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AUD 589

AUDITING 1

Introduction to Auditing

Prepared by:
Yusarina Mat Isa
UiTM Kampus Puncak Alam
Learning Objectives
 Able to:
– Explain the objectives of external auditing
– Understand the responsibilities of external
auditors and management in relation to financial
statement audit.
– Understand the landscape of auditing profession

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What is Auditing?
• Accumulation and evaluation of evidence
about information to determine and report on
the degree of correspondence between the
information and established criteria
• Should be done by competent, independent
person/party

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Other Definition of Auditing….
• An independent examination of, and
expression of opinion on, the financial
statements of an organization by an
appointed auditor (a competent, independent
person) in pursuance of that appointment
and in compliance with any relevant
statutory requirements

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Objectives of an Audit

• Primary Objectives
– To form and express an independent expert
opinion based on the audit work performed that
the financial statements of an organisation which
are be relied upon by the users (shareholders,
creditors, investors) are free from material
misstatements
– Terms used: “true and fair view” or “present
fairly in all respects” and “reasonable assurance”

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Objectives of an Audit (cont.)

• Secondary Objectives
– To form and express an opinion on compliance
with statutory requirements and other
regulations
– To provide assistance to the clients in improving
financial controls and financial reporting within
the business
– To detect and prevent fraud and error in
accounting records

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Audit Principles

• Materiality Concept
– Information is material if it omission or misstatement
could influence users’ decision taken on the basis of the
financial statements

• Misstatement
– A mistake in presenting financial information which could
arise from errors and/or frauds
– Considered as material if the knowledge of misstatement
would affect a decision of a reasonable user of the
financial statements

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Audit Principles (cont.)

• True and Fair View


– True: Account are prepared in accordance with facts and
reality
– Fair: Accounts should be unbiased, just and equitable
– The accounts would be true and fair when the information
they contain is sufficient in quantity and quality to satisfy
the reasonable expectation of the users
– True and fair view implies that the accounting principles
have been applied consistently
• Reasonable assurance
– Not an absolute assurance or guarantee

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Accounting Vs. Auditing
Accounting Auditing
Creates financial statements Enhance the credibility of financial
Accountant statements
Responsibility of the management Responsibility of the independent
of the client auditor
Accountant – knowledge on the Auditor – knowledge on the
accounting principles and accounting and auditing principles
rules/regulations and rules/regulations
Process of recording, classifying Involve the process of
and summarizing economic events accumulation and interpretation
in a logical manner for the of audit evidence, evaluating the
purpose of providing financial results and problems before
information for decision making expressing independent audit
by the various users opinion on the financial
statements

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Demand for Auditing

Manager Shareholders &


other stakeholders

Financial
statements

Board/ Audit
committee
Verification of the
financial statements

Issue audit
Auditor
report

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Management’s and Auditor’s
Responsibilities
• Management’s Responsibilities on the F/S
– Ensure that the preparation of the financial statements conform
in all material respects with International Accounting Standards.
– Management has established systems of internal control over
financial reporting
– Appropriate actions are taken by management to correct
deficiencies as they are identified.
• Auditor’s Responsibilities on the F/S
– To express an opinion on whether management has fairly and
truthfully presented the information in the financial statements
– To collect evidence to obtain reasonable assurance that the
accounts are free of material misstatement.
– The independent auditor may make suggestions about the form
or content of the financial statements 
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Types of Audits
• Financial Statement Audit
– To determine overall financial statements & quantifiable information
are being verified and stated in accordance with specific criteria

• Operational Audit
– To review any part of organization's operating procedures for the
purpose of evaluating the efficiency and effectiveness of the
organization's management

• Compliance Audit
– To determine whether the management of any organization is
conforming to specific procedures, regulations or rules set by higher
management

• Forensic Audit
– an examination and evaluation of a firm's or individual's financial
records to derive evidence that can be used in a court of law or legal
proceeding
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Types of Auditors
• External Auditor/Chartered Accountant
– Approved company auditor
– Primary responsibility – provide a true and fair opinion on the
financial statements
• Internal Auditor
– Employee of the organization itself who carries out an appraisal of
the accounting and operations of the organization
• Government Auditor
– Government employee reporting to Auditor General Department
– Audit on government agencies/departments
– Include both audit on financial statements and compliance audit

• Forensic Auditor
– ‘Investigator’ with special skill to elicit useful information from the
suspected wrongdoers or witnesses
– Can be part of the accounting firm, or internal auditor of the
organization
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Accounting/Audit Firm
• The ‘Big 4’
– Ernst & Young (EY), Deloitte & Touche (Deloitte), KPMG and
PricewaterhouseCoopers (PwC) )
• Many other small and medium firms >1000
• Service offered
– Assurance services (audit and review of financial statements)
– Non-assurance services (includes accounting, taxation, advisory,
internal auditing and consultancy)
• Role of Malaysian Institute of Accountants (MIA)

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Professional Bodies (Example)

• To promote and regulate and • To advance the theory and practice


regulate professional and ethical of accountancy in all its aspects
standards • To recruit, educate, train and assess
• To enhance competency through by means of examination or
continuous education and training otherwise a body of members
• To enhance the status of members skilled in
• To lead research and development • To preserve at all times the
for the enhancement of the professional independence of
profession accountants
• To inculcate a high sense of social • To maintain high standards of
responsibility practice among members 15
Framework of Auditing
• Companies Act 2016
• MIA By-Law (On Professional Ethics, Conduct and Practice)
• Approved Auditing Standards
– International Standard of Auditing (ISA)
– Malaysian Standard of Auditing (MSA)
– Audit technical release and other statement issued as best
current practice
• Auditor must comply with the approved auditing
standards in conducting audit
• The audit report should contain a positive statement to
the effect that the audit has been conducted in
accordance with approved auditing standard

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Chartered Accountant
• Chartered accountant (CA) is an international
accounting designation granted to accounting
professionals
• CA typically focus on one of the following
areas: audit and assurance, financial accounting and
reporting, management accounting,
• Different countries impose different rules and
regulations on the process of becoming a CA and
applied finance or taxation. In Malaysia, a CA must be:
– Member of MIA, and comply to the requirements as a
member
– obtain a recognized degree or a professional
accountancy qualification
– 3 years of approved experience 17
Line of Defense
Governing Body/Board/Audit Committee

Senior Management

External Audit

Regulator
1st Line of Defense 2nd Line of Defense 3rd Line of Defense
Financial controls
Management
controls
Security
Internal Audit
Risk management
Internal control
measures
Compliance

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End of Topic 1

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