5 - Auditing

FAR 360
AUDITING
BY:
KAMARUZZAMAN MUHAMMAD
SHAH ALAM
12/08/2021 1
TOPICS TO BE DISCUSSED
1. Overview
2. Statutory responsibility of auditors
3. MIA By-Laws (on Professional ethics, conduct
and practice)
4. Auditing Standards
5. Auditing framework in practice
6. Audit evidence & Audit procedures
7. Audit Documentation
8. Audit program
9. Audit report
10. Annual Report for Private entity
12/08/2021 2
1. OVERVIEW
12/08/2021 3
OVERVIEW
 Auditing is a process of an auditor collecting and gathering evidence
and ultimately based on the evidence gathered, the auditor express
his or her opinion on the financial statements.
 Auditor collecting evidence using procedures (audit procedures)

such as inspection of records, confirmation to verify the true and fair
view of the financial statements
 The auditor is not and cannot be held responsible for the prevention
of fraud and error. The management of the company assumes full
responsibility for the prevention and detection of fraud and error.
 However, auditor to act as a deterrent and to perform the following:

 Maintain professional scepticism
 Carry out risk assessment procedures.
 Carry out detection procedures where applicable.
12/08/2021 4
AUDIT OBJECTIVES
◦ To form and express an independent opinion based on
the audit work performed that the financial statements
are free from material misstatements (financial
statements presenting fairly stated).
◦ To form and express opinion on compliance with

statutory requirements and other regulations
◦ To provide assistance to the organization in improving

financial controls and financial reporting within the
business
◦ To employ audit procedures that could help in

detecting and preventing fraud and errors within the
accounting records
12/08/2021 5
2. STATUTORY
RESPONSIBILITY
12/08/2021 6
STATUTORY RESPONSIBILITY
Section 169 of Companies Act, 1965
Profit and loss account, balance-sheet and directors'
report.
 (3) The directors of every company shall cause to be

made out, and to be laid before the company at its
annual general meeting with the profit and loss account
required by subsection (1) a balance sheet as at the
date to which the profit and loss account is made up.
 (4) The profit and loss account and the balance sheet
of a company shall be duly audited before they are laid
before the company at its annual general meeting as
required by this section.
12/08/2021 7
 Section 8 & 9 – Qualification of an approved

auditors
 Section 172 – Appointment, removal,

resignation and remuneration of an auditors
 Section 174 – Duties and right of auditors
12/08/2021 8
 Qualification
Section 8: Requires a company to appoint an
approved company auditor.
An approved company auditor: is a qualified person
approved by the MoF to act as auditor, is of good
character and competent to perform the duties of an
auditor under the Companies Act.
An approved auditor must have a professional
accountancy qualification with adequate practical
training before be recognised as MIA member (CA).
A partnership firm may be appointed as approved
company auditors in the firm’s name. The firm must
register with CCM before being appointed as auditor
of a company.
An audit firm generally in the forms of sole-
proprietorship or partnership.
12/08/2021 9
 Qualification
 To ensure auditor’s independence, integrity & objectivity,
Section 9 of Company Act 1965 laid down with the
necessary qualifications as an Auditor.
 Section 9 (1): A person shall not be appointed as auditor

of company if:-
○ Sec 9 (1) (a): he is not an approved company auditor
○ Sec 9 (1) (b): he is indebted to company, its holding or
subsidiaries company in an amount exceeding
Rm2,500
○ Sec 9 (1) ( c ): if he is:-
An officer of the company
A partner, employer or employee of an officer of the c
ompany
A partner or employee of an employee of an officer of
the company
12/08/2021 10
 Qualification
○ Sec 9 (1) ( c ): if he is:-
A shareholder or his spouse is a shareholder of a c
orporation whose employee is an officer company.
○ Sec 9 (1) (d): he is responsible for or if he is the
partner, employer or employee of a person
responsible for the keeping of the register of
members or the register of holders of debentures of
the company. (Company Secretary)
○ Sec 9 (2): if an officer has resigned from a company,

he can only be the auditor of the company after 12
months of his resignation. If less than 12 months, he
is not eligible to be appointed as an auditor of the
company.
12/08/2021 11
 Appointment
Sec 172(1): Power of directors to appoint auditor

before 1st general meeting, if not, members entitled to
do in general meeting.
Sec 172(2): Co shall appoint auditor at each AGM.

Term of office starts from appointment at present
AGM till conclusion of next AGM. Co must at every
AGM appoint and reappoint auditor.
12/08/2021 12
 Appointment
Sec 172(3): Power to directors to appoint to fill

casual vacancy (termination of auditors practice,
Auditor cease operation), exception to resignation/
removal of Auditors.
Sec 172 (10): If a company does not appoint an

auditor, CCM on the application in writing of any
member of the company make the appointment.
12/08/2021 13
 Removal
Sec 172(4): To be done at general meeting of which
special notice of ordinary resolution to remove auditor
issued.
Sec 172(5): On receipt of special notice by co,

○ It must send a copy of special notice to present auditor and
CCM.
○ Auditor may within 7 days of receiving special notice make
representation in writing to co, request representation be sent
by co. to all members entitled to receive notice of general
meeting.
Sec 172(6): The auditor may request that the

representation be read out at the general meeting.
12/08/2021 14
 Removal
Sec 172(7):
○ Special resolution is needed to appoint new auditor replace
the removed at the same AGM
○ If to appoint at the adjourned meeting, we can do so but
through ordinary resolution and adjourned AGM need to be
done note earlier than 20 BUT not later than 30 days from
AGM date that removed auditor.
Sec 172 (8): Co shall inform in writing of removal of

auditor to the CCM. If the company did not appoint the
auditor, CCM shall appoint an auditor.
12/08/2021 15
 Resignation
Sec 172 (14): auditor may resign:

○ If not the sole auditor of company
○ At general meeting of company
Sec 172 (15): If an auditor desires to resign shall give

notice of resignation to directors of the company. The
directors shall call EGM for the purpose of appointing
new auditor and the resignation only effective on the
appointment of new auditor.
12/08/2021 16
 Section 172 (16): The fees and expenses of an
auditor of a company:-
a) If auditor appointed in general meeting – the fees shall

be fixed by the company at general meeting.
b) If auditor appointed by directors or by CCM – the

auditor’s remuneration then, shall be fixed by the
Directors or CCM respectively.
12/08/2021 17
 Duties: Section 174 (1) – (3)
Section 174 (1): To report to the members of the company

(the accounting and other records on consolidation basis, if
applicable) in the general meeting.
Section 174 (2): To express opinion in his report,

WHETHER:
○ The account are properly drawn up so as to give a true
and fair view of the matters required by section 169.
○ in accordance of the provision of the act so as to give a
true and fair view of the company’s affairs (BS, PL & CF)
○ In accordance with the applicable accounting standards.
○ AND so forth. Refer to Section 174 (2) (a) to (e)
12/08/2021 18
 Duties: Section 174 (1) – (3)
Section 174 (3): Also an auditor need to form an

opinion on the following:-
○ Whether he obtained all the information required
○ Whether proper accounting and other records include registers
have been properly keep

○ Whether the procedures and methods used by a holding
company or subsidiary in consolidation amount were

appropriate.
12/08/2021 19
 Power or Rights of Auditors: Section 174 (4) – (9)
To access at all time books and records

Right to information and explanation as he considers
necessary in performing his duties
To Attend general meeting, to receive all notice relating
general meeting which concern auditor
Right to make written representation when company
dismiss him as auditor
To attach auditor’s report to annual report, to be read
in general meeting
12/08/2021 20
3. MIA BY-LAWS
(ON PROFESSIONAL
ETHICS, CONDUCT AND
PRACTICE)
12/08/2021 21
MIA BY-LAWS
MIA By-Laws
12/08/2021 22
MIA BY-LAW
 All professional bodies impose a code of conduct on their
members.
 This code of ethics provides a set of principles and rules

that offer guidance to members.
 In Malaysia, FOR ACCOUNTANTS, MIA issued the By-Laws

on professional conduct and ethics (called “MIA By-Law [on
Professional Ethics, Conduct and Practice]”)
 Provide standard of conduct in daily professional life
 Important for gaining public confidence in auditors’
services
 These by-laws are issued by the Council of MIA on

24/11/2006 and came into operation on 1 January 2007,
revokes and supersedes the By laws revised January 2002.
12/08/2021 23
MIA BY-LAW
 The By-Laws comprise of two main parts
Part I relates to the By-Laws on Professional Ethics
○ Which is substantially based on the Code of Ethics for

Professional Accountants issued by the International Federation
of Accountants (IFAC). The By-Laws on Professional Ethics
establishes the ethical requirements and standards applicable to
all members of the Institute as professional accountants.
Part II relates to the By-Laws on Professional Conduct

and Practice
○ Which contain prescriptive obligations applicable to members or

member firms (as defined herein) of the Institute in respect of
their professional conduct or the practice of their firms.
12/08/2021 24
MIA BY-LAW
 The MIA By-Laws divided into 2 MAIN Parts:-
 PART I: BY-LAWS ON PROFESSIONAL ETHICS

 PART A – General Application
 PART B – Professional Accountants in Public Practice
 PART C – Professional Accountants in Business
 PART II: BY-LAWS ON PROFESSIONAL CONDUCT AND

PRACTICE
 PART A – ALL PROFESSIONAL ACCOUNTANTS
 PART B – MEMBERS IN PUBLIC PRACTICE
SEE MIA BY-LAWS
12/08/2021 25
MIA BY-LAW (on Professional Ethics, Conduct and Practice)
12/08/2021 26
MIA BY-LAW
 100: Fundamental Principles and Conceptual Framework
 Professional Accountant is required to comply with the following
fundamental principles:
1. Integrity
2. Objectivity
3. Professional Competence and Due Care
4. Confidentiality
5. Professional Behavior
 Auditor in performing professional services may face many threats to

compliance with the fundamental principles.
 Therefore, auditor should be able to identify threats, apply safeguards

to eliminate the threats or reduce to acceptable level to make sure the
auditor comply with fundamental principles.
12/08/2021 27
MIA BY-LAW
 110: Integrity
 The principle of integrity is be straightforward and honest in
professional and business relationship. Integrity also implies fair
dealing and truthfulness.
 No member shall make false and misleading report.
 120: Objectivity
 Principle of objectivity: not to compromise their professional
judgment because of bias, free of conflict of interest and influence
by others
 A member shall be and be seen to be free of any interest which

cause problem to his objectivity.
 Regardless of service and capacity, all members shall protect the

integrity and maintain objectivity in their judgment (For example:
pressure, multiple services, etc).
12/08/2021 28
MIA BY-LAW (On professional ethics, conduct and practice)
 130: Professional Competence and Due Care
 Strive continually to improve his professional services, keep his
technical knowledge up to date, enhance professional competence.
 Members shall not undertake professional work which he is not

