ACT3141: AUDIT 1

1. ACT3141: AUDIT 1 Assoc. Professor Dr. Zulkarnain Bin Muhamad Sori CA(M) Head Department of Accounting and Finance Faculty of Economics and Management Universiti Putra Malaysia Tel: +006 03 89467755/7599/7742 Fax: +006 03 89486188 E-mail: zms@putra.upm.edu.my, zulkarnainms@gmail.com

2. Learning Objectives • To differentiate auditing and accounting • To understand the need for auditing/assurance services • To understand the demand for audit services • To understand the audit profession and regulatory environment in Malaysia • To differentiate audit and non-audit services

3. Learning Objectives • To understand Malaysia accounting and auditing standards • To understand inherent limitations of an audit • To understand management assertions and audit objectives • To understand fundamental concepts in audit • To understand audit process

4. Case 1.1 • Case material will be distributed during the class. • Questions: • What is the best form of business organisation in this situation? • What is your opinion on the credibility and reliability of financial information? • Do you think auditor is needed here? WHY? WHY NOT?

5. Introduction to Auditing & Assurance Engagements • What is the different between Accounting & Auditing? • Confuse? • Audit firm perform audit as well as accounting services! • Chartered Accountant exists in audit firm & business organisation etc! • What is the dividing line?

6. Distinction Between Accounting & Auditing • Confuse => auditor examine accounting data & use title ‘public accountants’ • Accounting = a process that creates financial stmts & other financial info that is useful for mgt. • Auditing = enhances the credibility of the financial stmts or other information.

7. Distinction Between Accounting & Auditing • Audit = audit evidence – come from accounting records and supporting documents – from accounting system • Auditor => must have accounting knowledge & expertise to accumulate & evaluate audit evidence. • Accountant => don’t need audit knowledge

8. The Need for Auditing • Economic relationship = within an entity, and between entity and other parties that have a vested interest in the entity. • Agency Relationship

9. The Need for Auditing Principal Contract Agent Shareholders Provide a financial report Managers Verifies the correspondence of the financial information in the report to the contract • Stewardship • Conflict of interest • Information asymmetry • Maximise own self int. • Creditors concern Issues audit report Auditor

10. CA 1965 • Section 8 • Finance Minister – satisfy that the candidate have good character & competent • Approval company auditor – 2 years

11. CA 1965 • Section 9 • The following shall not be a company auditor: • Not an approved company auditor • Indebted to the company = >RM2,500 • An officer of the company • Partner, employer or employee of an officer of the company • Etc.

12. Auditing • “give a true and fair view” or • Present fairly, in all material respects”

13. Auditing • Objective of an audit of financial statements = to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework. • Opinion – indicate the credibility but not the future viability, efficiency or effectiveness. • Opinion – “true and fair view” (AI200, p.1)

14. Objective of an Audit of Financial Statements • To arrive at opinion • various audit procedures – accumulate & evaluate various audit evidence Vs mgt assertions • Assertions Vs Financial reporting framework • Auditing stds => ensure audit quality

15. General Principles of An Audit(AI200, p.1) • Ethical principles: • Independence • Integrity • Objectivity • Professional competence and due care • Confidentiality • Professional behaviour • Technical standards

16. Reasonable Assurance(AI200, p.2) • An audit in accordance with ISAs – to provide reasonable assurance that the f/s taken as a whole are free from material misstatements.

17. Reasonable Assurance(AI200, p.2) • Limitations to detect material misstatements: • The use of testing • The inherent limitations of any accounting and internal control system (e.g. the possibility of collusion) • The fact that most audit evidence is persuasive rather than conclusive

18. Conclusion Based on Audit Sampling • Why not test all transactions? • Cost • Feasibility of such an audit • Auditor uses: • His knowledge about the transaction – industry knowledge • A sampling approach to examine the transactions

19. Conclusion Based on Audit Sampling • Inverse relationship between sample size and either materiality or acceptable audit risk. • Low materiality => Large sample size

20. Opinion and Reasonable Assurance • An opinion on the f/s ≠ guarantee or certification of the correctness of the management’s assertions • Auditor did not use the term ‘auditor’s certificate’ • Auditor – not guarantee to detect material misstatement.

21. Opinion and Reasonable Assurance • Use of testing • Inherent limitations of internal control • Audit evidence is persuasive and not conclusive • Use of judgement

22. The Financial Reporting Framework • Financial reporting framework => recognised accounting standards issued by authoritative standard setting bodies • MASB => FRS • The provisions of the ACT

23. Approved Accounting Standards • AAS under FRA1997 => Stds issued or approved by the MASB • Sn 27 FRA1997 => f/s prepared under any law relating to the SC, CB, RoC = must be prepared in accordance with approved accounting stds.

24. Approved Accounting Standards • Opinion para. Of audit report: • “the financial statements … are properly drawn up … in accordance with applicable approved accounting standards.”

