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TEACHING AND LEARNING MODULEFACULTY OF ACCOUNTANCYAUDAUDITINGMAIZURA MEOR ZAWAWIROSLAN ABD WAHABMOHD ZULFIKRI ABD RASHIDAMIZAHANUM ADAMFebruary 2020TOPIC 1INTRODUCTION(TEST 1)TOPIC COVERAGEIntroduction 1) Definition of auditing 2) Objectives of financial statements audit 3) Distinction between audit...

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TEACHING AND LEARNING MODULE

FACULTY OF ACCOUNTANCY

AUD339 AUDITING

MAIZURA MEOR ZAWAWI ROSLAN ABD WAHAB MOHD ZULFIKRI ABD RASHID AMIZAHANUM ADAM February 2020

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TOPIC 1 INTRODUCTION (TEST 1) TOPIC COVERAGE Introduction 1) Definition of auditing 2) Objectives of financial statements audit 3) Distinction between auditing and accounting 4) Management and auditor’s responsibilities 5) Demand for auditing 6) Types of audits a. Financial statement audit b. Compliance audit c. Operational audit d. Forensic audit 7) Types of auditors a. Chartered accountants b. Internal auditors c. Auditor-General d. Forensic auditors 8) Chartered accounting firms a. Structure of the firms b. Professional services  Assurance services  Non-assurance services 1) DEFINITION OF AUDITING Definition 1 “Auditing is 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.”

(source: American Accounting Association Committee on Basic Auditing Concepts (1973, p. 8)

Keywords 

Systematic process: audits are structured activities that follow a logical sequence

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Objectively: a quality methods by which information is obtained and also a quality of the person doing audit.(unbiased)

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Obtaining and evaluating evidence: a matter of examining the underlying support for assertions or representations

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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)

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Degree of correspondence…established criteria: an audit establishes the conformity of assertions with specified criteria.

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Communicating results: to be useful, the results of the audit need to be communicated to interested parties by either oral or written means Definition 2 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. 

Keywords: 

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

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Expression of opinion: to form an opinion on the truth and fairness of financial statements

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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

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Enterprise: any form of entity whether profit orientated or not

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Appointed auditor: Section 263 of Companies Act 2016 – an approved company auditor or the Audit Firm – a chartered 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.

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In pursuance of auditor’s appointment: as per statutory requirements and other regulations including letter of engagement

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In compliance with any relevant statutory requirements: Companies Act (Malaysia) 2016, Banking Act, Industrial Act, etc.

AUDIT OF FINANCIAL STATEMENTS OF A COMPANY

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REASON FOR AUDIT OF COMPANY  The audit of company is a statutory requirement under Companies Act 2016  To increase the confidence level of the shareholders  To reduce information risk i.e. risk that information provided is misleading / inaccurate.  Helps owners assess how well managers have discharged their stewardship duties. 2) OBJECTIVES OF FINANCIAL STATEMENTS AUDIT (a) 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 (b) To report on the financial statements, and communicate as required by the Auditing Standards (ISAs), and in accordance with the auditor’s findings.  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 financial statement are actually free from material misstatement.

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Auditor needs to obtain a degree of reasonable assurance that the accounting & other records are not affected by material misstatements resulting from fraud & error.

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Materiality – information is material if its omission or misstatement could influence the economic decision of users taken on the basis of the financial statements

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Misstatement – a mistake in financial information which would arise from errors and fraud.

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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

Meaning of “TRUE AND FAIR VIEW” 

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

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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.

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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

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The court will treat compliance with the generally accepted accounting principles (GAAP) as reflected in the Statements of Accounting Standard as prima facie

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evidence that the accounting principles have been applied consistently.

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SCOPE OF FINANCIAL STATEMENT AUDIT The scope of Financial Statement audit is governed by: Legislation

Companies Act 2016 gives auditors the right to access the accounts & other records deemed necessary, thus unlawful if client impose restriction on any records or withholds info.

Regulations

- Banks & Finance .companies incorporated under Companies .Act 2016 but activities monitored by the Bank Negara Malaysia (BNM). - Other regulations pertaining to type of industries

Auditing Standards

International Standard on Auditing (ISA) & Malaysian Standard on Auditing (MASA)

3) DISTINCTION BETWEEN AUDITING AND ACCOUNTING

Auditing

Accounting

Determine whether recorded info fairly reflects actual transactions

Record transactions & provide financial information

Auditor responsible to evaluate the system to determine its effectiveness

Accountant responsible to develop a system to ensure that transactions are properly recorded

Auditor must understand accounting principles so that he/she would be able to detect non-compliance by the Accountant

Accountant must understand accounting principles so that transactions were recorded according to accepted standards

Auditor should possess expertise to accumulate & interpret audit evidence

Accountant should possess expertise to record transactions & to prepare financial statements

4) MANAGEMENT AND AUDITOR’S RESPONSIBILITIES MANAGEMENT’S RESPONSIBILITY    

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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AUDITOR’S 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 that the financial statements taken as whole are free from material misstatements 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 are:   

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: 1. Audit evidence resulted from testing a sample of population 2. Accounting presentations contain complex estimates 3. Fraudulent are often difficult to detect

AUDITOR’S RESPONSIBILITIES FOR DETECTING & REPORTING OF FRAUD & ERROR  AI 240 Fraud & Error  What is a fraud?  Fraud : Intentional misrepresentations of financial information by 1 or more individuals among management / employee or 3rd parties, involving: 1. Manipulation, falsification or alteration of records or documents 2. Misappropriation of assets 3. Suppression/omission of the effects of transactions from records/documents 4. Recording of transactions without substance 5. Misapplication of accounting policies 

Error : unintentional mistakes in financial information such as; 1. Mathematical or clerical mistakes in the underlying records and accounting data 2. Oversight or misinterpretation of facts, or 3. Misapplication of accounting policies

WHO ARE 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 Plan audit so that they would have reasonable expectation of detecting

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Auditor

material misstatement in the fin.info resulting from F&E such as designing a sufficient audit program.

