AUD339

INTRODUCTION
TO AUDITING

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MR MUHAMAD ASHAARI SUKAR
A211
07-9352082
019-6619688

muham964@[Link]

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TEST DATE & COVERAGE
Test 1 (15%) Test 2 (15%)
Date: 12/4/2019 (FRI) Date: 13/6/2019 (THU)
Time : 2.45pm – 4.15pm Time: 2.00pm – 3.30pm
Venue: DST Venue: DST
Coverage:
Coverage: 1. Preliminary planning, Audit risk &
Materiality, Sampling
1. Introduction (2q x 15marks)
2. Audit of SOFP & SOPL
2. CA 2016 (1q x 20marks) ◦ PPE, Cash, LTL
◦ Other items in SOPL

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Quiz, presentation and final
exam coverage
Quiz (5%) FE (20 marks each)
1. Audit Evidence (week 14) Q1. MIA by Law
Q2. pre plan, planning, AR, AP, AD
Q3. AE, Audit Procedures to any
PRESENTATION (5%) cycles
Q4. Audit report, ICS
1. Group of 5
Q5. Case study
2. sales/purchase/payroll cycle
(sales/purchase/payroll cycle)
3. 20 mins + 10 mins Q&A
4. week 13

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INTRODUCTION
•NATURE OF AUDIT → DEFINITION
• OBJECTIVES OF FS AUDIT
•DISTINCTION BETWEEN AUDITING &
ACCOUNTING
•MGT AND AUDITOR’S RESPONSIBILITIES
•DEVELOPMENT OF AUDITING
•DEMAND FOR AUDITING
•TYPES OF AUDIT & AUDITORS
•CHARTERED ACCOUNTING FIRMS
•AUDITING STANDARDS

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COVERAGE
AUDIT REPORT ON
DEFINITION
TRUE & FAIR VIEW
OF FINANCIAL
STATEMENTS
OBJECTIVES OF
AUDIT OF FS

AUDIT EXAMINATION
AN OVERVIEW
(accumulate and evaluate
evidence) – AUDIT PROCESS OF AUDITING

APPROVED TYPES OF AUDIT / AUDITORS

AUDITING STANDARDS
1. Financial Statement audit
2. Operational audit 3. Compliance audit
4. Forensic Audit
1. International Standards
on Auditing
1. External auditor 2. Internal auditor
2. Malaysia Standards on
Auditing 3. Government auditor 4. Forensic auditor
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NATURE OF AUDITING -pg 8
Definition (1): (developed by American Accounting Association Committee on
Basic Auditing Concepts)

A systematic process (1) of objectively obtaining

and evaluating evidence (2) regarding assertions
about economic actions & events (3) to ascertain
the degree of correspondence (4) between those
assertions and established criteria (5) and
communicating the results (6) to interested users.

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Keywords
✓Systematic process: audits are structured activities that follow a logical
sequence
✓Objectively: a quality methods by which information is obtained and also a
quality of the person doing audit.(unbias)
✓Obtaining and evaluating evidence: a matter of examining the underlying
support for assertions or representations
✓Assertions about economic actions & events: An assertion is
essentially a proposition that can be proved or disproved.(representations
made by a responsible party in an accountability arrangement that pertains to
economic actions and events)
✓Degree of correspondence…established criteria: an audit establishes
the conformity of assertions with specified criteria.
✓Communicating results: to be useful, the results of the audit need to be
communicated to interested parties by either oral or written means.

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 NATURE OF AUDITING

Definition (2)
◦ “Audit is an independent examination (1) of, and
expression of opinion (2) on, the financial
statements (3) of an enterprise (4) by an appointed
auditor (5) (competent independent person) in
pursuance of that appointment (6) and in
compliance with any relevant statutory
requirements” (7)
◦ Keywords:
◦ Independent examination (using audit procedures and
carrying out tests to accumulate self-generated evidence,
third – party evidence, etc which are independent from
management before arriving at the conclusions on which
the audit opinion is based)
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NATURE OF AUDITING (CONT’D)
◦ Keywords :

◦ Expression of opinion (to form an opinion on the

truth and fairness of financial statements)
◦ Financial statement (all statements and financial
information identified within the scope of an audit
normally balance sheet, profit & loss accounts,
notes to the accounts, cash flow statements, group
accounts, etc)
◦ Enterprise (any form of entity whether profit
orientated or not)

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NATURE OF AUDITING (CONT’D)

◦ Appointed auditor (Section 263 of CA2016– an approved

company auditor or the Audit Firm – a public accounting firm
ranges from sole proprietorships to partnerships providing
broad categories of services such as attestation services
including audits, tax services, accounting service and
management advisory services.
◦ In pursuance of auditor’s appointment (as per statutory
requirements and other regulations including letter of
engagement)
◦ In compliance with any relevant statutory requirements
(Companies Act (M’sia) 2016, Banking Act, Industrial Act, etc.)

