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Introduction

 NATURE OF AUDIT - DEFINITION

 OBJECTIVES OF FS AUDIT
 DISTINCTION BETWEEN AUDITING & ACCOUNTING
 MGT AND AUDITOR’S RESPONSIBILITIES
 DEVELOPMENT OF AUDITING
 DEMAND FOR AUDITING
 TYPES OF AUDIT & AUDITORS
 CHARTERED ACCOUNTING FIRMS
 AUDITING STANDARDS

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AUDIT REPORT ON
DEFINITION
TRUE & FAIR VIEW
OF FINANCIAL
STATEMENTS
OBJECTIVES OF
AUDIT OF FS

AUDIT EXAMINATION
AN OVERVIEW
(accumulate and evaluate
evidence) – AUDIT PROCESS OF AUDITING

APPROVED TYPES OF AUDIT / AUDITORS

AUDITING STANDARDS
1. Financial Statement audit
2. Operational audit 3. Compliance audit
4. Forensic Audit
1. International Standards
on Auditing
1. External auditor 2. Internal auditor
2. Malaysia Standards on
Auditing 3. Government auditor 4. Forensic auditor

Definition (1): American Accounting Association Committee on Basic Auditing

Concepts
 A systematic process of objectively obtaining and evaluating evidence regarding
assertions about economic actions and events to ascertain the degree of
correspondence between those assertions and established criteria and
communicating the results to interested users.

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 Systematic process: audits are structured activities that follow a logical sequence
 Objectively: a quality methods by which information is obtained and also a quality of
the person doing audit (unbias)
 Obtaining and evaluating evidence: a matter of examining the underlying support for
assertions or representations
 Assertions about economic actions & events:
 An assertion is essentially a proposition that can be proved or disproved.
 Representations made by a responsible party in an accountability arrangement that pertains to
economic actions and events
 Degree of correspondence & established criteria: an audit establishes the conformity of
assertions with specified criteria
 Communicating results: To be useful, the results of the audit need to be communicated
to interested parties by either oral or written means

 “Audit is an independent examination of, and expression of opinion on, the

financial statements of an enterprise by an appointed auditor (competent
independent person) in pursuance of that appointment and in compliance with any
relevant statutory requirements”

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 Independent examination (using audit procedures and carrying out tests to

accumulate self-generated evidence, third – party evidence, etc which are
independent from management before arriving at the conclusions on which the
audit opinion is based)
 Expression of opinion (to form an opinion on the truth and fairness of financial
statements)
 Financial statement (all statements and financial information identified within the
scope of an audit normally balance sheet, profit & loss accounts, notes to the
accounts, cash flow statements, group accounts, etc)
 Enterprise (any form of entity whether profit orientated or not)

 Appointed auditor:
 An approved company auditor, or
 Audit Firm – a public accounting firm ranges from sole proprietorships to partnerships
providing broad categories of services such as attestation services including audits, tax
services, accounting service and management advisory services.
 In pursuance of auditor’s appointment (as per statutory requirements and other
regulations including letter of engagement)
 In compliance with any relevant statutory requirements (Companies Act (M’sia)
2016, Banking Act, Industrial Act, etc.)

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COMPETENT INFORMATION (VERIFIABLE)

INDEPENDENT
Annual Financial Statements
PERSON
(AUDITOR) ACCUMULATES & REPORT ON
EVALUATES EVIDENCE RESULTS

Determines
Public Examines correspondence Audit report
Accounting accounting records on financial
Firm & supporting documents statements
(CPA)

Conduct audit in accordance to:

•AUDITING STANDARDS Accounting Standards
ISA & Companies Act 2016
MASA
•GAAP
ESTABLISHED CRITERIA

 Required by the statutory

 To increase the confidence level of the shareholders
 To reduce information risk i.e. risk that information provided is misleading /
inaccurate.

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 To obtain reasonable assurance about whether the financial report as a whole is

free from material misstatement, whether due to fraud or error, thereby enabling
the auditor to express an opinion on whether the financial report is prepared, in all
material respects, in accordance with an applicable financial reporting framework;
and
 To report on the financial statements, and communicate as required by the Auditing
Standards (ISAs), and in accordance with the auditor’s findings.
(ISA 200, paragraph 11)

