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(1a)BBFD 3023 & 3024 (2022)WEEK 1 LECTURE

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BBFD 3023 / 3024
Auditing
1
Lecture Week
1
2
INTRODUCING THE LECTURER
• Associate Professor Puan Sri Dato’ Dr Mary Lee
• Diploma in Commerce ( FA) from TARC
• FCCA (UK)
• ACMA & CGMA (UK)
• CA (M) from MIA
• MBA (Australia)
• DBA (Australia)
• FIIA – Fellow of The Institute of Internal Auditors (Malaysia)
• CIPFA – Chartered Institute of Public Finance & Accountancy (UK)
• CPA (Australia)
• CPA (MICPA)
• FCTIM (Chartered Tax Institute of Malaysia)
RESOURCES REQUIRED
• 1) ACCA Approved Workbook AA (BPP latest edition till June 2023)
• 2) ACCA Practice & Revision Kit AA ( BPP latest edition till June 2023)
• 3) Selected ACCA Technical Articles
V
5
COURSEWORK TEST : 50% of overall assessment
N
Coursework Reference
Assessment Type
o
Coursework Test 1
- AXP
Certification
(Topics/ Chapters/ Subjects covered or other
Relevant Information)
Issue to Feedback
Marks
to
Students
Students (100%)
(Week)
(Week)
JULY/
10
20%
30%
AUG
CWT 2
8
11
MGT
12
13
50%
Final Exam
6
•
•
Chapter 1 : Concept of Audit & Other
Assurance Engagement
(BPP WB Chapter 1)
7
Objective of external audit
• To obtain REASONABLE ASSURANCE about whether the FS
AS A WHOLE ARE FREE FROM MATERIAL
MISTATEMENT, whether due to FRAUD AND ERROR,
thereby enabling the AUDITOR TO EXPRESS AN OPINION
on whether the financial statements are prepared, in all material
respects, in accordance with an APPLICABLE FINANCIAL
REPORTING FRAMEWORK.
• To report on the F/S , and communicate as required by the
ISAs, in accordance with the auditor’s findings. (Auditor’s
Report)
8
INTRODUCTION TO AUDIT –Why need to
audit
• Requirement under the Malaysia Companies Act 2016 –mandatory for
company’s accounts to be audited by an independent party (EA) to
protect the shareholders & stakeholders
• Refer to Diagram on Page 3
• Shareholders own the company (Agency Theory)
• Shareholders (Principals) appoint the Directors & Management to manage
the Co as agents for them (running the company on the behalf of the
shareholders)
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and be accountable for their stewardship of the entity’s assets which are
placed under their control. Management achieve this by preparing FS
which are presented to the shareholders.
• Shareholders will appoint an independent Auditor to provide an opinion
and to provide assurance as to whether the FS are “presented fairly” or “
give a true & fair view” .
• Audit opinion IS NOT an opinion of ABSOLUTE CORRECTNESS . Auditors act
as agents for the shareholders, by giving them assurance over the F/S.
•
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• Other users of financial statements :
• - internal stakeholders – management & employees who wants to
know the performance of the company (Job security). Financial
stability of the company
- External stakeholders – eg shareholders ; suppliers ; customers ;
bankers
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TRUTH & FAIRNESS / fair presentation
• True & Fair view in auditing means the F/S are free from MATERIAL
misstatements and faithfully represent the financial performance and
positions of the company
• True – info is factual and conforms with reality
•
- it complies with the accounting standards & relevant legislation
•
- data is correctly transferred from the accounting records to the FS
• Fair – info is clear, impartial & biased
•
- info reflects the commercial substance of the transactions of the
entity (honest & clear representation, with no bias) .
• Present Fairly - the F/S shows a true & fair view. They are factual and free
from bias.
•
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ACCOUNTABILITY, STEWARDSHIP & AGENCY Pg3
*
SHAREHOLDERS
-Provides capital & invest
(shares)
in an entity
-expects capital growth and
dividends
-manages the entity
(stewards)
-provides financial
statement to users
DIRECTORS
-accountable to shareholders
-acts as stewards of sh/h’s
investment
-shareholder’s agent
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• Audit is the process and Assurance is the product.