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AUDIT OF FINANCIAL STATEMENTS OF A COMPANY - process

COMPETENT INFORMATION (VERIFIABLE)

INDEPENDENT
Annual Financial Statements
PERSON
(AUDITOR) ACCUMULATES & REPORT ON
EVALUATES EVIDENCE RESULTS

Determines
Public Examines correspondence Audit report
Accounting accounting records on financial
Firm & supporting documents statements
(CPA)

Conduct audit in accordance to:

•AUDITING STANDARDS Accounting Standards
✓ISA & Companies Act 1965
✓MASA
•GAAP
ESTABLISHED CRITERIA
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WHY AUDIT?
◦ Required by the statutory
◦ To increase the confidence level of the shareholders
◦ To reduce information risk i.e. risk that information
provided is misleading / inaccurate.

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Objectives of audit of FS-core
(a) To obtain reasonable assurance about whether the
financial report as a whole is free from material
misstatement, whether due to fraud or error, thereby
enabling the auditor to express an opinion on whether
the financial report is prepared, in all material respects,
in accordance with an applicable financial reporting
framework; and
(b) To report on the financial statements, and communicate
as required by the Auditing Standards (ISAs), and in
accordance with the auditor’s findings.
(ISA 200, paragraph 11)

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OBJECTIVE OF A FS AUDIT…cont
 The phrases used to express the auditor’s opinion are “give true and
fair view” or “ presented fairly, in all material respects,” which are
equivalent terms.
 Both terms indicate FS are actually free from material misstatement.
 Auditor needs to obtain a degree of reasonable assurance that the
accounting & other records are not affected by material misstatements
resulting from fraud & error.
 Materiality – information is material if its omission or misstatement
could influence the economic decision of users taken on the basis of
the financial statements
 Misstatement – a mistake in financial information which would arise
from errors and fraud.
A misstatement in the financial statements can be considered
material if knowledge of the misstatement would affects a
decision of a reasonable user of the statements

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Meaning of...TRUE AND FAIR VIEW

•True and Fair View is a legal concept but there is no

legal definition made by the court. The decisions of
courts are available only based on the concept in action
•to be true, account must be in accordance with facts
and reality.
•Fair is interpreted that the accounts should be unbiased,
just and equitable.
The accounts will be true and fair when the information
contained is sufficient in quantity and quality to satisfy
the reasonable expectation of the readers to whom they
are addressed
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SCOPE OF FS AUDIT
The scope of FS audit is governed by
◦ Legislation
◦ CA 2016 gives auditors the right to access the acc & other
records deemed necessary, thus unlawful if client impose
restriction on any records or withholds info. Disclosure
must comply the Ninth Schedule
◦ Regulations
◦ Banks & FI incorporated under CA 2016. But activities
monitored by the BNM. Also regulated by BAFIA.
◦ Other regulations pertaining to type of industries
◦ Auditing Std
◦ ISA & MASA
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AUDITING VS ACCOUNTING
ACCOUNTING AUDITING
Record transactions & Determine whether
provide financial recorded info fairly
information reflects actual
transactions
Accountant responsible to Auditor responsible to
develop a system to evaluate the system to
ensure that transactions determine its
are properly recorded effectiveness
AUDITING VS ACCOUNTING

ACCOUNTING AUDITING
Accountant must Auditor must understand
understand acc principles acc principles so that
so that transactions were he/she would be able to
recorded according to detect non-compliance by
accepted standards the Accountant
Accountant should possess Auditor should possess
expertise to record expertise to accumulate
transactions & to prepare & interpret audit evidence
financial stmts
RESPONSIBILITIES: Mgt vs
auditors
▪MANAGEMENT RESPONSIBILITIES

▪Preparation of yearly financial statements

▪To develop and maintain adequate accounting
records and internal control systems
▪Safeguarding of company’s assets
▪Prevention and detection of errors, irregularities &
fraud

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 AUDITOR’S RESPONSIBILITIES
◦ To state an opinion on the financial statements in auditor’s
report based on his independent examination.
AI 200 also noted that:
• to provide reasonable assurance that the financial statements
taken as whole are free from material misstatements
• auditors are responsible to detect material misstatements in the FS
• To report on the effectiveness of internal control over financial
reporting
• To identify material weaknesses in internal control and provide
recommendations to overcome weaknesses (letter of weaknesses
@ management letter)
• To perform audit with due care and professional competence.
• To conduct audit with professional skepticism i.e with questioning
in mind and critical evaluation of evidence
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meaning of…Reasonable assurance