 The phrases used to express the auditor’s opinion are “give true and fair view” or “
present fairly, in all material respects,” which are equivalent terms.
 Both terms indicate FS are actually free from material misstatement.
 Auditor needs to obtain a degree of reasonable assurance that the accounting &
other records are not affected by material misstatements resulting from fraud &
error.
 Materiality – information is material if its omission or misstatement could influence
the economic decision of users taken on the basis of the financial statements
 Misstatement – a mistake in financial information which would arise from errors
and fraud.
 A misstatement in the financial statements can be considered material if
knowledge of the misstatement would affects a decision of a reasonable user of the
statements

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 True and Fair View is a legal concept but there is no legal definition made by the
court. The decisions of courts are available only based on the concept in action
 Basically, to be true, account must be in accordance with facts and reality. Fair is
interpreted to mean that the accounts should be unbiased, just and equitable.
 The accounts will be true and fair when the information they contain is sufficient in
quantity and quality to satisfy the reasonable expectation of the readers to whom
they are addressed
 The court will treat compliance with the generally accepted accounting principles
(GAAP) as reflected in the Statements of Accounting Standard as prima facie
evidence that the accounting principles have been applied consistently.

The scope of FS audit is governed by:

 Legislation
 Companies Act (CA) 2016 gives auditors the right to access the accounts & other records
deemed necessary, thus unlawful if client impose restriction on any records or withholds
information
 Regulations
 Banks & fin.co incorporated under CA 2016
 Their activities are monitored by the BNM
 Other regulations pertaining to type of industries

 Auditing Std
 ISA & MASA

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ACCOUNTING AUDITING
Record transactions & provide financial Determine whether recorded info fairly
information reflects actual transactions
Accountant responsible to develop a Auditor responsible to evaluate the
system to ensure that transactions are system to determine its effectiveness
properly recorded
Accountant must understand Auditor must understand acc
accounting principles so that principles so that he/she would be
transactions were recorded according able to detect non-compliance by the
to accepted standards Accountant
Accountant should possess expertise to Auditor should possess expertise to
record transactions & to prepare financial accumulate & interpret audit evidence
statements

MANAGEMENT RESPONSIBILITIES
 Preparation of yearly financial statements
 To develop and maintain adequate accounting records and internal control systems
 Safeguarding of company’s assets
 Prevention and detection of errors, irregularities & fraud

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AUDITORS’ RESPONSIBILITIES
 To state an opinion on the financial statements in auditor’s report based on his independent
examination.
AI 200 also noted that:
 An audit in accordance with ISAs/MASA is designed to provide reasonable assurance (see next
slide) that the financial statements taken as whole are free from material misstatements
 auditors are responsible to detect material misstatements in the FS
 To report on the effectiveness of internal control over financial reporting
 To identify material weaknesses in internal control and provide recommendations to overcome
weaknesses (letter of weaknesses @ management letter)
 To perform audit with due care and professional competence.
 To conduct audit with professional scepticism i.e. with questioning mind and critical evaluation of
evidence

 Reasonable assurance: measure of the level of uncertainty that the auditor has
obtained at the completion of the audit
 Reasonable but not absolute, indicates that the auditor is not insurer or guarantor of
the correctness of the FS
 Reason for stating reasonable assurance:
 Audit evidence resulted from testing a sample of population
 Accounting presentations contain complex estimates
 Fraudulent are often difficult to detect

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AI 240 Fraud & Error

 Fraud : Intentional misrepresentations of financial information by 1 or > individuals
among management / employee / 3rd parties, involving:
 Manipulation, falsification or alteration of records or documents
 Misappropriation of assets
 Suppression/omission of the effects of transactions from records/documents
 Recording of transactions without substance
 Misapplication of accounting policies

 Error : unintentional mistakes in financial information such as:

 Mathematical or clerical mistakes in the underlying records and accounting data
 Oversight or misinterpretation of facts, or
 Misapplication of accounting policies

 In general, the auditor does not have a responsibility to plan and conduct the
audit with the expectation of detecting frauds, errors and irregularities that have a
material effect on the financial report (see ISA 200, 220, 230, 240, 250, 300, 320 and
720).
 It is the auditor’s duty to investigate and report frauds and irregularities only
in circumstances where concerns are raised by evidence, which comes to light
in the course of a normal audit designed to provide reasonable assurance that the
financial report is free of material misstatement (see ISA 315, 330, 500, 520 and
610).

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Who’s responsible to detect fraud & error? Management? or Auditor?