competent to perform unless the member obtains such advice and
assistant as will enable him to carry out the work completely.
 Comply with Continuing Professional Education (CPE) requirement,

standards and guidelines issued by MIA council.
 Due care means should conduct with courtesy and responsible

toward person who engage him and also to the public.
 It also includes consideration of completeness of working paper,

sufficiency of audit evidence, appropriateness of audit report
12/08/2021 29
MIA BY-LAW (On professional ethics, conduct and practice)
 140: Confidentiality
To treat client information acquired as confidential –

cannot use or appear to use that information for his
personal advantage or third party advantage. Example:
Members dealing in the shares of the company using
information obtained during his engagement.
Confidential information of the client shall be not

disclosed except:-
○ Consent to do so obtained from client
○ There is legal right or duty to disclose.
○ Provisions of written law (non-compliance, criminal act)
12/08/2021 30
MIA BY-LAW
 150: Professional Behavior
The basic principle of Professional Behavior requires auditor to
comply with relevant laws and should also perform the job to
maintain good name of institute (MIA) as well as other
members.
Auditor should refrain from acting in a manner that would

discredit the profession.
Auditors also required to take consideration of how they

promote their services through the public relations channel.
Professionally done, follow laws, not exaggerated, not
comparing to the work of others.
12/08/2021 31
MIA BY-LAW (on Professional Ethics, Conduct and Practice)
12/08/2021 32
MIA BY-LAW
 210 Professional Appointment
◦ Client acceptance
The auditor should investigate the background and business

activities of the audit client and he should consider:
 Whether the acceptance of the nomination would create any

threats to compliance with the fundamental principles; for example
any blood relationship between auditor and audit client; or
 Whether there are any client issues that would threaten

compliance of fundamental principles; for example the audit client
involves in illegal business activities such as money laundry etc.
To accept the appointment, the auditor need to eliminate or reduce

the threats to an acceptable level with proper safeguards. Otherwise
the auditor should decline the appointment.
12/08/2021 33
MIA BY-LAW
 210 Professional Appointment
 Engagement acceptance
The auditor should only accept audit engagements that he is

competent to perform. He should consider whether acceptance would
create any threats to compliance with the fundamental principles. After
identified the threats, the auditor needs to eliminate or reduce threats
to an acceptable level, by applying the following safeguard measures:-
○ Acquiring understanding of the nature and complexity of the client’s

business
○ Acquiring knowledge of relevant industries
○ Obtaining experience with regulatory & reporting requirements
○ Assigning sufficient stat with the necessary competencies
○ Using expert where necessary
○ Agreeing on the realistic time frame for performance of the
engagement
○ Comply with quality control policies and procedures..
12/08/2021 34
MIA BY-LAW
 Changes in Professional Appointments
 Potential Auditor…
 A member who is asked to accept nomination as auditor is required
to communicate with the existing auditor (with the permission the
prospective client), for the purposes:
○ To obtain information about client
○ To know the professional reasons for such changes before
proposed auditor accept the appointment.
 If the client does not granted the permission, the potential auditor
shall decline the appointment.
 Existing Auditor…
 The existing auditor, on receipt of a communication, within 14 days
to reply that, the existing auditor should get permission from the
client.
12/08/2021 35
MIA BY-LAW
 Changes in Professional Appointments
 Existing Auditor..
○ If permission granted: existing auditor should reply in writing
whether there are reasons why the new auditor should not accept
appointment.
○ If permission not granted: existing auditor should report the fact to

the proposed client.
 Potential Auditor …
○ If the proposed auditor unable to obtain satisfactory reply from
existing auditor within reasonable time, he should follow up by A.R.
Register.
○ And if still no reply after a few attempt by letter and calls, further
letter to be send to existing auditor stating he assume that “there is
no professional reasons why he should not accept appointment”.
12/08/2021 36
MIA BY-LAW: APPOINTMENT OF
AUDITOR
 Appointment and re-appointment of auditor is normally under the
shareholders’ approval during the general meeting (there are
circumstances where the power to appoint auditor rests with directors
or Companies Commission of Malaysia (CCM)).
 Appointment process starts with nomination of prospective auditors

(at least 21 days before the general meeting) and must be endorsed
by the existing auditors, if any.
 Once the shareholders have agreed on auditor’s appointment during

the general meeting, an appointment letter will be issued by the client.
12/08/2021 37
AUDITOR
 Subsequently, once an auditor is engaged to audit an organization,
the contractual agreement between the auditor and the client will be
stipulated in an engagement letter. Engagement letter is issued by the
auditor and acknowledged by the client.
 Purpose of engagement letter:

 To define clearly the extent of auditor’s and client’s responsibilities
 To avoid misunderstanding between auditor and client
 To provide written confirmation on auditor’s acceptance of the
appointment, the scope of audit, etc.
Example Engagement Letter
12/08/2021 38
AUDITOR
The process of appointment of new auditor to replace existing auditor:
 Letter from a substantial shareholder to the company, to nominate
new auditor to replace present auditors within 21 days from the
date of the general meeting (Letter 1)
 The Company upon receiving letter from the shareholder should:-
○ Inform present auditor; ask for resignation letter (Letter 2)
○ Inform prospective auditor; ask for consent to act as auditors of the
company (Letter 3)
 Present auditor need to reply to the company before general
meeting (Letter 4)
12/08/2021 39
AUDITOR
Prospective auditor should:-
○ Sent a letter to present auditor; asking the professional reason
why he or she should not accept the appointment (professional
clearance from present auditor)- Letter 5
○ Upon receiving professional clearance from present auditor; sent
a letter to the company and give the company the consent to act
as auditors of the company - Letter 6
○ (need to be done before general meeting)
The company upon receiving resignation letter from

present auditor and consent to act as auditor from
prospective auditor held general meeting to approved
the nomination to appoint new auditor
12/08/2021 40
AUDITOR
The company after general meeting should sent to
prospective auditor the appointment letter - Letter 7
The prospective auditor upon receiving letter of

appointment, sent an engagement letter to the company
- Letter 8
12/08/2021 41
Shareholders
Company
Present auditor Prospective

auditor
General
Meeting
12/08/2021 42
4. AUDITING STANDARDS
12/08/2021 43
MIA By-Law
MASA
12/08/2021 44
5. AUDITING FRAMEWORK
IN PRACTICE
12/08/2021 45
Appointment Planning
Risk Assessment
G Preliminary Evaluate of Accounting & Internal Control (IC) System AUDITI

at
h NO
To rely
YES NG
er
in
on IC?
Test of Control
FRAM
g
ev Final Evaluation of IC EWOR
id
e Increased
BAD
Good
K IN
nc Substantive Test
e
IC?
GOOD
PRACT
Reduced
Substantive Test
ICE
Completing the Audit
Audit Report
12/08/2021 46
Process for understanding ICS and assessing
control risk (Pg 279)
(a) Phase 1: Obtain and documented the understanding
of IC in terms of design and operation;
(b) Phase 2: Assess control risk;
(c) Phase 3: Design, perform and evaluate test of

controls;
(d) Decide planned detection risk and substantive tests.
AR = IR X CR X DR
Elements of Internal Control Systems
(PAPAMOSS)
1. Physical custody of assets: custody of assets, restricting

access of valuable & attractive
2. Authorisation and approval: duties & limits are clearly
defined
3. Personnel: selection & training (HRD)
4. Arithmetical and accounting: accuracy, maintenance &
checking
5. Management: by internal audit, review by directors
6. Organisation: division, segregation, coordination
7. Segregation of duties: reduce risk of fraud & error, no one
person to record complete transaction (initiate transaction-
physical custody-recording)
8. Supervision: checking work by juniors to ensure accuracy &
completeness
Internal Control Systems
1. A system of internal control consists of policies and

procedures designed to provide management with
reasonable assurance that the company achieves its
objectives and goals.
2. The objectives of ICS:-

 Reliability of financial reporting; management has
responsibility to prepare financial information is fairly
stated in accordance with reporting requirements.
 Efficiency and effectiveness of operations; Effective and
efficient in utilised the company resources to optimize
the company goal.
 Compliance with laws and regulations; to ensure
company always comply with law.
(PAPAMOSS)
1. Physical custody of assets: With objectives to prevent

unauthorised access / alteration to physical asset and
records. E.g. To ensure the inventories are safe-keeping in
a locked store. Documents and records be kept in a locked
cabinet.
2. Authorisation and approval: Every transaction should be

authorised and approved by person with the authority. This
to ensure only transaction which are valid to the company is
approved. E.g. Signing cheque for the amount more than
RM50,000 required MD to sign (General authorization).
Authorised to write-off bad debt is example of specific
authorization.
(PAPAMOSS)
3. Personnel: The company should employ competent and

honest staff, such as effective interview and adequate /
continuous training for the staff.
4. Arithmetical and accounting: Concern to the accuracy of

recording. E.g. Need proper checking before record the
transaction. The company need to ensure:
 validity (e.g. matched all related document with
approval),
 completeness (e.g. use serial number and properly mark
the document; “POSTED” and
 accuracy (accurate figure and correct classification as
well as posting) of recorded transaction.
(PAPAMOSS)
5. Management: Management is responsible to maintaining

good and up to date internal control system so that all
significant controls are operating effectively. This job may
be delegated to the internal auditor and review by the audit
committee.
6. Organisation: Organization structure created to facilitate
delegation of duties, coordination of activities, to control the
actions of its employee as well as define the level of
responsibility.
7. Segregation of duties: Fundamental aspect of good internal
control. It means that no one should be in a position to
mix/responsible the three primary functions of authorisation,
recording, and custody of assets. If no division of these
duties, an employee may easily perpetrate fraud.
8. Supervision: checking work by juniors to ensure accuracy &
completeness on timely basis.
Limitation Control Systems
1. Collusion between staff to perpetrate fraud;

2. Abuse of power – Over-ruled by higher management;
3. Control normally limited to only anticipated types of
transactions especially recurring transaction;
4. Human error; staff
5. Outdated system due to changes in company size and
activities / transaction; e.g. Sale and lease-back transaction,
Non-current assets held for sale.
 Auditors during the audit must the effectiveness of the

internal control system with the audit client. The above
limitation will lead to control risk.
6. AUDIT EVIDENCE &
AUDIT PROCEDURES
12/08/2021 54
AUDIT EVIDENCE & AUDIT
PROCEDURES
12/08/2021 55
PROCEDURES
 Sources of evidence could be derived from:
Management/staff of the client
Third parties e.g. creditors, bankers
 To obtained audit evidence, the auditors would perform

the structured audit procedures.
 Audit procedures are specific acts performed by the

auditor to gather evidence to draw conclusions on which
to base the audit opinion.
12/08/2021 56
PROCEDURES
Types of audit procedures to obtain audit evidence:-
Audit procedures Explanations & Example