25. Auditing Standards as Quality Assurance • IFAC – MIA adopted the auditing stds issued under the authority of IFAC • MIA – Member of IFAC – Obliged to support the work of IFAC

26. Auditing • Approved standards on auditing – conduct of f/s audit: • International Standards on Auditing (ISA) • Malaysian Standards on Auditing (MSA) (Preface to Approved Standards on Auditing, p.1)

27. Auditing • AI 100 – Preface to International Standards on Auditing and Related Services

28. Auditing • MIA – Member of IFAC • IFAC Mission: • “the development and enhancement of an accountancy profession able to provide services of consistently high quality in the public interest” • …standards and statements – will improve the degree of uniformity of auditing practices and related services throughout the world. (AI100, p. 1)

29. Auditing • AI 120 – Framework of International Standards on Auditing • ISA – apply in audit of financial statements under all reporting framework • In exceptional circumstances – an auditor may judge it necessary to depart from an ISA – effective & objective audit. Have to justify the departure.

30. Auditing • Compares the evidence gathered to assertions about economic activities • To assess the correspondence between assertions and financial statement framework. • FRS issued by the MASB = required by the CA1965

31. Management Assertions Vs Audit Objectives • Three categories • Transactions • Occurrence • Completeness • Accuracy • Cutoff • Classification

32. Management Assertions Vs Audit Objectives • Three categories (Cont.) • Account balances • Existence • Rights and Obligations • Completeness • Valuation and Allocation

33. Management Assertions Vs Audit Objectives • Three categories (Cont.) • Presentation and disclosure • Occurrence and Rights and Obligations • Completeness • Classification and Understandability • Accuracy and Valuation

34. Management Assertions in Financial Statements, and Audit Objectives • ISA500 – Audit evidence classifies management assertions into the following categories: • Existence • Rights and obligations • Occurrence • Completeness • Valuation • Measurement • Presentation and disclosure

35. 3 Fundamental Concepts in Conducting an Audit • 3 Fundamental concepts: • Materiality • Accounting materiality • Audit materiality • Risk • Risk of material misstatement • Evidence • Relevance • Reliability

36. Case 1.2 • Case material will be distributed during the class. • Questions: • What is going on in this case? • What is the company business model? • What kind of information should the management provides to their auditor? • Discuss the relevant audit objectives on the above information.

37. Auditing • At audit completion = auditor communicate the results to interested users. • Intended users => shareholders, creditors, employees, suppliers, government agencies, stock exchanges etc.

38. Assurance Engagements • AE – independent professional svcs – intended to enhance the credibility of info. that is the responsibility of another party. • AE - provides the users of the info a certain level of assurance on the subject matter. • Express a conclusion – high or moderate level of assurance & not absolute assurance (not attainable).

39. Assurance Engagements • Assurance services improve the quality of info and its context for decision makers.

40. Auditing • Assurance – refers to the auditor’s satisfaction as to the reliability of an assertion being made by one party for use by another party. (AI 120, p.2)

41. Auditing • Level of Assurance • Audit Engagement : High but not absolute • Review engagement : Moderate • Agreed-upon procedures : no assurance • Compilation engagement : no assurance (AI120, pp.2-3)

42. Types of Audits • Financial Statement Audits • Compliance Audits • Operational Audits • Forensic Audits

43. Types of Auditors • External Auditors • Internal Auditors • Government Auditors • Forensic Auditors

44. Public Accounting Firms • Public accounting firms – proprietorship or partnership • Protection to users – unlimited liability • In the US - LLP • Big 4 firms – EY, KPMG, PwC, Deloitte KasimChan. • Big 4 - audit most of the large companies e.g. plc on the KLSE (Bursa Mal.)

45. Duties of Audit Team Members • Partner • Manager • Senior/Senior-in-charge • Assistants

46. Types of Services • Auditing • Accounting & all forms of accounting related consultancy • Accounting related investigations or due diligence • Forensic accounting • Tax Services • Bookkeeping • Costing and management accounting • Insolvency, liquidation and receiverships • Provision of management information system and internal controls • Provision of secretarial services

47. Organisations That Affect Financial Statement Audits • Malaysian Institute of Accountants (MIA) • Malaysian Accounting Standards Board (MASB) • Securities Commission (SC) • Companies Commission (CC) • Bursa Malaysia

48. Appointment of Auditors • Section 172 – • company to appoint auditor at every AGM • To hold office until next AGM • Appointed by shareholders of the co.

49. Provisions for Audit Under Companies Act 1965 • Financial statements – Responsibility of directors – Section 169 CA1965 • The provisions relating to the appointment, powers and responsibilities of auditors – Section 172-175 CA1965

50. Fraud, Error, and Breaches of Laws and Regulations • Financial stmts = responsibility of the directors • Not auditor responsibilities: • To detect all errors, fraud and irregularities • To detect non-compliance of all laws and regulations