 Management: Responsible to prevent & detect F & E through the implementation &
continued operation of an adequate system of IC. H/over such system will only
reduce, not eliminating the possibility of F & E
 Auditor : Plan audit so that they would have reasonable expectation of detecting
material misstatement in the fin.info resulting from F&E such as designing a
sufficient audit programme

 Formerly, involves checking of accounts for stocks &/ revenue

 Now it is called professional assurance services
 Auditing derived from Latin “audire”
 Luca Pacioli
 Industrial Revolution in mid 1800s
 Joint Stock Companies
 Regulation & Acts – compulsory for corporations to have their accounts audited

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 Agency relationship is:

 A contract under which involves one or more persons
 whereby the principal engage another person (the agent)
 to perform services on behalf
 which involves delegating some decision-making authority to the agent

 AR exists between owners (s/holders) & the management resulting conflict of

interest due to information asymmetry
 Audit is needed to safeguard the interest of the s/holders.

Owners
Separation Manager (Agent)
(Principal)

 Demand for Auditing to reduce information asymmetry and also due to regulatory
requirements
 A quality audit is defined in terms of the probability that the auditor discovers
unfaithful representation of the financial statements and having discovered such
situation, the auditor reports such findings to those charged with governance and
ultimately reports to shareholders when required adjustments are not made.

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Figure 1.3

Relationship of External User to Management and Independent Auditor

Attest Function

Financial report for external users

External users Conflict of interest Prepare

Shareholders Separation between Management
Bankers Owners (shareholders) responsible for
Government agencies and management accuracy and
Potential shareholders adequacy of
Creditors Financial reports
Suppliers
Employees Need for protection of
absentee owners

Credibility gap

Need for assurance as to

reliability of financial report

Assurance provided by independent auditor

PURPOSE PERFORMED BY
FINANCIAL To determine whether FS reflects true • Approved co. auditor
STATEMENT & fair view, according to accounting • Government auditor
AUDIT standards & CA, 2016 • Internal auditor
OPERATIONAL To evaluate effectiveness & efficiency • Approved co. auditor
AUDIT of operating/ • Government auditor
procedures • Internal auditor
COMPLIANCE To determine whether specific • Approved co. auditor
AUDIT procedures/rules & regulations were • Government auditor
being complied with • Internal auditor
FORENSIC To detect/ deter fraudulent activities • Approved co. auditor
AUDIT • Government auditor
• Internal auditor
• Forensic auditor

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Type Nature
External • Independent from the co.
• Appointed by shareholders during AGM
• Audit fee agreed by auditor & management
• S.8 CA 2016 : approved by MOF
Internal • Employee of the co. thru interview process
• Salary fixed by the company’s management
• Review the accounting & internal control systems
• Examination of financial & operating information
• Review of the economy, efficiency & effectiveness of operations including non-financial
controls of an entity
• Review of compliance with laws, regulations and other external requirements and with
management policies and directives and other internal requirements
Govt • Responsible for federal & state accounts, public authorities & statutory bodies
• Remuneration fixed by government
Forensic • Employed by company/government agencies/public accounting firms/ investigative firm
• Well trained in detecting/investigating/deterring fraud

The Institute of Internal Auditors USA (IIA) provides the definition of internal
auditing as follows:
 Internal auditing is an independent, objective assurance and consulting activity
designed to add value and improve an organisation’s operations. It helps an
organisation accomplish its objectives by bringing a systematic, disciplined
approach to evaluate and improve the effectiveness of risk management, control
and governance processes

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Internal audit acts as a control mechanism of board of directors as well as senior

management to:
 Review the effectiveness of corporate governance mechanism
 Ensure proper risk management process
 ensure an adequate internal control structure;
 review the reliability of records;
 prevent and detect fraud or material misstatement;
 fulfil statutory duties where they exist;
 monitor the reporting procedures;
 enforce management decisions;
 undertake value-for-money appraisal exercises.

INTERNAL VS EXTERNAL AUDITOR (1/2)

Characteristics Internal Auditing External Auditing
Performance/ By employee within the organization/company By practising professional
Status outside the organization/Public
Accounting Firm
Primary concern To serve the needs of the organization To serve the needs of third
parties, eg:shareholders
Objective of review To develop improvements & induce compliance To determine reliability of
with established policies & procedures Financial Reports
Independence Independence organizationally but ready to Independence in fact and
respond to needs & desires of management appearance
Detection of fraud Directly concerned with prevention & detection Incidentally concerned with
of fraud prevention & detection of fraud
Period/Frequency Continuous review/throughout the year or as Periodic evaluation/financial
requested by management year ended

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INTERNAL VS EXTERNAL AUDITOR (2/2)