• Auditors go through the process of testing the client’s financial
reports ( audit)
• in order to give our client the confidence that their report is what it
seems to be (assurance)
• Auditor’s opinion - enhances credibility of the F/S by providing
reasonable assurance that the F/S s are free from material
misstatement
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REASONABLE ASSURANCE (HIGH BUT NOT
ABSOLUTE LEVEL OF ASSURANCE)
Auditor
designs & performs audit procedures
sufficient & appropriate
audit evidence (AE)
Auditor cannot give 100% guarantee that the FS are
free from material misstatements due to
LIMITATIONS OF AN AUDIT eg not all items are tested
15
ASSURANCE
• Assurance is a concept that is widely used in the business
environment ( to seek expert advice on whether things are OK )
• Eg : shareholders need assurance that the published F/S of a
company are accurate; so need the EA to check on the F/S
• Directors need assurance that the systems inside the company are
working and so need the internal auditors to check on these systems.
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• Definition of an “ assurance engagement “ . (BPP Page 7)
• - a practitioner (assurance provider) aims to obtain sufficient
appropriate evidence in order to express a conclusion designed to
enhance the degree of confidence of the intended users other than
the responsible party about the outcome of the evaluation or
measurement of a subject matter against suitable criteria.
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Elements of an assurance engagement (Page 8 BPP )
• An assurance engagement performed by a practitioner will consist of the following elements:
• (a) A three party relationship. The three parties are the intended user (the party who
relies on the assurance report) , the responsible party (the person who prepares the
subject matter being examined) and the practitioner (party who forms the opinion on the
subject matter and gives the assurance)
• (b) A subject matter. – what is it we are examining?
• eg financial performance (eg historical financial information),
❖nonfinancial performance (eg key performance indicators),
Assurance engagement
• (c) Suitable criteria. The subject matter is evaluated or measured against criteria in order
to reach an opinion. Eg IFRS
• (d) Evidence. Sufficient appropriate evidence needs to be gathered to support the required
level of assurance.
• (e) An assurance report. A written report containing the practitioner's opinion is issued to
the intended user, in the form appropriate to a reasonable assurance engagement or a
limited assurance engagement.
C
riteria
R
eport
E
vidence
S
ubject matter
T
hreeparty relationship
LEVELS OF ASSURANCE
• An assurance engagement will provide the user with either :
•
Type of engagement
Evidence- gathering
procedures
The assurance report
1) Reasonable assurance
eg statutory audit
/financial statement
audit
SAAE obtained by –
understanding the entity;
assessing risk; responding
to risk; further procedures
to draw a conclusion
Positive form of
expression
“ in our opinion internal
control is effective , in all
material respects, based
on XYZ criteria. The FS
shows a true & fair view”.
- High but not absolute
assurance . Not 100%
guarantee
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2) Limited assurance eg review of
cash flow forecasts or a review of
financial statement
- Auditor giving a moderate (low)
level of assurance
The evidence gathered is limited ,
involving techniques such as
enquiry and analytical procedures
. Enquiry means seeking
information from client staff or
external sources
Analytical procedures – evaluate &
compare financial and/or nonfinancial data for plausible
relationships. Also include the
investigation of identified
fluctuations and relationships that
are inconsistent with other
relevant information or deviate
significantly from predicted
amounts (BPP Page 168)
Negative form of expression – “
Based on our work described in
this report, nothing has come to
our attention that causes us to
believe that internal control is not
effective, in all material respects ,
based on XYZ criteria . “
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Limitations of an audit (auditor can only
express an opinion and NOT to certify that the a/c are
correct (refer to Diagram on Page 7)
● 1) Inherent limitations of internal control systems – an internal
control system is operated by people and hence is liable to human
error. In addition, there is the possibility of controls override by
management and of collusion and fraud. It is impossible to remove
all of these inherent limitations and as the auditor relies on the
internal control systems, this can reduce the usefulness of the audit.
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•
•
2)Subjectivity – financial statements include judgemental and
subjective areas and therefore the auditor is required to use their
judgement in assessing whether the financial statements are true
and fair. EG Judgements on what to test ; how much to test and the
Audit Opinion to express
3)Sampling – it is not practical for an auditor to test 100% of
transactions and so they have to apply sampling methodologies in
selecting balances/transactions to test. Therefore, there could be
an error in an item not selected for testing by the auditor.
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● .
● 4)Historic information – the audit report is often issued some time
after the year end, and so the financial information can be quite
different to the current position. In the current marketplace where
companies’ financial positions can change quite quickly, the audit
opinion may no longer be relevant as it is out of date.
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● 5)Evidence is persuasive not conclusive – the opinion is based on
audit evidence gathered; however, while this evidence can indicate
possible issues affecting the audit opinion, evidence involves
estimates and judgements and hence does not give a definite
conclusion.
● 6) Audit report format – the format of the opinion is determined by
International Standards on Auditing. However, the terminology
used is not usually understood by non-accountants. This means
that users may not actually understand the audit opinion given.
