AUDITING

BAC2664 (New), BAC2287(Old)

Lecture 3
Topic 3
Objective and Scope of Financial
Statements Audit

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 Objective and Scope of Financial
Statements Audit

• Appointment
• Engagement Letter
• Basic Principles of Auditing
• Responsibility of Auditor to Detect Fraud

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 Appointment – S172, CA 1965
• Criteria of Appointed
- appointment by shareholders
- approval for appointment by ordinary resolution
- appointment for a limited duration

• Four types of appointment

- initial auditor
- filling casual vacancy
- retiring auditor
- new auditor
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 Engagement Letter (EL)
• Ensuing the appointment, the auditor should issue a letter of
engagement addressed to the company’s Board of Directors

• Purpose of an engagement letter

- to evidence the auditor’s acceptance
- to avoid misunderstanding
- to document the auditor’s contractual duties
- to protect the auditor from legal liability

• The EL would be looked upon by the court of law as prima facie

evidence of the essential contractual arrangements which subsist
between auditors and their clients

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Procedures Involved Before Issuing
An Engagement Letter

• Ethical clearance
• Letter of consent
• Annual general meeting
• Letter of engagement

Legal requirement – S9(6) – all auditors prior to the

appointment issue a letter of consent

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Contents of An Engagement Letter
The contents of an audit EL may vary for each client, but
they should normally include the following matters (ISA
210 – Terms of Audit Engagement):

• Identification of the statements that are subject to formal

examination
• The objective of the audit of financial statements
• The scope of the audit of financial statements
• The management’s responsibility for the financial
statements
• The degree of auditors assurance
• The form of Audit Reports

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Contents of An Engagement Letter
continued

• The form of Other Reports

• The description of letters the auditor is expected
to issue to the client
• The auditors expectation of receiving Letter of
Representation
• Access to records, documents and information
• Basis on which fees are computed and billing
arrangements
• Request for acknowledgement of acceptance to
the terms of engagement
• Other matters
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 Instances of Fresh Engagement
Letter
• Client misunderstands the objective and
scope of the audit
• Terms of the engagement are revised or
special term are to be included
• Change in client’s management or
ownership
• Significant change in the nature or size of
the client’s business
• Legal requirements
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 Scope of An Audit
ISA 120 – Framework of International Standards on
Auditing, paragraph 11, states:
“the objective of an audit of financial statements is to
enable the auditor to express an opinion (give a true and
fair view or present fairly) whether the financial
statements are prepared, in all material respects, in
accordance with identified financial reporting framework”.

The scope of auditor’s examination on financial statements

is governed by:
1. Legislation – CA 1965 (rights), 9th Schedule
(disclosure)

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 Scope of An Audit continued

2. Regulations – Bank Negara Malaysia

guidelines in regulating the banking industry –
BNM/GP3, Guidelines on Interest Suspension
3. Auditing Standards – MIA approved
auditing standards.

Auditors shall observe at all times the standards

when discharging their responsibilities.

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 Auditor’s Responsibilities for Detecting
and Reporting of Fraud and Error
ISA 240, Fraud and Error, discusses the auditor’s responsibility for the
detection of material misstatements resulting from fraud or error
when carrying out an audit of financial statements.

Paragraph 3: “Fraud” refers to intentional misrepresentation of financial

information by one or more individuals among management,
employees, or third parties.

Fraud may involve:

6. manipulation, falsification or alteration of records or documents
7. Misappropriation of assets
8. Suppression or omission of the effects of transactions from
records or documents
9. Recording of transactions without substance, or
10. Misapplication of accounting policies

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Auditor’s Responsibilities for Detecting
and Reporting of Fraud and Error continued

Paragraph 4: “Error” refers to unintentional

mistakes in financial statements
(information).
Error may be such as:
3. Mathematical or clerical mistakes in the
underlying records and accounting data
4. Oversight or misrepresentation of facts,
or
5. Misapplication of accounting policies
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Auditor’s Responsibilities for Detecting
and Reporting of Fraud and Error continued

The responsibility for the prevention and detection of fraud

and error rests with management through the
implementation and continued operation of an adequate
system of internal control. (The system reduces but does
not eliminate the possibility of fraud or error).

Auditors shall plan their audit so that they have a

reasonable expectation of detecting material
misstatements in the financial information resulting from
fraud and error. This will include designing audit
programs that sufficiently explain the procedures to be
carried out.

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Auditor’s Responsibilities for Detecting
and Reporting of Fraud and Error continued

If the results from the procedures indicated fraud

or error has occurred, the effect of fraud is
properly disclosed in the financial statements or
the error is corrected.

The degree of auditor’s assurance of detecting

errors would normally be higher than that of
detecting fraud, since fraud is usually
accompanied by acts specifically designed to
conceal its existence.

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 References
• Lecture Notes
• Tutorial Questions
• Past Exam Questions
• Chapter 2 – Table 2.2 - ISA, Table 2.2 –
RPG
• Chapter 5 – Exhibit 5.1 – Engagement
Letter

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