1. Inspection of Vouching internal & external documents &
records or normally makes up bulk of evidence. E.g.
documentation Sales invoices
2. Examination of Inspecting and counting of physical assets.
physical assets E.g. Counting cash on hand, certificates of
deposit.
3. Observation Looking at a procedures performed by
others. E.g. observation of the counting of
stock
4. Inquiries Seeking information of knowledgeable
person. Extensively used. E.g. inquiry
management about entity.
12/08/2021 57
PROCEDURES
Audit procedures Explanations & example

4. Confirmation Specific type of inquiry in writing. Use
extensively. E.g. bank balance, debtors etc
5. Scanning Review of accounting data to identify significant
or unusual items. E.g. scanning credit balance
in the debtors’ ageing
6. Computation or re- Checking mathematical accuracy. E.g.
calculation recalculate the depreciation expenses
7. Re-performance The auditor independence execution of
procedures. E.g. the auditor re-perform the PPE
listing.
12/08/2021 58
PROCEDURES
Audit procedures Explanations & example

8. Analytical procedures Consist of evaluation of financial information by
comparing among both financial and non-
financial data. E.g. GP this year compared to
previous (financial data to financial data).
Another e.g.: comparing rental amount and no
of premise rent (financial to non-financial
data).
AP help auditor understand the client business, high risk area for further
attention, providing audit evidence and assisting in evaluation of audit
result. Three type: Trend analysis, Ratio analysis and reasonableness
analysis.
12/08/2021 59
PROCEDURES
 Audit procedures are performed for following level of audit (audit
framework):-
 Risk assessment procedures – to obtain understanding of the entity
and its environment, include internal control and risk of material
misstatements. The concept of Audit Risk.
AR = IR X CR X DR
 Test of controls – to test the effectiveness of controls in preventing,

detecting, correcting misstatements
 Substantive testing – based on assessed risk of material

misstatement, the auditor decide the extent of substantive
procedures.
12/08/2021 60
PROCEDURES
Uses of audit procedures in the respective level of audit:-
Level Audit Procedures

Inquiries of management & others,
Risk Assessment
Analytical procedures, observation &
Procedures
inspect
Inquiries, inspections documents &

Test of control
walkthroughs (tracing sales cycle)
Use almost all the 8 audit procedures

Substantive testing above; to test accuracy of transactions,
account balance and disclosures.
12/08/2021 61
PROCEDURES
Levels of reliability of audit evidence:
12/08/2021 62
7. AUDIT
DOCUMENTATION
12/08/2021 63
AUDIT DOCUMENTATION
12/08/2021 64
AUDIT DOCUMENTATION
 Purpose of audit working papers:
To aid auditor in providing assurance that an adequate
audit has been conducted
Provide a basis for planning the audit
As a record of evidence being accumulated and results
of tests
Provide data for determining proper type of audit report
Provide basis for review by supervisors, partners and
other auditors
Reference for future audit
12/08/2021 65
AUDIT DOCUMENTATION
Types of audit working papers:
1. Permanent files - contain data of historical or continuing nature.
Examples:
 Copies of, or excerpts from, the memorandum and articles of
association of the company, Charts of accounts, Organization
chart, Accounting manual;
 Copies of important contracts (pension contracts, union
contracts, leases, etc), documentation of internal control (flow
charts), terms of debenture and bond issues, agreements, Prior
years’ analytical procedure results, prior years audited financial
statements
12/08/2021 66
AUDIT DOCUMENTATION
Types of audit working papers:
2. Current files – includes all audit documentation applicable to the year
under audit.
Examples:
 Copy of financial statements and auditor’s report
 Audit plan and audit programs
 Copies or, or excerpts from, minutes of important committee
meetings
 Working balance sheet and income statement
 Adjusting and reclassification journal entries
 Working papers supporting financial statement amounts
Example of working papers
12/08/2021 67
8. COMPLETING THE
AUDIT
12/08/2021 68
COMPLETING THE AUDIT
 Comply with Accounting Standards and Companies Act

1965
 Analytical review on overall performance of financial
statements
 Going concern status
 Post balance sheet event, contingencies and commitments
 Management representations
 Management letter
 Appropriate audit report
12/08/2021 69
COMPLETING THE AUDIT:
Compliance with FRS & CA
Compliance with FRS and Companies Act;
 The auditor should consider whether the information

presented and the accounting policies adopted are in
accordance with the Companies Act 1965 and accounting
standards.
 Approved Accounting Standards; example:

 FRS 101 – Presentation of Financial statement
 FRS 110 – Event after the balance sheet date
 FRS 124 – Related party disclosures
 FRS 137 – Provisions, contingent liabilities & Contingent Assets
12/08/2021 70
Analytical procedures
 Analytical Procedures applied by auditors at the following stage of
audit:-
 Planning the audit – understand the business and identify areas of

potential risk and determine the nature, timing and extent of auditor
procedures
 During the audit – as substantive test to reduce detection risk
 At end of audit – forming overall conclusion that the financial
statements are consistent with the auditor’s knowledge of the
business.
 AI 520 – The auditor should apply analytical procedures at or near the

end of the audit when forming an overall conclusion as to whether the
financial statement as a whole are consistent with the auditor’s
knowledge of business.
12/08/2021 71
Analytical procedures
 Analytical procedure at the end of audit is intended to re-confirm
with the conclusion made during the audit of individual account
balances.
 For example: During substantive test, auditor concluded that

