appropriate audit evidence is crucial for the auditor to draw reasonable conclusion on the
true and fair view of the financial statements.
Nature of Evidence
The use of the evidence does not uniquely belong to the audit professions. The evidence
has been widely used in the legal and scientific profession. One may be familiar with the

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evidence that is sought by the lawyer in the determining the innocence and guilt of the
parties charged with the criminal offence in the television series such as Law and Order
or the Practice.

Similarly, in the scientific experiment, the scientists conduct experiments in the order to
find evidence to draw a conclusion about a theory. For example a forensic will examine
and conduct operations on the murdered victim to find the evidence to establish the cause
and time of the death.

In the audit of financial statements, the auditors also gather evidence to help them to
arrive at conclusion whether the financial statement has been prepared according to the
requirements of law and stipulated standards. Although the nature, the type and the
manner in which the evidence is used differ among lawyers, doctor or auditors, but in all
of these cases the evidence is used to help the decision maker to draw a conclusion.

Definition of audit evidence

By now, you should know that according to ISA 500, the audit evidence is defined as all
of the information used by the auditor in arriving at the conclusions on which the audit
opinion is based. The audit evidence includes the information such accounting records nd
documents underlying the financial statements, as well as corroborating information from
other sources.
In the audit of financial statements, the auditors also gather the evidence to help them o
arrive at the conclusion whether the financial statement has been prepared according to
the requirements of the law and stipulated standards. Although the nature, type and the
manner in which the evidence is used differ among lawyers, the doctor or auditors, but in
all of these cases the evidence is used to help the decision maker to draw a conclusion.

The definition of audit evidence

By now, you should know that accounting to the ISA 500, the audit evidence is defined
as all of the information used by the auditor in arriving at the conclusions on which the
audit opinion is based. The audit evidence includes the information such as the

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accounting records and the documents underlying he financial statements, as well as
corroborating information from other sources.

The accounting records are accounting entries such as journal, general ledger, and
subsidiary ledgers and cash book. Although an auditor can rely on the accounting records
as a source of evidence, it is not sufficient to help him or her to base an opinion on the
financial statements hence, the auditors needs to seek other audit evidence or
corroborating evidence to support his or her conclusion and opinion. Other forms of audit
evidence includes the information from the internal or external to the organization such
as, minutes of board of director, agreements, memorandum of associations, supplier
statements, bank statements, confirmation from external parties, industries data and
evidence sought by the auditor through observation, discussion with the clients`
personnel and physical examination.

Audit evidence decision

One of the critical decisions that need to be made by the auditor is to determine the
amount and the appropriate type of evidence to accumulate. This will enable the auditor
to draw reasonable conclusion as to the true and fair view of the financial statements
under the consideration.

The auditor`s decision on the evidence accumulation can be divided into four types of
decisions:
 Which audit procedure to use?
 What sample size to select for a particular procedure?
 What items to select from the population?
 When to perform the procedures?
a) Which audit produce to use?
An audit procedure is the detailed instruction for the collection of a type of audit
evidence that needs to be obtained at some time during the audit. A set of audit
procedures prepared to test audit objectives for a specific component of the
financial statements is referred to as an audit programmer. An example of an audit

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 procedure used in order to achieve the objective of accuracy in the terms of the
price charged to the customer is that the auditor makes a comparison of selling
price in the price lists with duplicate copies of sales invoice.
b) What sample size to select for particular procedure?
Once an audit produce is selected, it is possible to vary the sample size form one
to all the items in the population being tested. The decision of how many items to
test must be made by the auditor for each audit procedure. The sample size for
any given procedure is likely to vary from audit to audit.
c) What items to select from the population?
After the sample size has been determined for an audit procedure, it is still
necessary to decide which items in the population to test. For example, if the
auditor wants to select 40 account receivables, he can choose to select 40 large
account receivables or he can choose to select randomly from the totel account
receivables.
d) When to perform the procedures?
This involves the timing of the audit evidence that needs to be collected. Timing
decision is affected by many factors, such as when the client needs the audit to be
completed, when the auditor believes collection of evidence will be most effective
and also the availability of the staff to evidence when he thinks the like hood of
misstatement is high such as a week before or after the year end. It is also
sometimes depends on the availability of the audit staff.

Persuasiveness of audit evidence

For the ISA 500 requires the auditor to accumulate sufficient appropriate audit evidence
to support the opinion issued. As explained in the ISA 500, the appropriateness of audit
evidence relates to its relevance to a particular assertion and its reliability.

The two determinants of the persuasiveness of evidence are appropriateness and

sufficiency as explained below.
a) Appropriateness
The evidence is considered appropriate if it can be believable or reliable. If

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 evidence is consider highly appropriate, it is a great help in persuading the auditor
that the financial statement reflects a true and fair view. Appropriateness of audit
evidence deals only with audit procedure selected. Appropriateness cannot be
improved only by selecting a larger sample size or different population items.
b) Characteristics of appropriate evidence
The characteristics of appropriate evidence are listed as below.
i. Relevance
The relevance must pertain to or be relevant to audit objective that the
auditor is testing before it can be reliable. For example, assume that the
auditor wants to verify the ownership of the client’s vehicle. If the auditor
personally examine that the vehicle is parked at the client’s compound,
this does not constitute appropriate evidence to test ownership objective.
A relevant procedure would be to examine the name of the owner stated
on the registration card.
ii. Independence of provider
The evidence obtained from a source outside the entity is more reliable
than the evidence obtained from within. For example, the confirmation
received from the bank or attorney is considered more reliable than the
client’s record.
iii. The effectiveness of client’s internal controls
When a client’s internal control are effective, the evidence obtained is
more reliable than when internal controls are weak. For example, if the
internal controls over sales and billings are effective, the auditor could
obtain more appropriate evidence form sales invoices and shipping
documents than if the controls were inadequate.
iv. The auditor’s direct knowledge
The evidence obtained directly by the auditor through physical
examination, observation, inquiry, computation and the inspection is more
appropriate than information obtained indirectly. For example, if the
auditors recalculate the total of account receivable listing is more reliable
than if the auditors just rely on the client’s casting.

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 v. The qualification of the individuals providing the information
Although the source of the information is independent, the evidence may
not be reliable unless the individual providing it is qualified to do so. For
example, the confirmation of account receivable received from the
individual not familiar with business environment is less reliable than
confirmation received form the business entities. Besides, the evidence
obtained directly by the auditor may be reliable if the auditor is not
qualified to evaluate such the evidence, for instance to value the stock in
the case of diamonds or jewellery.

ATTACHMENT

REFERENCES

Noor Adwa Sulaiman, Zarina Zakaria, Zamzulaila Zakaria(2007). BBAA3103 Audit I,

Open University Malaysia (OUM).

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