TOPIC OUTLINE

Development of auditing
Distinction between auditing accounting
Types of audit and auditors
Principles of stewardship, accountability and

agency
Auditing standards
Auditors 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 AUDITING
To 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 AUDITING
Primary objectives
To 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 misstatements
Secondary objectives
Forming and expressing an opinion on compliance with
statutory requirements and other regulations
To provide assistance to the client company in improving
financial controls and financial reporting within the
business
To detect and prevent fraud and error in the accounting
records

1.

Audit - Latin word audire, meaning to hear.

2.

Audit - a social phenomenon serves because of its practical

usefulness (Flint, 1988).

3.

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-

4.

Audit function serves as social control to monitor the conduct and

performance, to secure and to enforce accountability.

5.

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.

6.

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 approach
- plan and carry out audit based on risk
assessments.
- greater use of analytical procedure

ACCOUNTING

AUDITING

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 AUDITS
1. Operational audit
2. Compliance audit
3. Financial statement audit

1. Operational Audit
Evaluates- efficiency and effectiveness of

operating procedures and methods

(organizational structure, computer
operations, production methods, marketing).
End product- Report recommending for

improving operations.

2. Compliance Audit
Whether 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 Audit

To 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 AUDITORS
1. Chartered Accountant firms.
2. Government auditors /Compliance Auditor.
3. Inland revenue assessment (audit) officers.
4. Internal auditors.

1. CA firms
Responsible 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 auditors
Auditors 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 officers
They 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.

STEWARDSHIP
Fiduciary 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.

ACCOUNTABILITY
Often used with synonymously with such

concepts as answerability, responsibility.

The willingness to stand up and be accounted

as part of a process or activity.

AGENC
Y
CA1965 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 STANDARDS
ISA 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
Statements
ii. ISA 510 (Redrafted), Initial Audit
Engagements - Opening Balances
iii. ISA 540 (Revised and
Redrafted), Auditing Accounting
Estimates, Including Fair Value
Accounting Estimates, and Related
Disclosures
iv. ISA 550 (Revised and
Redrafted), Related Parties

v. ISA 560 (Redrafted), Subsequent

Events
vi. ISA 570 (Redrafted), Going
Concern
vii. ISA 580 (Revised and Redrafted),
Written Representations
viii. 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

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 independence
Investigate independence
Reporting 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-interest
Self-review
Advocacy
Familiarity
Intimidation

 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 :
i.
ii.
iii.
iv.

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.