Account Receivable is fairly stated. When Analytical Procedure on
Account Receivable is perform and if the result also conclude that
the amount is fairly stated, it look like to re-confirm the conclusion
and it can be a basis for auditor’s opinion. (Receivable ratio –
Average collection period)
 Another example: Analytical or calculation of gross profit margin of a

Oil and Gas company and compared with the auditor’s knowledge
about the margin in the industry.
12/08/2021 72
COMPLETING THE AUDIT: Going Concern
 AI 570 – Requires the auditor to assess the risk of going-concern
problems at the planning stage and again during the final review
 Going Concern assumption is an important assumption underlying

the preparation of financial statements.
 Under going concern assumption, an entity is assumed to be able to

continue as a going concern for a foreseeable future period of a time
(at least 12 months beyond the year-end date)
 Accordingly assets and liabilities are recorded on the basis that the
entity will be able to realize its assets and discharge its liabilities in
the normal course of the business. (going concern basis)
12/08/2021 73
Subsequent event review
 AI 560 – Auditor should consider the effect of subsequent event on

the financial statement and on the auditor’s report.
 AI 560 – term subsequent events is used to refer to both

1. events occurring after period end and the date of the auditor’s
report
2. facts discovered after the date of the auditor’s report
 FRS 110 – event after the balance sheet date are those events both
favorable and unfavorable that occur between the balance sheet
date and when the financial statements are authorized for issue
12/08/2021 74
End of field work & Audit

Reporting date report signed
Financial statements
31 Dec 15 May deliver 20 May
Subsequent events
Subsequent period Post- audit period
1 2 3
12/08/2021 75
Type of Subsequent events
1. Non-Adjusting events
Conditions that did not exist at the balance sheet date but exist
subsequent to that date. If material, need to be disclose in the
notes to the accounts.
Example: purchase or disposal of a major business or subsidiary

by the entity, issue of shares or bonds by the entity,
Also include: Contingent liability and capital commitments
12/08/2021 76
Type of subsequent events
2. Adjusting events
These events affect the financial position and the financial
statement on balance sheet date need to accounted for the events.
Example: the bankruptcy of a customer that occurs after the

balance sheet date usually confirms that a loss existed at the
balance sheet date on a trade receivable and the entity needs to
adjust
Another example: the sale of inventories after the balance sheet

date may give evidence about their net realizable value at the
balance sheet date.
12/08/2021 77
Audit Procedures
 Reviewing procedures management policies has established to
ensure that subsequent event are identified.
 Reading minutes of meeting
 Review budget, cash flow forecasts and other management report
 Inquiring to lawyers
 Discuss with management on the following:-
 New Capital commitment, borrowings and guarantee
 Sales of assets, merger and acquisition
 Issue new shares or debentures
 Any damage of the asset due to fire, flood
 Contingent liability and capital commitment
 Obtain representation letter from management.
12/08/2021 78
Management representation
 AI 580 – requires the auditor to obtain appropriate representations
from management, which may be oral or written.
 Management Representation Letter is a letter from the management to

confirm to the auditor that all information (in all material respect) has
been properly disclosed in the financial statement and to be dated on
the same day the financial statements are approved.
 Important purpose of management letter:

1. Acknowledgement by the management of its responsibility for
the financial statements
2. Representation by management as audit evidence
3. To conform the oral representation (documented the oral
representation)
 Example.
12/08/2021 79
Management Letter
 Advise client on the weaknesses of internal control found

during the audit before signing the audit report.
 Example.
12/08/2021 80
9. AUDIT REPORT
12/08/2021 81
AUDIT REPORT
 Audit report is the final stage in the entire audit
process. It is a written communication of audit findings
to the shareholders.
 It may also be read by the others such as bankers,

creditors and other parties who use the information in
the financial statements
 To avoid confusion to the readers, it is important for the

auditing profession to adopt conventional and uniform
wording in auditor’s reports
12/08/2021 82
AUDIT REPORT
Basic elements of a standard unqualified audit report:
 Report title
 Addressee
 Introductory or opening paragraph
 Scope paragraph
 Opinion or reporting paragraph
 Name and signature of the auditor
 Date of the report
 Name and address of the audit firm
12/08/2021 83
Report of the auditors to the members of Gemilang Sdn. Bhd. Report Title
(Incorporated in Malaysia) & Addressee
We have audited the financial statements of Gemilang Sdn Bhd. set out on pages 8 to 20. The preparation of the Opening
financial statements is the responsibility of the Company’s Directors. paragraph
It is our responsibility to form an independent opinion, based on our audit, on the financial statements and to
report our opinion to you, as a body, in accordance with Section 174 of the Companies Act 1965 and for no other
purpose. We do not assume responsibility to any other person for the content of this report.
We conducted our audit in accordance with approved Standards on Auditing in Malaysia. These standards require Scope
that we plan and perform the audit to obtain all the information and explanations which we consider necessary to Paragraph
provide us with evidence to give reasonable assurance that the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence relevant to the amounts and disclosures in
the financial statements. An audit also includes an assessment of the accounting principles used and significant
estimates made by the Directors as well as evaluating the overall adequacy of the presentation of information in
the financial statements. We believe our audit provides a reasonable basis for our opinion.
In our opinion: Opinion
(a) the financial statements are properly drawn up in accordance with the provisions of the Companies Act, 1965 Paragraph
and applicable approved accounting standards in Malaysia so as to give a true and fair view of:
i) the state of affairs of the Company at 31 December 2006 and of its results of operations and cash flows for the
year ended on that date; and
ii) the matters required by Section 169 of the Companies Act, 1965 to be dealt with in the financial statements of
the Company.
(b) the accounting and other records and the registers required by the Companies Act, 1965 to be kept by the
Company have been properly kept in accordance with the provisions of the said Act.
AHMAD & PARTNERS AHMAD ARIFF MASNAN Name &