5) DEVELOPMENT FOR AUDITING      

Formerly, involves checking of account for stocks & revenue Now  professional assurance services Auditing derived from Latin “audire” Luca Pacioli Industrial Revolution in mid 1800s  Joint Stock Companies Regulation & Acts – compulsory for co. to have their account audited

AGENCY THEORY: AGENCY RELATIONSHIP

Asymmetric information

Self interest

hires Principals

Agents

Self interest

performs

Making it difficult for principals to monitor and enforce contracts

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Agency relationship is: A contract under which one or more persons (the principal/s engage another person (the agent) to perform services on behalf which involves delegating some decisionmaking authority to the agent.”

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Agency relationship exists between owners (s/holders) & the management resulting conflict of interest due to information asymmetry

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Audit is needed to safeguard the interest of the s/holders.

AGENCY THEORY IN THE CONTEXT OF AUDITING 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

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shareholders when required adjustments are not made.

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DEMAND FOR AUDITORS’ SERVICES Relationship of External User to Management and Independent Auditor Attest Function

Financial report for external users

Conflict of interest Separation between Owners (shareholders) and management

External users Shareholders Bankers Government agencies Potential shareholders Creditors Suppliers Employees

Prepare Manageme responsible f accuracy a adequacy of Financial report

Need for protection of absentee owners

Credibility gap

Need for assurance as to reliability of financial report

Assurance provided by independent auditor

6) TYPES OF AUDITS

TYPES

PURPOSE

PERFORMED BY

FINANCIAL STATEMENT AUDIT

To determine whether FS reflects true & fair view, according to accounting standards & Company Act 2016

- Approved Company Auditor/External Auditor - Government Auditor

OPERATIONAL AUDIT

To evaluate effectiveness & efficiency of operating/Procedures

- Internal auditor - Government Auditor

COMPLIANCE AUDIT

To determine whether specific procedures/rules & regulations were being complied with

- Internal auditor - Government Auditor

FORENSIC AUDIT

To detect/ deter fraudulent activities

- Forensic auditor

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7) TYPES OF AUDITORS Type

Nature

External

- Independent from the co. - Appointed by shareholders during AGM - Audit fee agreed by auditor & management - Section 264, Companies Act 2016 - approved by Ministry Of Finance

Internal

- Employee of the co. thru interview process - Salary fixed by the co’s mgt. - Review the accounting & internal control systems - Examination of financial & operating information - Review of the economy, efficiency & effectiveness of operations including non-fin controls of an entity - Review of compliance with laws, regulations and other external requirements and with management policies and directives and other internal requirements

Government

- Responsible for federal & state acc, public authorities & stat bodies - Remuneration fixed by govt

Forensic

- Employed by co./govt agencies/public acc.firms/ investigative firm - Well trained in detecting/investigating/deterring fraud

Internal Auditing 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 Internal audit acts as a control mechanism of board of directors as well as 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.

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senior

DIFFERENCES BETWEEN INTERNAL AUDITING & EXTERNAL AUDITING

Characteristics

Internal Auditing

External Auditing

Performance/ Status

By employee within the organization/company

By practising professional outside the organization/Chartered 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 with established policies & procedures

To determine reliability of Financial Reports

Independence

Independence organizationally but ready to respond to needs & desires of management

Independence in fact and appearance

Detection of fraud

Directly concerned with prevention & detection of fraud

Incidentally concerned with prevention & detection of fraud

Period/Frequency

Continuous review/throughout the year or as requested by management

Periodic evaluation/financial year ended

Scope of audit

Determined by the management

Laid by the Statutory

Appointment

Appointed by the company’s management through formal interview process

Appointed by the company’s shareholders through voting at AGM (or other types of appointment as per Companies Act 2016)

Salary/remuneratio n

Salary; fixed internally

Agreed by the auditors & management ; as per Companies Act 2016

Reporting Responsibility

To the board of directors or to the audit committee or to the management

To the company’s shareholders

Rights and duties

Defined by company’s

As laid down by Companies

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management DEVELOPMENTS IN MALAYSIA

Act 2016

The Malaysian Institute of Accountants (MIA)

The Malaysian Institute of Certified Public Accountants (MICPA)

- Regulatory Body , established by Accountants Act 1967 - Business managed by council members - Issue auditing standards and Code of ethics - Does not conduct professional exams

- Formed in 1958 - A professional body - Managed by Council elected by members - Conducts professional exams

INFLUENCES ON THE DEVELOPMENT OF AUDITING International Federation of Accountants (IFAC) Develops and implements international auditing standards. The International Statement of Auditing (ISA) and International Statement of Quality Control (ISQC) are adopted and used by most jurisdictions including Malaysia The Quality Standards 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

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maintaining training programmes to keep partners and staff up to date on international developments in financial reporting

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maintaining quality control standards and conducting regular quality assurance reviews to monitor compliance with the firm’s policies and methodology

Other regulatory requirements; 

Companies Act 2016

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Securities Commission Act

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Capital Market and Services Act

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Bursa Malaysia requirements

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MIA by laws

BODIES RELATING TO AUDITING IN MALAYSIA  Malaysian Institute of Accontants (MIA)  National acc body, est. under Accountants Act 1967 

Member of IFAC, adopts ISAs as the basis for developing stds & issuing pronouncements on auditing matters

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Issued BY-laws (On Professional Conduct, Ethics & Practice)

 Malaysia Accounting Standar...