INTRODUCTION TO AUDIT

PROFESSION
EPPA3013 AUDIT
SEMESTER 2 – Week 1
SESSION 2019/2020

ARZIM NAIM CA(M) . CPA(M) . FCCA . CPIF . ACPA . Ph.D (INCEIF)

INTRODUCTION TO AUDIT PROFESSION
CONTENTS
1. Concept and definition of auditing.
2. Auditing, attestation and assurance services by
CA firms.
3. Nonassurance services by CA firms.
4. Distinction between auditing and accounting
5. Evolution of auditing profession & economic
demand for auditing
6. Types of audit and auditors
INTRODUCTION TO AUDIT PROFESSION
CONTENTS
7. Financial statements audit - Objectives and
principles
8. Provisions for audits under the Companies Act,
1965
2. AUDITING, ATTESTATION AND ASSURANCE
SERVICES BY CA FIRMS

 ASSURANCE services are independent professional services that

improve the quality of information, or its context, for decision
makers. Such services are valued because the assurance provider
is independent and perceived as being unbiased with respect to the
information examined.

 Assurance services is a general term used to describe independent

professional services that are intended to enhance the degree of
confidence of the intended users about certain subject matter
information that is the responsibility of another party.
2. AUDITING, ATTESTATION AND ASSURANCE
SERVICES BY CA FIRMS

 Individuals who are responsible for making business decisions

seek assurance services to help improve the reliability and
relevance of the information used as the basis for their decisions.

 Eg. Consumers Association of Penang (CAP) provides

information to help consumers make intelligent decisions about
product they buy.
2. AUDITING, ATTESTATION AND ASSURANCE
SERVICES BY CA FIRMS

 An assurance engagement involves the evaluation of a

subject matter against certain identified or established
criteria to determine the conformity of the subject matter
with these criteria.

 CA firms have provided many assurance services

particularly assurances about historical financial statement
information. Other assurance services???
2. AUDITING, ATTESTATION AND ASSURANCE
SERVICES BY CA FIRMS

 Examples:

 Risk assessment
 Information system reliability
 Electronic commerce
 Health care performance measurement

 Other category of assurance services by CA firms is

“attestation services”.
2. AUDITING, ATTESTATION AND ASSURANCE
SERVICES BY CA FIRMS

 ATTESTATION occurs when a practitioner is

engaged to issue or does issue a written
communication that expresses a conclusion about
the reliability of a written assertion that is the
responsibility of another party.
2. AUDITING, ATTESTATION AND ASSURANCE
SERVICES BY CA FIRMS

 Examples:
 The effectiveness of internal control
 Financial information other than the financial statements
 Future-oriented financial information
 Compliance with statutory, regulatory, or contractual
obligations
 Management’s discussion and analysis
2. AUDITING, ATTESTATION AND ASSURANCE
SERVICES BY CA FIRMS

 ATTESTATION service is a type of assurance

service in which CA firm issues a report about the
reliability of an assertion that is made by another
party.
2. AUDITING, ATTESTATION AND ASSURANCE
SERVICES BY CA FIRMS

 Attestation services fall into 4 categories;

1. Audit of historical financial statements

2. Attestation on internal control over financial

reporting

3. Review of historical financial statements

4. Other attestation services that may be applied to a

broad range of subject matter
2. AUDITING, ATTESTATION AND ASSURANCE
SERVICES BY CA FIRMS

“AUDITING (broadly defined) is a systematic process

of objectively obtaining and evaluating evidence
regarding assertions about economic actions and
events to ascertain the degree of correspondence
between those assertions and established criteria
and communicating the results to interested
parties.”
2. AUDITING, ATTESTATION AND ASSURANCE
SERVICES BY CA FIRMS

“AUDITING (narrowly defined) is a written report on

the examinations of financial statements for a
client.”
2. AUDITING, ATTESTATION AND ASSURANCE
SERVICES BY CA FIRMS

1. Audit of Historical Financial Statements

 AUDITING of historical financial statement; is a form of
attestation service in which auditor issues a written report
expressing an opinion whether the financial statements are
fairly stated in accordance with FRS.
 Audits represent the predominant form of assurance performed
by auditors. When presenting information in the form of
financial statements, the company makes various assertions
about its financial condition and results of operations.
2. AUDITING, ATTESTATION AND ASSURANCE
SERVICES BY CA FIRMS

1. Audit of Historical Financial Statements (Cont’d)

 External stakeholders rely whose rely on those
financial statements to make business decisions look
to the auditor’s assurance because auditor’s
independence from client and knowledge of financial
statement reporting matters.
2. AUDITING, ATTESTATION AND ASSURANCE
SERVICES BY CA FIRMS

2. Attestation on Internal Control over Financial Reporting

 Auditors also attest to the effectiveness of internal
control over financial reporting.
 This evaluation, which is integrated with the audit of the
financial statements, provides forward-looking
information, because effective internal controls reduce
the likelihood of future misstatements in the financial
statements.
2. AUDITING, ATTESTATION AND ASSURANCE
SERVICES BY CA FIRMS

3. Review of Historical Financial Statements

 Whereas an audit provides a high level of assurance, a
review of historical financial statements provides a
moderate amount of assurance on the financial
statements, and less evidence is necessary to support
this level of assurance. A review is often adequate to
meet financial statement user’s needs, and it can be
provided by the CA firms at much lower fee than an
audit.
2. AUDITING, ATTESTATION AND ASSURANCE
SERVICES BY CA FIRMS