Reasonable assurance: measure of the level of uncertainty

that the auditor has obtained at the completion of the audit
Reasonable but not absolute, indicates that the auditor is not
insurer or guarantor of the correctness of the FS
Reason for stating reasonable assurance:
◦ Audit evidence resulted from testing a sample of population
◦ Accounting presentations contain complex estimates
◦ Fraudulent activities are often difficult to detect

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AUDITOR’S RESPONSIBILITIES FOR DETECTING &
REPORTING OF FRAUD & ERROR

AI 240 Fraud & Error

What is a fraud?
Fraud : Intentional misrepresentations of [Link] by 1
or > individuals among mgmt/ employee or 3rd parties,
involving
◦ Manipulation, falsification or alteration of records or documents
◦ Misappropriation of assets
◦ Suppression/omission of the effects of transactions from
records/documents
◦ Recording of transactions without substance
◦ Misapplication of accounting policies

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AUDITOR’S RESPONSIBILITIES FOR DETECTING
& REPORTING OF FRAUD & ERROR

Error : unintentional mistakes in financial information

such as,
◦ Mathematical or clerical mistakes in the underlying records
and accounting data
◦ Oversight or misinterpretation of facts, or
◦ Misapplication of accounting policies

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AUDITOR’S RESPONSIBILITIES FOR DETECTING
& REPORTING OF FRAUD & ERROR
Who’s responsible to detect fraud & error? Mgmt? or Auditor?

Mgmt : responsible to prevent & detect F & E through the

implementation & continued operation of an adequate system of IC.
H/over such system will only reduce, not eliminating the possibility
of F & E

Auditor : Plan audit so that they would have reasonable expectation

of detecting material misstatement in the [Link] resulting from
F&E such as designing a sufficient audit programme

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DEVELOPMENT OF AUDITING
Formerly, involves checking of a/c for stocks &/ rev
Now → professional assurance services
Auditing derived from Latin “audire”
Luca Pacioli
Industrial Revolution in mid 1800s
◦ Joint Stock Companies
Regulation & Acts – compulsory for co. to have their a/c audited

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AGENCY THEORY: AGENCY RELATIONSHIP

Owners (Principal) Separation Manager (Agent)

Agency relationship is
A contract under which one or more persons (the principal/s
engage another person (the agent) to perform services on
behalf which involves delegating some decision-making
authority to the agent.”
 AR exists between owners (s/holders) & the mgmt resulting conflict
of interest due to information asymmetry
 Audit is needed to safeguard the interest of the s/holders.
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TYPES OF AUDIT

PURPOSE PERFORMED
BY
FINANCIAL To determine - Approved co.
whether FS reflects auditor
STATEMENT true & fair view, - Govt auditor
according to
AUDIT accounting stds &
- Internal auditor

Co. act
OPERATION To evaluate - Approved co.
effectiveness & auditor
AL efficiency of - Govt auditor
AUDIT operating/ - Internal auditor
procedures
TYPES OF AUDIT

PURPOSE PERFORMED
BY
COMPLIANCE To determine - Approved co.
whether specific auditor
AUDIT procedures/rules & - Govt auditor
regulations were - Internal auditor
being complied with

FORENSIC To detect/ deter - Approved co.

fraudulent activities auditor
AUDIT
- Govt auditor
- Internal auditor
-Forensic auditor
 TYPES OF AUDITORS
Type Nature
External -Independent from the co.
- Appointed by shareholders during AGM
- Audit fee agreed by auditor & mgmt
- S.263 Co. Act 2016 : approved by MOF

Internal -Employee of the co. thru interview process

- Salary fixed by the co’s mgt.
-Review the accounting & internal control systems
-Examination of financial & operating information
-Review of the economy, efficiency & effectiveness of operations
including non-fin controls of an entity
-Review of compliance with laws, regulations and other external
requirements and with management policies and directives and other
internal requirements

Govt -Responsible for federal & state acc, public authorities & stat bodies
- Remuneration fixed by govt

Forensic -Employed by co./govt agencies/public [Link]/ investigative firm

- Well trained in detecting/investigating/deterring fraud
Internal Auditing

The Institute of Internal Auditors USA (IIA) provides the

definition of internal auditing as follows:

Internal auditing is an independent, objective assurance and

consulting activity designed to add value and improve an
organisation’s operations. It helps an organisation
accomplish its objectives by bringing a systematic, disciplined
approach to evaluate and improve the effectiveness of risk
management, control and governance processes

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 Internal Auditing (cont.)

