SOLUTIONS MANUAL

CHAPTER
Audit Legal
2 Requirements

Auditing in Action: Questions

(a) Among the key aspects of a good organization is by implementing within the audit firm’s policies
and procedures addressing each of the following six elements:
(i) Leadership responsibilities for quality within the firm
• The firm should establish policies and procedures designed to promote an internal culture
based on the recognition that quality is essential in performing engagements. The firm’s
leadership and the examples it sets significantly influence the internal culture of the firm.
(ii) Ethical requirements
• The firm should establish policies and procedures designed to provide it with reasonable
assurance that the firm and its personnel comply with relevant ethical requirements.
Ethical requirements relating to audits and reviews of historical financial information, and
other assurance and related services engagements ordinarily comprise Parts A and B of the
IFAC Code together with national requirements that are more restrictive, which include
(a) integrity; b) objectivity; (c) professional competence and due care; (d) confidentiality,
and (e) professional behaviour.
(iii) Acceptance and continuance of client relationships and specific engagements
• The firm should establish policies and procedures for the acceptance and continuance
of client relationships and specific engagements, designed to provide it with reasonable
assurance that it will only undertake or continue relationships and engagements where it (a)
has considered the integrity of the client and does not have information that would lead it to
conclude that the client lacks integrity; (b) is competent to perform the engagement and has
the capabilities, time and resources to do so and (c) can comply with ethical requirements.
• Where the firm obtains information that would have caused it to decline an engagement
if that information had been available earlier, policies and procedures on the continuance
of the engagement and the client relationship should include consideration of (a)  the
professional and legal responsibilities that apply to the circumstances, including whether
there is a requirement for the firm to report to the person or persons who made the
appointment or, in some cases, to regulatory authorities; and (b) the possibility of
withdrawing from the engagement or from both the engagement and the client relationship.
(iv) Human resources
• The firm should establish policies and procedures designed to provide it with reasonable
assurance that it has sufficient personnel with the capabilities, competence, and
commitment to ethical principles necessary to perform its engagements in accordance
with professional standards and regulatory and legal requirements, and to enable the firm
or engagement partners to issue reports that are appropriate in the circumstances.
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• Competence and capabilities can be developed by the following methods: (a) professional
education; (b) continuous professional development and training; (c) work experience;
and (d) coaching by more experienced staff.
(v) Engagement performance
• The firm should establish policies and procedures designed to provide it with reasonable
assurance that engagements are performed in accordance with professional standards
and regulatory and legal requirements, and that the firm or the engagement partner issue
reports that are appropriate in the circumstances.
• Through its policies and procedures, the firm seeks to establish consistency in the quality
of engagement performance.
(vi) Monitoring
• The firm should establish policies and procedures designed to provide it with reasonable
assurance that the policies and procedures relating to the system of quality control are
relevant, adequate, operating effectively and complied with in practice. Such policies and
procedures should include an on-going consideration and evaluation of the firm’s system
of quality control, including a periodic inspection of a selection of completed engagements.
• The purpose of monitoring compliance with quality control policies and procedures is to
provide an evaluation of (a) adherence to professional standards and regulatory and legal
requirements; (b) whether the quality control system has been appropriately designed and
effectively implemented; and (c) whether the firm’s quality control policies and procedures
have been appropriately applied, so that reports that are issued by the firm or engagement
partners are appropriate in the circumstances.

(b) Among the control procedures that should be applied to individual audits:
• Independent within-firm reviews
• Ensuring high quality audit documentations
• Highly competent audit team members are assigned to a particular task.
• Maintaining an effective code of conduct to be applied on all the auditors.
• Performing reviews and inspections within the profession.

Review Questions
QUESTION 1
According to ISA700 (Revised), the auditor’s responsibility is to form an opinion on the financial
statements as well as the form and content of the auditor’s report issued as a result of an audit of
financial statements, whereas the responsibilities of the management are to adopt sound accounting
policies, maintaining adequate internal control and make fair representations in the financial
statements.