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Statutory audit
& regulation
(WB Chap 2)
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Auditor duties – Section 266 of the Co Act 2016
Compliance with legislation
• Whether the financial statements have been prepared in accordance with the applicable
approved accounting standards (IFRS)
• Truth and fairness of accounts
• Whether the statement of financial position shows a true and fair view of the company's
affairs at the end of the period and the statement of profit or loss and other comprehensive
income (and statement of cash flows) show a true and fair view of the results for that period
Adequate accounting records and returns
• Whether adequate accounting records have been kept and returns adequate for the audit
received from branches not visited by the auditor
Agreement of accounts to records
• Whether the accounts are in agreement with the accounting records and returns
Consistency of other information
• Whether the information in the directors' report is consistent with the financial
statements
Directors' benefits
• Whether disclosure of directors' benefits has been made in accordance with the
Companies Act 2016
Auditor rights
Access to records
• A right of access at all times to the books, accounts and vouchers of the company (in whatever
form they are held)
Information and explanations
• A right to require from the company's officers such information and explanations as they think
necessary for the performance of their duties as auditors
Attendance at / notices of general meetings
• A right to attend any general meetings of the company and to receive all notices of and other
communications relating to such meetings which any member of the company is entitled to
receive
Right to be heard at general meetings
• A right to be heard at general meetings which they attend on any part of the business that
concerns them as auditors
Rights in relation to written resolutions
• A right to receive a copy of any written resolution proposed
APPOINTMENT , REMOVAL & RESIGNATION
OF AUDITORS
• Appointed by and answerable to the shareholders . S 248 (2) of the
Co Act 2016 requires every registered public company to appoint a
company auditor at every AGM and the auditor will hold office until
the conclusion of the next AGM.
• Appointment :
• - normally appointed annually
• - by shareholders
• - in particular circumstance eg the first auditors, casual vacancy , Di
can appoint the auditors
• Removal :
• - resolution by shareholders
• - Auditors entitled to :
• - notice of resolution
• - make written representation that they ought to stay in office
• - speak at shareholder’s meetings
• - must deposit a Statement of Circumstances at the Co. registered
office within 14 days of ceasing office and send a statement to the
regulatory authority
• Statement of Circumstances
• - is a document prepared by the auditor explaining REASONS for his
removal, resignation , non-reappointment
• The Law requires that auditor prepare this document :
• - to ensure that auditors do not seek to avoid their responsibilities
by “going quietly” where problems arise
• - to enable investors to understand the reasons for the resignation or
removal of the auditor & will result in greater undertstanding &
transparency & reduce speculations against the company or the
auditor
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• Resignation :
• - auditors may resign at any time
• - give written notice with a statement of circumstances to members/
creditors
• - notice of resignation is sent by the company to the regulatory
authority
• - auditors can call the Di to call a general meeting within 21 days to
discuss the circumstances of the resignation
• - right to speak at the general meeting on matters which concern
them as auditors.
International Standards on Auditing (ISA) –
• ISAs are set by the International Auditing and Assurance Standards
Board
• The process in the development of the IAASB Standard:
• 1) Research & consultation – a project task force is established to
develop a draft standard or practice statement .
• 2) Transparent debate – a proposed standard is discussed at a
meeting open to the public
• 3) Exposure for public comment – exposure drafts are put on the
IAASB’s website and widely distributed for comment for a min of 120
days
• 4) Consideration of comments – any comments as a result of the
exposure draft are considered at an open meeting of the IAASB and it
is revised as necessary
• 5) Affirmative approval – approval is made by the affirmative vote of
at least 2/3 of IAASB members
Status of ISAs
• As the statutory audit is governed by the local legislation, the status
of ISAs will vary between countries.
• - national standards may continue to exist , but aligned with the
principles of ISAs.
• - The ISAs could be adopted without or with any additional guidance
relating to the national circumstances
•-
Audit Oversight Board (AOB)
AOB is established under the Securities Commission Act Malaysia 1993
(SCMA).
Came into force on 1 April 2010 to promote and develop an effective
audit oversight framework and to promote confidence in the quality
and reliability of audited financial statements in Malaysia.
AOB is responsible for the registration of auditors of PLCs or schedule
funds under Part 111A of the SCMA. Registration would ensure that
only fit and proper auditors are involved in auditing.
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Practice Review Committee (PRC)
PRC is established to oversee the conduct of practice review.
PRC applies to all member firms which are engaged in audit,
irrespective of whether the audit firms are auditors of PLCs or
otherwise.