Internal audit acts as a control mechanism of board of directors as well

as senior management to:
•Review the effectiveness of corporate governance mechanism
•Ensure proper risk management process
•ensure an adequate internal control structure;
•review the reliability of records;
•prevent and detect fraud or material misstatement;

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 DIFFERENCES BETWEEN IA & EA
Characteristics Internal Auditing External Auditing
Performance/ By employee within the By practising professional
Status organization/company outside the organization/Public
Accounting Firm
Primary To serve the needs of the To serve the needs of third
concern organization parties, eg:shareholders
Objective of To develop improvements & To determine reliability of
review induce compliance with Financial Reports
established policies &
procedures
Independence Independence organisationally Independence in fact and
but ready to respond to needs appearance
& desires of mgt
Detection of Directly concerned with Incidentally concerned with
fraud prevention & detection of prevention & detection of fraud
fraud
Period/Freque Continuous review/throughout Periodic evaluation/financial
ncy the year or as requested by year ended
mgt
 DIFFERENCES BETWEEN IA & EA
Characteristics Internal Auditing External Auditing

Scope of audit Determined by the mgmt Laid by the Statutory

Appointment Appointed by the co’s mgt Appointed by the co’s

through formal interview shareholders through voting at
process AGM (or other types of
appointment as per sec.267 &
sec 271)
Salary/remuner Salary; fixed internally Agreed by the auditors &
ation management ; as per sec.274

Reporting To the board of directors or to To the co’s shareholders

Responsibility the audit committee or to the
mgmt

Rights and Defined by co’s management As laid down by Sect. 266 Co’s
duties act 2016
 Developments in Malaysia

The Malaysian Institute of The Malaysian Institute of

Accountants Certified Public Accountants
 Regulatory Body , established (MICPA)
by Accountants Act 1967  Formed in 1958
 Business managed by council  A professional body
members
 Managed by Council
 Issue auditing standards and
Code of ethics elected by members
 Does not conduct  Conducts professional exams
professional exams

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Influences on the Development of Auditing

Other regulatory requirements (established criteria);

 Companies Act 2016

 Securities Commission Act 1963
 Capital Market and Services Act 2007
 Bursa Malaysia requirements
 MIA by laws

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BODIES RELATING TO AUDITING…in
Malaysia
MIA
◦ National acc body, est. under Accountants Act 1967
◦ Member of IFAC, adopts ISAs as the basis for developing stds &
issuing pronouncements on auditing matters
◦ Issued BY-laws (On Professional Conduct, Ethics & Practice)
MASB
◦ Std setting authority for establishing acc stds for financial acc and
reporting in Malaysia
SC
◦ Statutory body set up in 1993 under SC Act 1993
◦ Regulates securities & futures industries in Malaysia

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 The Accountancy Profession
Admission Requirements to be a member of MIA
1. Passed any of the final examinations specified in *Part I of the First Schedule of the
Accountants Act, 1967 and undergo the Chartered Accountant’s Relevant Experience
(CARE) for a minimum period of 36 months up to a rolling period of 60 months. This
programme requires the Graduates who aspire to become MIA members to go through a
structured assessment programme which is based on the mentor – mentee approach that
monitors the practical experience of the mentees; and/or
2. Member of any of the recognised bodies specified in **Part II of the First Schedule of the
Accountants Act, 1967; and/or
3. Passed the MIA Qualifying Examination and undergo the CARE programme as explained
in part 1; and/or
4. Company auditor per S263 of the Companies Act 2016 without limitations or conditions.

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 The Accountancy Profession ( cont.)
Continuing Professional Development
The MIA in its Statement 1.500 Continuing Professional Development,
paragraph 18, for example, has stipulated that all members (except
retired members) are required to:
complete at least 120 hours of relevant CPD activity in
each rolling three-year period, of which 60 hours
should be verifiable;

complete at least 20 hours (of the 120 hours required in

(a) above) each year; and

track and measure learning activities to meet the above

requirements.

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 Organisation of Accounting
Practice
Big Accounting Firms
PWC
Ernst and Young
KPMG
Deloitte Small Medium Practices
(SMP)
BDO
KHR
Grant Thornton
Stephen Moore
Cheng & Co

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INTRODUCTION TO AUDITING STANDARDS
The council of the Malaysian Institute of Accountants
(MIA) has determined that approved Auditing
Standards for members comprise:
◦ International Standards on Auditing (ISA) issued
by the International Auditing Practices Committee
(IAPC) of the International Federation of
Accountants (IFAC) and approved by the MIA
◦ Malaysia Approved Standards on Auditing
(MASA) issued by the MIA

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PROFESSIONAL SERVICES
Auditing & Assurance Services
➢Financial Statement Audit
Other audits & Assurance services
➢Compliance audit
➢Operational audit
➢Forensic audit
Related services (Non-assurance services)
➢Tax Services
➢Management Advisory Services
➢Accounting & Compilation Services

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