AF 1502 Partner Signature
Chartered Accountants 1007/07/07/(J)
Kuala Lumpur Address

12/08/2021 84
Date: 15 May 2007 Date
AUDIT REPORT
 Types of audit report:-
Unmodified or clean or Unqualified Audit Report
Modified Audit Report….

○ Emphasis of Matter
○ Qualified opinion
○ Disclaimer
○ Adverse
12/08/2021 85
12/08/2021 86
AUDIT REPORT: TYPE 1
 An unqualified opinion should be expressed when the auditor
concludes that the financial statements give a true and fair view (or are
presented fairly, in all material respects) in accordance with the
applicable financial reporting framework.
 An unqualified opinion also indicates implicitly that any changes in

accounting principles or in the method of their application, and the
effects thereof, have been properly determined and disclosed in the
financial statements. Issue when the following conditions are met:-
 the auditor has obtained all the information and explanation..

 FS prepared according to applicable accounting standards,
relevant regulations and statutory requirements.
 The auditor concludes that financial statements are free from
material misstatements.
 There are no circumstances requiring additional explanatory
paragraph.
12/08/2021 87
AUDIT REPORT: TYPE 2
Second type: Unqualified with Emphasis of Matters
The auditor should modify the auditor’s report by adding a
paragraph to highlight a material matter regarding a going
concern problem and a significant uncertainty (if any). Example:
Litigation issues
Overall audit took place with satisfactory result (after satisfied

with mitigating factors provided by audit clients) and financial
statements present a true and fair view, BUT the auditor believe
that it is important or required to provide additional information
e.g. emphasis of a matter, substantial doubt about going concern
or other uncertainty…
12/08/2021 88
AUDIT REPORT: TYPE 3, 4, 5
MATERIAL BUT NOT MATERIAL AND
CIRCUMSTANCES
PERVASIVE PERVASIVE
Limitation of scope Qualified opinion Disclaimer opinion
Disagreement with
Qualified opinion Adverse opinion
management
 Material – the omission, non-disclosure, misstatement of an item would

influence the decision of users of financial statement
 Pervasive – is one matter which so significant as to undermine the
financial statement as a whole…
12/08/2021 89
AUDIT REPORT: EXAMPLE
 For the following independent situation, assume that you are the
audit partner on the engagement and each of the situation you are
required to do the following:-
a. Identify the condition

b. State the level of materiality whether immaterial, material and
pervasive. If you cannot decide the materiality, state the
additional information needed to make a decision.
c. State the type of audit report and comments.
12/08/2021 90
The independent situation:-
1. During your audit of Dunga Indah Sdn Bhd, you conclude that there is a
possibility that inventory is highly materially overstated. The client refuse to
allow you to expand the scope of your audit sufficiently to verify whether the
balance is actually misstated.
(b) (c)
(a)
MATERIALITY TYPE OF COMMENTS
CONDITION
LEVEL REPORT
Because the client refuses

to allow the auditor to
expand the scope of his
Scope Material and
Disclaimer audit, a disclaimer of
Limitation pervasive opinion is appropriate rather
than a qualified as to scope
and opinion.
12/08/2021 91
2. You are auditing Kota Permai Sdn Bhd for the first time. Kota Permai has been in
business for several years but has never had an audit before. After the audit is
completed, you conclude that the current year balance sheet is stated correctly in
accordance with approved accounting standards. The client did not authorise you to
do test work for any of the previous years.
(b)
(a) (c)
MATERIALITY
CONDITION TYPE OF REPORT
LEVEL
Scope Limitation Material and pervasive Disclaimer
Comments: The auditor cannot issue an unqualified opinion on the income statement
or the statement of cash flows because a disclaimer of opinion is necessary for the
beginning balance sheet. The auditor may issue an unqualified opinion on the ending
balance sheet and a disclaimer of opinion on the income statement, statement of cash
flows, and the beginning balance sheet.
12/08/2021 92
3. You were engaged to audit the Rewang-Rewang Cari Makan Sdn Bhd’s financial
statements for the year ended 31 December 2006. Because you are just
appointed, you not able to physically observe inventory, which is material. On the
completion of your audit, you are satisfied that RRCM’s financial statement are
present fairly including inventory about which you were able to satisfy yourself by
the use of alternative test procedures…
(b)
(a) (c)
MATERIALITY
CONDITION TYPE OF REPORT
LEVEL
Scope Limitation Material Unqualified
Comments: The auditor is able to satisfy him or herself that with the use of alternative
procedures, a qualified opinion is not necessary.
12/08/2021 93
10. ANNUAL REPORT
EXAMPLE BHD
12/08/2021 94
TUTORIAL
QUESTIONS
12/08/2021 95
TUTORIAL QUESTIONS
1. Explain the objective of an audit of financial statements.
2. Can ratio analysis technique be applied by the auditor to obtain the

