TOPIC OUTLINEDevelopment of auditingDistinction between auditing accountingTypes of audit and auditorsPrinciples of stewardship, accountability and agencyAuditing standardsAuditors independent

WHAT IS AUDITING ? Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria. Auditing should be done by the competent, independent person.

NATURE OF AUDITINGTo do an audit, there must be information in a verifiable form and some standards (criteria) by which the auditor can evaluate the information.

Auditors routinely perform audits of quantifiable information.

The criteria for evaluating information also vary depending on the information being audited.

To satisfy the purpose of the audit, auditors must obtain a sufficient quality and volume of evidence.

Auditors must determine the types and amount of evidence necessary and evaluate the information.

The auditor must be qualified to understand the criteria used and competent to know the types and amount of evidence to accumulate to reach the proper conclusion.

Auditors should strive to maintain high level of independence to keep confidence of users relying on their reports.

The final stage in the auditing process is the preparing of the audit report.

PURPOSE OF AUDITINGPrimary objectivesTo form and express an independent expert opinion based on the audit work performed that the financial statements which are to be relied upon the users (shareholders, creditors, investors) are free of material misstatementsSecondary objectivesForming and expressing an opinion on compliance with statutory requirements and other regulationsTo provide assistance to the client company in improving financial controls and financial reporting within the businessTo detect and prevent fraud and error in the accounting records

Audit - Latin word audire, meaning to hear.

Audit - a social phenomenon serves because of its practical usefulness (Flint, 1988).

Audit is a response to a perceived need of individuals who seek information or reassurance about the conduct of others in which they have legitimate interest. Complexity of corporations-

Audit function serves as social control to monitor the conduct and performance, to secure and to enforce accountability.

Mid 1800s to early 1900s audit seen as traditional conformance role of auditing i.e. concerned with ensuring the correctness of accounts and detecting frauds and errors.

Today to enhance the credibility of the financial statements, - seen to provide value-added services (reporting on irregularities, identifying business risks and advising management on the internal control environment (Cosserat, 2004).

Audit approach verifying transactions in the books

Strategic system based approach - relying on system- must have thorough understanding of the clients industry, regulatory requirement and operating environment.

Risk- based approachplan and carry out audit based on risk assessments.greater use of analytical procedure

ACCOUNTINGAUDITING Focus on recording, classifying, and summarizing of economic events in a logical manner for the purpose of providing financial information for decision making Focus on determining whether recorded information properly reflects the economic events that occurred during the accounting period Must have a thorough understanding of the principles and rules that provide the basis of preparing the accounting information Must have a thorough understanding of approved accounting standards and posses expertise in the accumulation and interpretation of audit evidence. Ensure that the entitys economic events are properly recorded on a timely basis and at a reasonable cost Evaluate whether the accounting information is properly recorded Accountant would produce Financial Statement, a summary report of the financial performance throughout the period Auditor conduct a check on the accuracy of the financial statements, to ensure that there is no material misstatement of the financial statement prepared

TYPES OF AUDITSOperational audit

Compliance audit

Financial statement audit

1. Operational AuditEvaluates- efficiency and effectiveness of operating procedures and methods (organizational structure, computer operations, production methods, marketing).

End product- Report recommending for improving operations.

2. Compliance AuditWhether the auditee - follows specific procedures, rules, or regulations set by the authority.

End product Report about compliance, addressed to someone within the organizational unit being audited (i.e management).

Example : Determine whether bank requirements for loan continuation have been met.

3. Financial Statement AuditTo determine

financial statements are stated in accordance with specified criteria.

The criteria is the FRS, CA1965, GAAP, and other regulations or requirements.

Using appropriate tests - to determine whether FS statements contain material errors or other misstatements.

TYPES OF AUDITORSChartered Accountant firms.Government auditors /Compliance Auditor.Inland revenue assessment (audit) officers.Internal auditors.

1. CA firmsResponsible for auditing the published historical FSs of all public companies, large or small companies and non-commercial organizations.