Characteristics Internal Auditing External Auditing
Scope of audit Determined by the mgmt Laid by the Statutory
Appointment Appointed by the company’s management Appointed by the co’s shareholders
through formal interview process through voting at AGM (or other
types of appointment as per sec.172)
Salary/remuneration Salary; fixed internally Agreed by the auditors &
management ; as per sec.172
Reporting Responsibility To the board of directors or to the audit To the company’s shareholders
committee or to the management
Rights and duties Defined by co’s management As laid down by Sect. 174 CA 2016

The Malaysian Institute of The Malaysian Institute of

Accountants Certified Public
 Regulatory Body , Accountants (MICPA)
established by  Formed in 1958
Accountants Act 1967
 A professional body
 Business managed by
 Managed by Council
council members
elected by members
 Issue auditing standards
and Code of ethics  Conducts professional
exams
 Does not conduct
professional exams

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 Develops and implements international auditing standards adopted and used by most
jurisdictions including Malaysia:
 The International Statement of Auditing (ISA) and
 International Statement of Quality Control (ISQC)

 ISQC recommended by IFAC includes the following:

 having audit policies and a methodology for conducting transnational audits in
accordance with International Standards of Auditing
 complying with the IFAC Code of Ethics
 maintaining training programmes to keep partners and staff up to date on international
developments in financial reporting
 maintaining quality control standards and conducting regular quality assurance reviews
to monitor compliance with the firm’s policies and methodology

 Companies Act 2016

 Securities Commission Act 1963
 Capital Market and Services Act 2007
 Bursa Malaysia requirements
 MIA by-laws

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 MIA
 National accounting body, established under Accountants Act 1967
 Member of IFAC, adopts ISAs as the basis for developing standards & issuing
pronouncements on auditing matters
 Issued By-laws (On Professional Conduct, Ethics & Practice)

 MASB
 Standards setting authority for establishing accounting standards for financial accounting
and reporting in Malaysia
 SC
 Statutory body set up in 1993 under SC Act 1993
 Regulates securities & futures industries in Malaysia

Admission Requirements to be a member of MIA:

1. Passed any of the final examinations specified in Part I of the First Schedule of
the Accountants Act, 1967 and undergo the Chartered Accountant’s Relevant
Experience (CARE) for a minimum period of 36 months up to a rolling period of
60 months. This programme requires the Graduates who aspire to become MIA
members to go through a structured assessment programme which is based on
the mentor – mentee approach that monitors the practical experience of the
mentees; and/or
2. Member of any of the recognised bodies specified in Part II of the First Schedule
of the Accountants Act, 1967; and/or
3. Passed the MIA Qualifying Examination and undergo the CARE programme as
explained in part 1; and/or
4. Company auditor per the Companies Act 2016 without limitations or conditions.

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Continuing Professional Development

 The MIA in its Statement 1.500 Continuing Professional Development, paragraph
18, for example, has stipulated that all members (except retired members) are
required to:

complete at least 120 hours of relevant CPD activity in each rolling

three-year period, of which 60 hours should be verifiable;

complete at least 20 hours (of the 120 hours required in (a) above) each
year; and

track and measure learning activities to meet the above requirements.

Big Accounting Firms Small Medium Practices

PWC (SMP)
Ernst and Young KHR
KPMG Grant Thornton
Deloitte Stephen Moore
BDO Cheng & Co

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 The council of MIA has determined that approved Auditing Standards for members
comprise:
 International Standards on Auditing (ISA) issued by the International Auditing Practices
Committee (IAPC) of IFAC and approved by MIA
 Malaysia Approved Standards on Auditing (MASA) issued by the MIA

 IAPC believes the issue of such standards will help improve the degree of
uniformity of auditing practices throughout the world.
 MASA are produced and issued by MIA as parts of its effort to:
 define standards of auditing and
 harmonise auditing practices in Malaysia and
 are intended to cover topics not dealt within an ISA or topics where particular features of
the Malaysian environment warrant a domestic standard.

 In addition to these promulgated standards, Auditing Technical Release and other

statements issued by the Council relating to auditing are to be regarded as
opinions on best current practice and thus form part of Generally Accepted
Auditing Principles (GAAP)
 COMPLIANCE WITH APPROVED AUDITING STANDARDS
 Independent auditors are required to use approved Auditing Standards in the conduct of
their audits
 Audit reports should contain a positive statement to the effect that the audit has been
conducted in accordance with approved Auditing Standards

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 Auditing & Assurance Services

 Financial Statement Audit

 Other audits & Assurance services

 Compliance audit
 Operational audit
 Forensic audit

 Related services (Non-assurance services)

 Tax Services
 Management Advisory Services
 Accounting & Compilation Services

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