QUESTION 2
The auditor should prepare an engagement letter to clarify the responsibilities and expectations of
each party, and to summarize and document this understanding, including the
• Nature of the services to be provided
• Timing of those services
• Expected fees and basis on which they will be billed (fixed fee, hourly rates)
• Auditor responsibilities including the search for fraud
• Client responsibilities including preparing information for the audit
• Need for any other services to be performed by the firm
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QUESTION 3
Approved auditing standards
Minimum standards of performance
Issued by the Auditing and Assurance Standard
Board (AASB) of the Malaysian Institute of
Accountants (MIA),
Example: Malaysian Approved Standards on
Quality Control, Auditing, Review, Other
Assurance and Related Services (MASA),
International Standard of Auditing (ISA).
Approved accounting standards
Mandatory for entities other than private
entities as prescribed by the GAAP
Issued by the Malaysian Accounting Standard
Board (MASB), Financial Accounting Standard
Board (FASB).
Example: Malaysian Financial Reporting
Standards (MFRS), International Financial
Reporting Standards (IFRS).

QUESTION 4
The approved standards on auditing are considered minimum standards of performance because
circumstances of individual audit engagements may require the auditor to perform audit work
beyond that specified in the auditing standards in order to appropriately issue an opinion that a set
of financial statements present a true and fair view of the entity’s financial position and results. As a
result, the auditor needs to use professional judgement in following all standards.

QUESTION 5
Among the objectives of the establishment of the AOB are to promote and develop an effective audit
oversight framework and to promote confidence in the quality and reliability of audited financial
statements in Malaysia. This is achieved by implementing the regulation for the registration of auditors
of public interest entities or schedule funds in order to ensure that only fit and proper auditors are
involved in auditing the financial statements of public interest entities or schedule funds.

QUESTION 6
The firm’s system of quality control as prescribed by the International Standard on Quality Control,
ISQC 1 should include policies and procedures addressing each of the following six elements:
• Leadership responsibilities for quality within the firm
• Ethical requirements
• Acceptance and continuance of client relationships and specific engagements
• Human resources
• Engagement performance
• Monitoring

Case 2: Questions
(a) The procedures that the auditors (Hassan, Hamid & Co) should perform before accepting the
engagement include the following:
(i) Hassan should explain to Idaman Bhd the need to make an inquiry of Rashid & Co and
should request permission to do so.
(ii) Hassan should ask Idaman Bhd to authorize Rashid & Co to respond fully to Hassan’s
inquiries.
(iii) If Idaman Bhd refuses to permit Rashid & Co to respond or limits Rashid & Co’s response,
Hassan should inquire as to the reasons and consider the implications in deciding whether
to accept the engagement.
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(iv) Hassan should make specific and reasonable inquiries of Rashid & Co regarding matters
Hassan believes will assist in determining whether to accept the engagement, including
specific questions regarding:
• Facts that might bear on the integrity of management.
• Disagreements with management as to accounting principles, auditing procedures, or
other similarly significant matters.
• Rashid & Co’s understanding as to the reasons for the change of auditors.
(v) If Hassan receives a limited response, Hassan should consider its implications in deciding
whether to accept the engagement.

(b) The additional procedures Hassan should consider performing during the planning phase of
this audit that would not be performed during the audit of a continuing client may include the
following:
(i) Hassan may apply appropriate auditing procedures to the account balances at the beginning
of the audit period and, possibly, to transactions in prior periods.
(ii) Hassan may make specific inquiries of Rashid & Co regarding matters Hassan believes may
affect the conduct of the audit, such as:
(iii) Audit areas that have required an inordinate amount of time;
(iv) Audit problems that arose from the condition of the accounting system and records.
(v) Hassan may request Idaman Bhd to authorize Rashid & Co to allow a review of Rashid &
Co’s working papers.
(vi) Hassan should document compliance with firm quality control policy regarding acceptance
of a new client.
(vii) Hassan should start obtaining the documentation needed to create a permanent audit file.

(c) Matters that Hassan, Hamid & Co would generally have included in the engagement letter are:
• The objective of the audit of financial statements
• Management’s responsibility for the financial statements
• The scope of the audit, including reference to applicable standards
• Statutory requirements
• The form of reports
• The fact that because of the test nature and other inherent limitations of an audit, together
with the inherent limitations of any system of internal control, there is an unavoidable risk that
even some material misstatement may remain undiscovered
• Access to whatever records, documentation, and other information may be requested in
connection with the audit
• Arrangements with respect to client assistance in the performance of the audit engagement
• Arrangements involving the use of specialists or internal auditors
• The estimated completion date
• A request for the client to confirm the terms of the engagement by acknowledging receipt of
the engagement letter
• The amount of audit fee and/or the basis on which fees are computed and any billing
arrangements
• Additional services to be provided relating to regulatory requirements