Audit firms are to be reviewed in cycles of five years each. Reviewers
evaluate the work of the auditors . Review the audit working papers whether audit is conducted following the ISA and whether the work
has been properly documented to provide SAAEs to support the audit
opinion.
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FINANCIAL STATEMENT ASSERTIONS (Pg 154
&155)
•
1) Statement of Profit or Loss assertions ( assertions in relation to
classes of transactions and events and related disclosures for the
period under audit )
C O C A P C
2) Statement of the Financial Position assertions ( assertions in
relation to account balance and related disclosure at the period
end )
•
C R A V E
•
•
•
P C
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Evidence Gathering Techniques (Audit
Procedures ) (Page 156)
•
•
•
•
•
•
•
A – Analytical Procedures
E - Enquiry
I - Inspection of documents ; Inspection of assets
O - Observation
U - Recalculation
C - confirmation
R – reperformance
CAAT – computer assisted audit techniques (KIV)
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Use of Analytical Procedures (ISA 520)
•
•
•
•
Page 157 & Page 112
What is Analytical Procedures?
- the evaluation of financial information by a comparison to
financial and non-financial data and
the investigation of significant differences and relationships which
are inconsistent with other information.
•
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•
•
•
•
3 main Types of AP :
1) Variance analysis – review of current year financial info in
comparison with prior period or budgeted information
2) Ratio analysis – calculation of ratios and analysis and
investigation of significant differences
3) Proof in total – use of interrelationships between data (financial
and non-financial) to estimate an expected value in the F/s ,
compare with the client’s recorded values and then investigate on
the differences, which should not be material.
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•
•
•
•
Use of AP :
1) During the audit planning process , as a risk assessment
procedures to obtain an understanding of the entity and its
environment .
Its use is compulsory to help identify areas of mm through looking
at comparisons or trend analysis .
Also to identify GC problems through ratios.
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•
•
•
2) During the actual auditing as a substantive procedure .
(Optional) . Through use of trend analysis ; Proof in total and
Ratios
3) During the final review stage at the end of the audit
- to review the overall F/S to see whether the F/S looks sensible and
credible. Through ratios (Compulsory)
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RATIOS ( BPP Workbook Page 113)
•
•
•
•
•
1) Profitability Ratios
(a) Returns on capital employed (ROCE) = PBIT/Debt (NCL) + Equity
+ reserves
The returns ie the profit on every $ invested in the company’s
resources ie its debt and its equity.
(b) Gross Profit Margin = Gross Profit/Revenue x 100 = %
This is a fundamental measure of a company’s performance and
tells how profitable a company is after taking into account its direct
production costs.
•
46
•
•
•
•
•
Unusual increase in the GP ratio could be due to :
- overstatement of sales
- understatement of purchases
- understatement of other direct expenses
- improper valuation of inventory
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•
•
•
•
© Net Profit Margin = PBIT / Revenue
2) Liquidity Ratios
(a) Current ratios = CA /CL ; ratio helps decide whether the CA will
be able to generate sufficient cash to pay off the CL as and when
they fall due.
Increase in current ratio may indicate increased inventory, cash or
receivables levels. Co maybe expanding or experiencing trading
difficulties and is unable to sell its inventory. An increase may be
due to decrease in trade payables or other current liabilities .
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•
•
•
•
(b) Quick Ratio/acid test ratio = CA less inventories / CL
Inventory can be hard to sell in a hurry. Therefore to exclude
inventory as Quick assets of a company will be able to generate
sufficient cash to pay off its CL as and when they fall due.
© Inventory holding period = inventories /COS x 365 days =
Number of days
If the number of days is high, it can indicate overstocking of goods
which will then be difficult to sell. Inventory valuation would have
to be investigated.
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•
•
•
•
•
•
(d) Receivables collection period =
trade receivables/ Credit sales x 365 days
It reflects the number of days it takes for the company’s trade
debtors to pay .
(e) Payables payment period
= Trade payables / Credit Purchases x 365 days
Number of days it takes for the company to pay its trade payables.
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•
•
•
•
3) Gearing ratio
(a) Total long term debt /Share capital + Reserves x 100
Measures the company’s risk and stability . It expresses the
relationship between the company’s borrowings (external debt
financing) and its own funds (equity financing).
High level gearing means the company must service on the high
interest borrowings.
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•
•
•
•
(b) Interest Cover ratio = PBIT/ Interest expenses
Shows the capability of the entity to pay the interest. How many
times a company could pay the interest.
The higher the ratio, the better is the position of the entity to pay
the interest expenses.
SELF PRACTICE Q : Page 114 – Activity 2 : Ratios and Risk DRESS YOU
LIKE CO
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