Chapter 1

AN INTRODUCTION TO AUDITING AND ASSURANCE ENGAGEMENTS

In Malaysia, it is mandatory for every company registered under the Malaysian

Companies Act, 1965 to have its financial statements audited annually.

The users of financial statements of companies include

____________________________and regulatory agencies.

Traditionally, auditing only covers the statutory audit of historical

_______________________. Recent developments have extended the scope of
auditing into other areas such as reporting on
______________________________________________, and compliance with
statutory, regulatory

There has been common confusion with the meaning of auditing and accounting as
they are regarded as the same activities.
This is due to auditing being associated with the examination of accounting data

The distinction between Accounting and Auditing can be seen from 2 angles: -

 Procedures

Accounting is a process that creates ___________________________and

other accounting information. Auditing does ________ create any financial
information, but rather, enhances the ____________of the
_____________________ or other information through the gathering of
audit _____________ from the accounting records and supporting
documents generated from the accounting system.

 Objectives

Accounting __________financial information useful for management.

Auditing provides an independent and objective view on whether the
management assertions contained in the financial statements correspond
with the generally_________________________________________

1. Audit and assurance

What is “AUDITING”?

It is not possible to check things for yourself, whether quality, accuracy or

performance. You might not have the skills. Therefore you must rely on someone
else to give you assurance.
Audit is _______________________

Audit define: the independent examination of and ________________________ on

the financial statements of an entity by jury appointed auditor.

Opinion: means that one auditor could look at his set of financial statements and
disagree with the opinion of another auditor.

2. Elements of an assurance engagement

Five elements of an assurance engagement:

A. A three party relationship involving a practitioner, a responsible party, and

intended users
-_____________-: for example an auditor. The practitioner is responsible for
determining the nature, _____________________________ is required to pursue
anything that leads the practitioner to question whether a material modification
should be made to the subject matter information
: auditor must be qualifies to understand the criteria used and
___________________
-responsible party: the person responsible for the information and assertions for
example _____________________________
- the intended users: are the person for whom the practitioner prepares the
assurance report. Example: _____________________________

B. An appropriate subject matter

- the subject matter can take many forms, such as:
.__________________________
. Non financial performance, for example efficiency and _______________.
. System for example entity’s ______________________ or IT system

C. Suitable criteria
- Criteria are the benchmarks used to evaluate the subject matter.
- when reporting on internal control, the criteria may be an established internal
control ____________________.
-auditing a vendor’s invoice for the acquisition of raw materials criteria will be:
.whether materials of the quantity and stated description were
_____________________.
.Whether the price charged was reasonable

Without the frame of reference provided by suitable criteria, any conclusion is open
to individual ______________________- and misunderstanding.

Suitable criteria exhibit the following characteristics:

. Relevance: relevant criteria contribute to conclusions that assist decision-making by
the intended users.
.Completeness: include all relevant factors
. Reliability
. Neutrality: free form ____________
. Understandability

Individual experience would not constitute suitable criteria.

D. Sufficient appropriate evidence

-Evidence takes many forms for example oral testimony,
_____________________________- and observations by auditors
- An attitude of professional scepticism means the
practitioner___________________ the validity of evidence and is alert to evidence
that brings into question the reliability of documents or representations.
-document better then oral and direct obtained better then inquiry.

E. A written assurance report

-the practitioner provides a written report containing a conclusion. For example ‘in
our opinion internal control is effective in all material”

The Need For Auditing

History has seen business growing from small organisations such as sole
proprietorships and
partnerships, to bigger corporations, which issue bonds and shares to the public and
borrow funds from financial institutions.

This leads to the presence of absentee owners and the use of professional
____________________to run the corporations. This is called the
_____________________ relationship.

There is a natural ____________________________ between the principals and

agents. agent generally has___________________________ about the true financial
position and results of the corporation than the principals. There is a possibility for
the manager to _________________________ certain information and reports for
his/her benefits.

The owners seek to ___________________ themselves by imposing certain

monitoring provisions in the manager’s employment contracts. One example is the
________________________ information based on some generally agreed upon
accounting principles. However, because the manager is
________________________________________, and the owners cannot observe
their actions, the need for_____________________ arises.

4. Types Of Audits

Financial Statements Audit

This type of audit covers the basic set of financial statements. The set consists of the
balance sheet, ___________________________, and the statement
of_____________________.

As the objective of an audit of financial statements is for the auditor to express an

opinion on whether the financial statements are prepared in accordance with a
specified financial framework, in Malaysia, the accounting standards issued by the
MASB serve as the framework.

Compliance Audits

This audit determines the extent to which ______________________, laws,

covenants, or governmental regulations are ______________________ by the
audited entity.

Operational Audits

This involves the systematic review of an organisation’s activities in relation to the

_________________________ use of resources. The objective is to assess
performance and identify areas for improvement.

Forensic Audits

This audit is used to __________ or deter a variety of fraudulent activities and is

most relevant when the fraud involves financial issues.

Types Of Auditors

External Auditors

External auditors are ___________________ auditors _______________________

by the entity being audited. External auditors audit financial statements for listed
and private companies, partnerships, registered businesses, clubs and societies, and
other entities.

In Malaysia, the audit of financial statements must be performed by approved

company auditors. An approved company auditor must obtain approval from the
Ministry of Finance to act. This approval is effected through the granting of an audit
licence. For example KPMG, and ESY

Internal Auditors
These auditors are _______________ by companies or other entities. Despite being
employed by the entity itself, internal auditors are required to maintain their
objectivity and independence.

Government Auditors

Government auditors perform audits for the Office of the Auditor General. The
Auditor General is responsible for auditing the financial statements of the Federation
and all States
The Auditor General ______________ to the Yang DiPertuan Agong and presents his
auditor’s report to the Parliament at the federal level.

Forensic Auditors

Forensic Auditors are trained in detecting, investigating, and deterring fraud and
white collar crime.
Review Questions for Chapter 1

1. Describe the 4 general types of audits.

2. For each of the following descriptions, indicate which type of audit best
characterizes the nature of the audit being conducted.

a. Evaluate the policies and procedures of the Health Department in

terms of bringing new drugs to the market.

b. Determine the fair presentation of Ajax Chemical’s balance sheet,

income statement, and statement of cash flows.

c. Review the payment procedures of Accounts Payable Department for

a large manufacturer.

d. Examine the accounting records of a division of a company to

determine if any accounting irregularities have occurred.

e. Evaluate the feasibility of forecasted rental income for a planned

housing project.

f. Evaluate a company’s Communications department in terms of the

efficient and effective use of corporate resources.

3. what is the definition of audit and what does it mean by independent auditor?
4. What is the distinction between accounting and auditing?
5. Give 5 element of assurance engagement.