The title auditor reflects the fact that auditors who express audit opinions on financial statements must be licensed as CA firms.

Also known as external auditors or independent auditors.

2. Government auditorsAuditors General (AG) from the Auditor Generals Dept.Report to and responsible solely to Yang Dipertuan Agong.AG- responsible to perform audit for all federal, states, statutory bodies and public authorities.Audit report - presented in the Parliament.

3. Inland revenue assessment officersThey work for Inland Revenue Board (IRB).

Audit the taxpayers returns - to determine whether they have complied with the tax laws.

4. Internal auditors Employed by individual companies to audit for management.

Responsibilities depend on the employer.

Report - audit committee.

STEWARDSHIPFiduciary duty Responsible to take a good care of resources entrusted to him (e.g. managements responsibility to properly utilize and develop the talents of the employees).Both director and auditor - appointed by shareholders to act on their behalf in their capacity.Director: responsible for preparing true and fair financial statements.Auditor: responsible for forming and expressing an opinion on the financial statements.

ACCOUNTABILITYOften used with synonymously with such concepts as answerability, responsibility.

The willingness to stand up and be accounted as part of a process or activity.

AGENCYCA1965 requires auditor to carry out sufficient examination on the FSs to allow to form an opinion as to:- the truth and fairness of the accounts- the maintenance of proper books of accounts- the degree of compliance with the provisions of FRSs and the CA1965.

The auditor is appointed by the shareholders to on their behalf in the capacity of agent.

To monitor the activities of the directors.

To ensure that any improprieties are fully disclosed.

AUDITING STANDARDSISA 200 ISA 240

MALAYSIAN APPROVED STANDARDS ON AUDITING (MASA)The following International Standards on Auditing (ISA) as Malaysian Approved Standards on Auditing :i. ISA 250 (Redrafted), Consideration of Laws and Regulations in an Audit of Financial Statementsii. ISA 510 (Redrafted), Initial Audit Engagements - Opening Balancesiii. ISA 540 (Revised and Redrafted), Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosuresiv. ISA 550 (Revised and Redrafted), Related Partiesv. ISA 560 (Redrafted), Subsequent Eventsvi. ISA 570 (Redrafted), Going Concernvii. ISA 580 (Revised and Redrafted), Written Representationsviii. ISA 600 Special Considerations Audits of Group Financial Statements (Including the Work of Component Auditors)

Both internal and external auditors must be independent.

Internal auditor - independence from parties whose interests might not be totally aligned with an effective risk management, an effective I.C., and an optimal governance.

External auditor independent from parties, that have an interest in FSs of an entity.

Auditor independence is commonly referred to as the cornerstone of the auditing profession since it is the foundation of the publics trust in the accounting profession.

Real independence and Perceived Independence Independence in fact(real independence)

Independence in appearance(perceived independence).

INDEPENDENCE IN APPEARANCE

- The auditor must be seen to be independent from the 3rd parties.

- The auditor must not have any financial involvement in the client company.

INDEPENDENCE IN FACT

Personal characteristics of the auditor.

Auditor himself is a good character

- Eg: honest, straight forward without bias

Programming/Plan independenceInvestigate independenceReporting independence

Relationship with the client An auditor earns a living from the fee he is paid it is therefore automatic that he does not want to do anything to jeopardize this income.

This reliance on clients fees may affect the independence of an auditor.

If the auditor feels this client income is more important than their responsibilities to shareholders he may not perform the audit with the shareholders interests in mind.

FIVE TYPES OF THREATS TO THE AUDITORS INDEPENDENCE Self-interestSelf-review AdvocacyFamiliarityIntimidation

Self-interest Auditor acts in his or her own emotional, financial or other personal self-interest.

Intimidation Auditor is being, or believes that he or she is being, overtly or covertly coerced by an audit client or by another interested party.

Independence can be compromised in following ways :

auditor is spouse of management of company doing some kind of business with any member of board of directors auditor is getting some kind of remuneration from the company which he auditing some kind of dealing with company or any member of management etc.

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