Introduction to
Auditing
Henny Hazliza Mohd Tahir
Table of contents -1
01
Definition
& Objective
02
Distinction
between Auditing
& Accounting
03
Mgt & Auditor responsibilities
04
Agency Theory
Table of contents - 2
05
Types of audit and
auditor
07
Development of
auditing
06
Differences
between IA and EA
08
Accounting &
Auditing Standards
“Success is no accident. It is hard work,
perseverance, learning, studying,
sacrifice and most of all, love of what
you are doing or learning to do.”
— Pele
01
Definition
& Objective
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
Definition (1): (developed by American Accounting
Association Committee on Basic Auditing Concepts)
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)
AUDITOR IS THE ONE WHO PREPARES
THE FINANCIAL STATEMENT
True
False
Why we need audit?
Required by the
statutory
To increase the
confidence level of
the shareholders
To reduce
information risk
Objective of AUDIT
(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)
Core Concepts - 1
The phrases used to express the auditor’s
opinion are “give true and fair view” or “present
fairly, in all material respects,” which are
equivalent terms.
Materiality
if its omission or misstatement
could influence the economic
decision of users on basis of FS
Misstatement
a mistake in financial
information which would
arise from errors and
fraud
Core Concepts - 2
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
TRUE
account must be in
accordance with
facts and reality.
FAIR
accounts should be
unbiased, just and
equitable.
Core Concepts - 3
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
Reasons for stating
the Reasonable
assurance
1.
2.
3.
Audit evidence resulted from
testing a sample of
population
Accounting presentations
contain complex estimates
Fraudulent are often difficult
to detect
Scope of FS Audit
01
Legislation
right to access the acc &
other records deemed
necessary, thus unlawful
if client impose restriction
on any records or
withholds info
02
Regulations
Banks & fin.co incorporated
under CA 2016. But activities
monitored by the BNM.
Other regulations pertaining
to type of industries
03
Auditing Stds
ISA & MASA
Auditor give absolute assurance that the FS is True & Fair
Agree
Disagree
02
Distinction between
Auditing & Accounting
Auditing VS Accounting
accounting
auditing
Record transactions &
provide financial
information
Determine whether
recorded info fairly reflects
actual transactions
Accountant responsible to
develop a system to ensure
that transactions are
properly recorded
Auditor responsible to
evaluate the system to
determine its effectiveness
Auditing VS Accounting
accounting
auditing
Accountant must
understand acc principles
so that transactions were
recorded according to
accepted standards
Auditor must understand
acc principles so that
he/she would be able to
detect non-compliance by
the Accountant
Accountant should possess
expertise to record
transactions & to prepare
financial stmts
Auditor should possess
expertise to accumulate &
interpret audit evidence
WHO must
understand acc
principles so that
he/she would be able
to detect
non-compliance?
WHO is responsible to
record transactions &
provide financial
information?
WHO should
possess expertise
to accumulate &
interpret audit
evidence?
03
Mgt & Auditor
responsibilities
Mgt 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
Auditor’s Responsibility
●
●
●
●
●
●
To state an opinion on the financial statements in
auditor’s report based on his independent examination
to provide reasonable assurance that the financial
statements taken as whole are free from material
misstatements
To report on the effectiveness of internal control over
financial reporting
To perform audit with due care and professional
competence.
To conduct audit with professional skepticism i.e with
questioning mind and critical evaluation of evidence
to detect material misstatements in the FS
Draw lines to match the image to the answer:
provide
reasonable
assurance
Prepare
FS
report on the
effectiveness
of ICS
prevention &
detection of
misstatement
AUDITOR’S RESPONSIBILITIES
safeguard
co’s assets
MGT’S RESPONSIBILITIES
state
opinion on
the FS
Auditor responsibilities - fraud & error
Fraud
●
●
●
●
●
Intentional misrepresentations of
fin.information by 1 or > individuals
among mgmt/ employee or 3rd
parties
Manipulation, falsification or
alteration of records or documents
Misappropriation of assets
Recording of transactions without
substance
Misapplication of accounting
policies
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
Who’s responsible to
detect fraud & error?
Mgt
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 fin.info resulting from
F&E such as designing a
sufficient audit programme
WHY do you
think
management is
the one who
need to prevent
and detect
fraud?
04
Agency Theory
Agency theory explained
Agency Theory
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.
what cause information asymmetrical and how to solve the
issue?
