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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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Types of auditors (Contd.)
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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Types of auditors (Contd.)
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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Types of auditors (Contd.)
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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Organisations that affect financial
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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Organisations that affect financial
reporting & audits (Contd.)
Malaysian Institute of Accountants (MIA)(Contd.)
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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Organisations that affect financial
reporting & audits (Contd.)
Malaysian Institute of Accountants (MIA)(Contd.)
Issued By-laws (On professional conduct ðics)
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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Organisations that affect financial
reporting & audits (Contd.)
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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Organisations that affect financial
reporting & audits (Contd.)
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
O i ti th t ff t fi i l
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Organisations that affect financial
reporting & audits (Contd.)
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
O i ti th t ff t fi i l
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Organisations that affect financial
reporting & audits (Contd.)
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
O i ti th t ff t fi i l
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Organisations that affect financial
reporting & audits (Contd.)
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
O i ti th t ff t fi i l
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Organisations that affect financial
reporting & audits (Contd.)
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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Provisions under CA1965 (Contd.)
- 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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Provisions under CA1965 (Contd.)
- 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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