sufficient appropriate evidence?
3. Discuss the procedures involve in the appointment of new auditor

to replace existing auditor.
4. What is an audit report? Discuss any the basic elements of a

standard unqualified audit report.
5. Do you agree that an external auditor’s responsibility is extended

to identify fraud and error?
6. How an accountant of a company can assist the auditors in audit

work?
12/08/2021 96
SOLUTIONS TO TUTORIAL
QUESTIONS
Solution 1
The audit objective is to enable to the auditors to form opinion
 FS True and fair view
 Compliance with statutory requirement
Solution 2
 As part of the substantive testing.
 AP at 3 audit stages.
 AP at Planning Stages: identify risk area
 AP during audit: Replacements to other audit procedures (e.g. asking
for debtor’s confirmation or requiring more evidence).
 AP at the end of audit stage: Used to confirm the auditors’
understanding of the entity.
12/08/2021 97
QUESTIONS
Solution 3
Procedure involved to replace auditor:
 Letter from shareholder to company
 Letter from company to present auditor and prospective auditor
 Letter from present auditor to company
 Letter from prospective auditor to present auditor
 Letter from prospective auditor to company
 General meeting
 Appointment letter from company to prospective auditor
 Engagement letter
Solution 4
 Audit report is the final stage
 Written communication of audit findings
 Also be read by the others
 To avoid confusion to the readers, used uniform wording
8 Basic element of standard unqualified audit report
12/08/2021 98
QUESTIONS
Solution 5
AI 240: The auditor is not and cannot be held responsible for the
prevention of fraud and error. Only as a deterrent. the management
of the company assumes full responsibility for the prevention and
detection of fraud and error. In order to act as a deterrent,
 Maintain professional scepticism
 Carry out risk assessment procedures.
 Carry out detection procedures where applicable.
Solution 6
 Prepare management financial statements
 Detailed schedules or other supporting documents.
 Advise the external auditors on areas that he suspects that potential
fraud or error
 Discuss and conclude every audit findings
12/08/2021 99
LET’S RECAP
1. Overview
2. Statutory responsibility of auditors
3. MIA By-Laws (on Professional ethics, conduct and
practice)
4. Auditing Standards
5. Auditing framework in practice
6. Audit evidence & Audit procedures
7. Audit Documentation
8. Completing the audit
9. Audit report
10. Annual Report for Private entity
12/08/2021 100
12/08/2021 101

5 - Auditing

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

5 - Auditing

Uploaded by

Copyright:

Available Formats

FAR 360

 Auditor collecting evidence using procedures (audit procedures)

 However, auditor to act as a deterrent and to perform the following:

◦ To form and express opinion on compliance with

◦ To provide assistance to the organization in improving

◦ To employ audit procedures that could help in

 (3) The directors of every company shall cause to be

 Section 8 & 9 – Qualification of an approved

 Section 172 – Appointment, removal,

 Section 174 – Duties and right of auditors

 Section 9 (1): A person shall not be appointed as auditor

○ Sec 9 (2): if an officer has resigned from a company,

Sec 172(1): Power of directors to appoint auditor

Sec 172(2): Co shall appoint auditor at each AGM.

Sec 172(3): Power to directors to appoint to fill

Sec 172 (10): If a company does not appoint an

Sec 172(5): On receipt of special notice by co,

Sec 172(6): The auditor may request that the

Sec 172 (8): Co shall inform in writing of removal of

Sec 172 (14): auditor may resign:

Sec 172 (15): If an auditor desires to resign shall give

a) If auditor appointed in general meeting – the fees shall

b) If auditor appointed by directors or by CCM – the

Section 174 (1): To report to the members of the company

Section 174 (2): To express opinion in his report,

Section 174 (3): Also an auditor need to form an

○ Whether he obtained all the information required

○ Whether proper accounting and other records include registers

have been properly keep

company or subsidiary in consolidation amount were

To access at all time books and records

 This code of ethics provides a set of principles and rules

 In Malaysia, FOR ACCOUNTANTS, MIA issued the By-Laws

 These by-laws are issued by the Council of MIA on

○ Which is substantially based on the Code of Ethics for

Part II relates to the By-Laws on Professional Conduct

○ Which contain prescriptive obligations applicable to members or

 The MIA By-Laws divided into 2 MAIN Parts:-

 PART I: BY-LAWS ON PROFESSIONAL ETHICS

 PART II: BY-LAWS ON PROFESSIONAL CONDUCT AND

SEE MIA BY-LAWS

 Auditor in performing professional services may face many threats to

 Therefore, auditor should be able to identify threats, apply safeguards

 No member shall make false and misleading report.

 A member shall be and be seen to be free of any interest which

 Regardless of service and capacity, all members shall protect the

 Members shall not undertake professional work which he is not

 Comply with Continuing Professional Education (CPE) requirement,

 Due care means should conduct with courtesy and responsible

 It also includes consideration of completeness of working paper,

To treat client information acquired as confidential –

Confidential information of the client shall be not

Auditor should refrain from acting in a manner that would

Auditors also required to take consideration of how they

The auditor should investigate the background and business

 Whether the acceptance of the nomination would create any

 Whether there are any client issues that would threaten

To accept the appointment, the auditor need to eliminate or reduce

The auditor should only accept audit engagements that he is

○ Acquiring understanding of the nature and complexity of the client’s

○ If permission not granted: existing auditor should report the fact to

 Appointment process starts with nomination of prospective auditors