Causes
Effects
05
Types of Audit & Auditor
Types of Audit
Purpose
Performed by
FS Audit
To determine whether FS reflects true
& fair view, according to accounting
stds & CA 2016
EA, Govt Auditor
Operational Audit
To evaluate effectiveness & efficiency
of operating/
procedure
IA, EA, Govt Auditor
Compliance Audit
To determine whether specific
procedures/rules & regulations were
being complied with
IA, EA, Govt Auditor
Forensic Audit
To detect/ deter fraudulent activities
Forensic Auditor
Types of Auditor
Type
Nature
External
Independent from the co.
Appointed by shareholders during AGM
Appointment, Duties and Powers regulated by CA 2016
Internal
Employee of the co. thru interview process
Salary fixed by the co’s mgt.
Govt
Responsible for federal & state acc, public authorities & stat bodies
Remuneration fixed by govt
Forensic
Employed by co./govt agencies/public acc.firms/ investigative firm
Well trained in detecting/investigating/deterring fraud
Stress Check
0
I’m in a
good space
and can
focus
1
2
3
4
5
Something
is bothering
me, but I
can still
focus
6
7
8
9
10
I can’t
manage my
emotions or
behaviors
right now
06
Differences
between IA & EA
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
Definition by IIA
Differences between IA & EA
Characteristics
Performance/
Status
Primary
concern
Objective of
review
Internal Auditing
External Auditing
By employee within the
organization/company
By practising professional outside
the organization/Public Accounting
Firm
To serve the needs of the
organization
To serve the needs of third parties,
eg:shareholders
To develop improvements &
induce compliance with
established policies &
procedures
To determine reliability of Financial
Reports
Independence
Independence organisationally
Independence in fact and
but ready to respond to needs & appearance
desires of mgt
Scope of Audit
Determined by the mgt
Laid by the Statutory
Differences between IA & EA
Characteristics
Appointment
Salary/remuneration
Reporting Responsibility
Rights and duties
Internal Auditing
External Auditing
Appointed by the co’s mgt
through formal interview process
Appointed by the co’s
shareholders through voting at
AGM (or other types of
appointment as per sec.267 & sec
271)
Salary; fixed internally
Agreed by the auditors &
management ; as per sec.274
To the board of directors or to the
audit committee or to the mgmt
To the co’s shareholders
Defined by co’s management
As laid down by Sect. 266 Co’s act
2016
internal auditor is more independent than external auditor
True
False
Draw lines to match the image to the answer:
To determine reliability of Financial Reports
To serve the needs of the organization
Responsibilities are aid by the Statutory
IA
Appointed by the co’s mgt through formal
interview process
Appointed by the co’s shareholders
through voting at AGM
Salary; fixed internally
EA
07
Development of
Auditing in
Malaysia
Development in Malaysia
The Malaysian Institute
of Accountants
●
●
●
●
Regulatory Body ,
established by
Accountants Act 1967
Business managed by
council members
Issue auditing
standards and Code of
ethics
Does not conduct
professional exams
The Malaysian Institute of Certified
Public Accountants (MICPA)
●
●
●
●
Formed in 1958
A professional body
Managed by
Council elected by
members
Conducts
professional exams
Other regulatory requirements
● Companies Act 2016
● Securities Commission Act 1963
● Capital Market and Services Act
2007
● Bursa Malaysia requirements
● MIA by laws
07
Auditing &
Accounting
Standards
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
Admission Requirements to be a
member of MIA
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
. Member of any of the
recognised bodies specified in
**Part II of the First Schedule
of the Accountants Act, 1967;
and/or
. Passed the MIA Qualifying
Examination and undergo
the CARE programme as
explained in part 1; and/or
Company auditor per
S263 of the Companies
Act 2016 without
limitations or conditions.
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
CPE
track and measure
learning activities to
meet the above
requirements.
Professional Services offered
Audit &
Assurance
Services
Other Assurance
services
CA
FA
OA
Non assurance services
Tax Services
Management Advisory
Services
Accounting &
Compilation Services
Reflect on today’s activities:
What did you like?
What didn’t you like?
What was easy?
What was hard?
QUIZ TIME!
QUESTION?
I will answer all the Qs during Tutorial
Circle how you are feeling:
Thanks!
Do you have any questions?
henny030@uitm.edu.my
+60 13 600 9474
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