2. Learning Outcomes
• Describe auditing
• Distinguish between auditing and
accounting
• Describe different types of audit.
• Explain why there is a need for auditing
and assurance services
• Explain the framework of auditing
• Describe the requirements for becoming a
Chartered Accountant
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3. Auditing
• Auditing is a systematic process of
objectively obtaining and evaluating
evidence regarding assertions on
economic actions and events, to ascertain
the degree of correspondence between
those assertions, and established criteria
and communicating the results to
interested users.
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4. Audit of Financial Statement
Auditing of financial statement is a type of
assurance engagement.
The objective of an audit of Financial
Statements is “ to enable the auditor to
express an opinion whether the financial
statements are prepared in all material
respects,in accordance with identified
financial reporting framework”(ISA 200)
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5. Opinion and Reasonable
Assurance
• Reasonable assurance as opposed to
Absolute assurance (Guarantee)
4 reasons:
1)Use of testing
2)Inherent Limitation of Internal Control
3)Audit Evidence is Persuasive and Not
Conclusive
4)Use Of Judgement
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6. Benefits of Financial statements
audit
• Obtain access to capital markets. Without an audit, companies
may be denied access to capital markets by the SC and Bursa
Malaysia
• Have a lower cost of capital. Given the reduced risk resulting from
audited financial reports, potential creditors may offer low interest
rates and potential investors may be willing to accept a lower rate
of return on their investment.
• Be a deterrent to inefficiency and fraud. Knowledge that an
independent audit is to be performed is likely to result in fewer
errors in the accounting process and reduce the likelihood of
employee misappropriation of assets.
• Control and operational improvements. Based on observations
made during the financial report audit, the independent auditor
can suggest how controls could be improved and how greater
operating efficiencies within the entity’s organisation may be
achieved.
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7. Distinguish Between
Auditing and Accounting
• Accounting is the recording, classifying,
and summarizing of economic events
for the purpose of providing financial
information used in decision making.
• Auditing is determining whether
recorded information properly
reflects the economic events that
occurred during the accounting period
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8. Limitation of external audit
The main limitations are as follows.
• Time lapse – by the time the audit report is released the information
is relatively ‘old’.
• Audit testing on selective samples, which has limitations due to
sampling risk.
• The assessment of materiality, with both quantitative and qualitative
considerations, requires a high degree of professional judgement.
There are, however, some guidelines, although by their nature are
necessarily arbitrary.
• Forming professional judgements in highly specialised areas Can
often result in disagreements between auditors and clients
• Report format limitations and the consequent “expectation gap”
often arises with users of financial statements.
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9. 9
• Early audits focused on finding errors in balance sheet
accounts, due to concerns about management fraud
• Auditors now face an increasing demand for more
accountability and more perceived benefits for users
of financial information
• An audit enhances credibility, integrity and usefulness
of financial information
Development of nature and scope of
auditing and assurance services
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10. 10
The principal–agent relationship
• Shareholders (principals) employ directors and
managers (agents) to conduct the business, in
the interest of the owners
• This often results in information asymmetry
• The managers assume a stewardship
function and are expected to manage the
business in the best interest of the principals
(Refer to page 4 of Margaret Boh 3rd
ed)
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11. 11
Auditing — a shifting paradigm
• From 2000, a series of corporate failures,
most of which related to accounting
misstatements, internal control problems
and the apparent failure of the auditors,
caused a major credibility crisis in the
accounting and auditing profession
• A spate of radical reforms undertaken by
the profession and regulators has since
followed
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12. 12
Accounting crises and
corporate collapses
• The major corporate collapses of Enron and
HIH Insurance have reshaped the auditing
profession
• Enron, an energy giant in the United States,
collapsed in October 2001
• HIH Insurance, the leading Australian
general insurance group, was placed into
liquidation in March 2001 12
13. Relationships Among Auditors,
Client, and External Users
AuditorAuditor
Client
ExternalExternal
UsersUsers
Client or audit
committee hires
auditor
Auditor issues
report relied
upon by users to reduce
information risk
Provides capital
Client provides financial
statements to users
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14. Certified Public Accounting Firms
• The four largest CPA firms in the United
States are called the “Big Four”
international CPA firms.
• These four firms have offices in most
major cities in the United States and in
many cities throughout the world.
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15. Compliance Audit
Example
Determine whether bank requirements
for loan continuation have been met
Information Company records
Established
Criteria
Loan agreement provisions
Available
Evidence
Financial statements and
calculations by the auditor
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16. Audit of Historical Financial
Statements
Example
Annual audit of Boeing’s financial
statements
Information Boeing's financial statements
Established
Criteria
Generally accepted accounting
principles
Available
Evidence
Documents, records, and outside
sources of evidence
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17. The need for company auditor
• The appointment of an auditor is also
required by sec 172 of the CA, which
states that every company incorporated
under the CA must appoint an auditor and
have the company's accounts audited
before presenting the accounts to the
shareholders at the Annual General
Meeting.
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18. The need for company auditor
• The company auditor shall perform an
audit before expressing true and fair
opinion. Upon expressing true and fair
view, the auditor is perceived to inform the
shareholders that, the financial statement:
(1) is not misleading;
(2) does not contain any material
misstatements; and
(3) is prepared under established criteria.
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19. Audited items
(1) Balance sheet;
(2) Income statement;
(3) Cash flow statement;
(4) Statement of changes of equity;
(5) Notes to the financial statement;
(6) Accounting system;
(7) Internal control system; and
(8) Relevant documentations.
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20. Approved company auditor in
Malaysia
“Approved company auditor” means a
person approved by the Minister of
Finance under sec 8(2) of the CA to
perform the duties of a company auditor.
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21. Post Enron and Worldcom
The work of 2 senators in US
Paul Sarbanes and Michael Oxley
In 2002, Sarbanes Oxley Act 2002 was
passed. (SOX)
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