Chapter 1

An Introduction

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 statement audits Know the provisions relating to audit of financial statements under the Companies Act, 1965

Nature of Auditing
The accumulation & evaluation of evidence about 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/partnerships under specific circumstances

Nature of Auditing - Purpose

Obtaining sufficient evidence about the FS conformance 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 ascertain correspondence between assertions & specified framework

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)

Nature of Auditing Accumulating & evaluating evidence

Evidence = any info used by the auditor to determine whether the info being audited is stated 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

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

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

Distinction between Accounting & Auditing

Accounting = the recording, classifying & summarising of economic events in a logical manner (which creates FS & other financial info) for mgt decision-making Auditing = determines whether recorded info properly reflects the economic events that occurred during the accounting period. Does not create FS, but enhances the credibility of FS/other financial info Auditor must possess accounting knowledge as well as the expertise to accumulate/ evaluate audit evidence

The Need for Auditing

Divorce of ownership & management Natural 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

The Need for Auditing Creditors/Employees

Prevents mgt from taking borrowed funds 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

Audit of a Company Example

Information

Competent, independent person

External Auditor

Historical FS Report on results

Determines correspondence

Report on true & fair presentation

Accumulates and Established criteria evaluates evidence Examines MASB, GAAP, supporting records, Companies Act 1965 observation, mgts assertions

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 evaluating subject matter against identified criteria Accounting professionals have the skills/competencies & are objective/independent Increases confidence of user

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

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

Types of audits
FS audits full set of FS, true & fair view, compliance with MASB standards & financial reporting framework Compliance audits compliance with specific procedures/rules established by higher mgt or regulatory authority Operational audits a systematic review of effectiveness & efficiency of operating procedures & resource utilisation

Types of audits (Contd.)

Forensic audits to obtain & develop information as legal evidence or for use by expert witnesses, in the courts of law Requires use of critical analyses & investigative skills, integrated with accounting knowledge & business experience

Types of auditors
External auditors Independent, members of public accounting profession, audit FS of public/private entities May conduct compliance, operational & forensic audits

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

Types of auditors (Contd.)

Internal auditors Employed by entities Usually certified by IIAM Reports directly to BOD/audit committee Can be involved in all 4 types of audits

Types of auditors (Contd.)

Government auditors Perform audits for the Office of Auditor General (OAG) AG is responsible for auditing FS of the Federation & all the States, public authorities, statutory bodies Mainly financial/compliance audits Enhance accountability of public expenditure & public funds

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

The Public Accounting Profession Latest issues

Litigation - Reduction of exposure/limitation of liability - Expectation gap Expanded services - forensic auditing, fraud investigation, internal controls

The Public Accounting Profession Latest issues (Contd.)

Globalisation - Delivery of diff services worldwide to clients, leading to mergers among major audit firms - Also, international affiliations to service clients foreign operations - Diversity of accounting standards harmonisation

The Public Accounting Profession Latest issues (Contd.)

Mergers - Amongst major firms, e.g. Deloitte + Touche Ross, Ernst & Whinney + Arthur Young & Co., Coopers & Lybrand + Price Waterhouse - To cope with increased competition for clients, expected efficiencies of scale, need to service international clients

Public Accounting Firms

Proprietorships/partnerships no limited 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

Organisations that affect financial reporting & audits

(a) (b) (c) (d) (e) Malaysian Institute of Accountants (MIA) National accounting body Regulatory body over accounting profession Main functions: Determine qualifications of persons for member admissions Establish standards & rules Training/education Approve/regulate/supervise the conduct of MIA Qualifying Exam Promote interests of accounting profession in Msia

Organisations that affect financial reporting & audits (Contd.)

Malaysian Institute of Accountants (MIA) (Contd.) MIA Council: AG of Msia, MICPA President + Presidents of 3 local branches of accounting bodies, appointed members of higher ed institutions, etc Empowered to establish various Committees of Council for effective operations, e.g. accounting standards, emerging issues

Organisations that affect financial reporting & audits (Contd.)

Malaysian Institute of Accountants (MIA) (Contd.) Types of MIA membership: Chartered Accountant, Licensed Accountant, Associate Member Eligibility for admission: academic/prof qualification Supports work of International Federation of Accountants, including adopting ISAs

Organisations that affect financial reporting & audits (Contd.)

Malaysian Institute of Accountants (MIA) (Contd.) Issued By-laws (On professional conduct & ethics) Financial Statements review Investigation & disciplinary MIA practice review Supports accounting research Provides continuing education programmes/seminars Publishes Accountants Today

Organisations that affect financial reporting & audits (Contd.)

(a) (b)
(c) (d)

Malaysian Accounting Standards Board (MASB) Independent standard-setting authority Functions: Issuing new a/c standards as approved Reviewing/revising existing a/c standards & adopt them as approved a/c standards Issuing of Statements of Principles & Technical Releases Sponsoring/undertaking development of a/c standards

Organisations that affect financial reporting & audits (Contd.)

Malaysian Accounting Standards Board (MASB) Functions (Contd.) (d) Conducting consultation to determine a/c concepts & principles (e) Developing conceptual framework for a/c standards Follows due process procedure: Discussion Paper, Draft SOP, MASB Exposure Draft

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 of CA1965, Trust Companies Act 1949, Registration of Businesses Act 1956 Also regulates proper conduct of corporate officers & good corporate governance

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/approving authority for bond issues (c) Regulating take-over & mergers & unit trust schemes (d) Supervising/monitoring activities of stock exchanges, clearing houses, central depositories

Organisations that affect financial reporting & audits (Contd.)

Securities Commission (SC) (Contd.) Functions (Contd.) (e) Licensing/supervising licensed persons provided under any securities laws (f) Suppressing illegal/dishonourable/improper practices 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 ensuring reliable info for making investment decisions

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

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

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 person responsible for keeping register of members/debenture-holders of company

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 & the registers required by the Act to be kept, have been properly kept in accordance with the Act

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