4. Other Attestation Services

 CA firms provide numerous other attestation services,
many of which are natural extensions of the audit of
historical financial statements, as users seek
independent assurances about other types of
information.
2. AUDITING, ATTESTATION AND ASSURANCE
SERVICES BY CA FIRMS

4. Other Attestation Services (Cont’d)

 When a bank loans money to a company, for example,
the loan agreement may require the company to hire
auditors who will provide assurance about the company’s
compliance with the financial provisions of the loan.
 Auditors can also attest to the information in a client’s
forecasted financial statements, which are often used to
obtain financing.
2. AUDITING, ATTESTATION AND ASSURANCE
SERVICES BY CA FIRMS

THE RELATIONSHIP BETWEEN AUDITING,

ATTESTATION, AND ASSURANCE
SERVICES

Auditing Attestation Assurance

3. NONASSURANCE SERVICES BY CA FIRMS

CA firms perform numerous other services that

generally fall outside the scope of assurance
services.

Three specific examples are;

 Accounting and bookkeeping services.
 Tax services.
 Management consulting services
4. DISTINCTION BETWEEN AUDITING AND
ACCOUNTING

Definition of Accounting;
 identification, recording, classification,
interpreting and communication of economic
events to permit users to make informed
decisions (AAA, 1966 )

 American Accounting Association (AAA).

1966. Committee to prepare a statement of
basic accounting theory. A Statement of
Basic Accounting Theory. Illinois. USA.
4. DISTINCTION BETWEEN AUDITING AND
ACCOUNTING

 Many people confuse auditing with accounting and

some considers auditing as branch of accounting.
One of the reasons for the confusion is because
auditing is most commonly associated with
examination of accounting data, and public
accounting firms that perform auditing, also
provide accounting services.
4. DISTINCTION BETWEEN AUDITING AND
ACCOUNTING

 In the auditor’s report, the audit partners who are

responsible for audit would ordinarily use the title
“Chartered Accountants” in the signing report.
4. DISTINCTION BETWEEN AUDITING AND
ACCOUNTING

 Auditing of financial statements is related to

accounting but, in terms of procedures and
objectives, auditing differs significantly from
accounting.
 Accounting is a process that creates financial
statements and other financial information that is
useful for management.
4. DISTINCTION BETWEEN AUDITING AND
ACCOUNTING

 Auditing on the other hand does not create

accounting information but it enhances the
credibility of the financial statements or other
information that is subject matter of audit.
4. DISTINCTION BETWEEN AUDITING AND
ACCOUNTING

 In financial statement audit, much of the audit

evidence the auditor gathers and evaluates comes
from examination of accounting books and records
and supporting documents that are generated from
examination of the accounting books and records
and supporting documents that are generated from
the entity’s accounting system.
4. DISTINCTION BETWEEN AUDITING AND
ACCOUNTING

 Thus, auditor of financial statements must possess

ACCOUNTING KNOWLEDGE as well as the
expertise to accumulate and evaluate audit
evidence.
5. THE EVOLUTION OF AUDITING PROFESSION
AND ECONOMIC DEMAND FOR AUDITING

THE DEMAND FOR AUDITING

 Why do organizations request an audit?

 It allows contracting to take place in an agency
relationship

 Evidence supporting demand for auditing without

regulation:
 Early Greece
 Extensive non-regulated audit
4. THE EVOLUTION OF AUDITING PROFESSION
AND ECONOMIC DEMAND FOR AUDITING

Principal Contract
Agent
Shar
e hold
ers
Capital
a nager
M

i d es
v
Pro ncial
a n
Fin matio
n f or
I

AGENCY RELATIONSHIP: PRINCIPAL-AGENT

RELATIONSHIP
4. THE EVOLUTION OF AUDITING PROFESSION
AND ECONOMIC DEMAND FOR AUDITING

Information Risk Reducing information risk

• Remoteness of information • User verifies information

• Biases and motives of the • User shares information risk
provider with management
• Voluminous data • Audited financial statements
• Complex exchange transactions are provided

ECONOMIC DEMAND FOR AUDITING AND

ASSURANCE
4. THE EVOLUTION OF AUDITING PROFESSION
AND ECONOMIC DEMAND FOR AUDITING
Princ
ipal Contract Agent
Share
holde na g er
rs Capital Ma

v id es
Infor
matio Pro cial
n a n
Risk n F i
a t io n
rm
Info

Verifies Correspond
ence of
Financial Informati a tion
on to f o r m
contract In
s y m m etry
A
Issues Conflict of
R eport
Auditor Interest
AGENCY RELATIONSHIP: PRINCIPAL-AGENT RELATIONSHIP
5. TYPES OF AUDIT AND AUDITORS
TYPES OF AUDITS

1. Financial statements audits

2. Compliance audits

3. Operational audits

4. Forensic audits
5. TYPES OF AUDIT AND AUDITORS

TYPES OF AUDITS
 Financial Statement Audits

The objective of financial statement audits is to determine

whether the overall financial statements are prepared in
accordance with specified financial reporting framework. The
phrase used to express the auditor’s opinion is “the financial
statements give true and fair view” or “presently fair”. This types
of audit covers the basic set of financial statements i.e. balance
sheet, income statement, statement of changes in shareholders’
equity and cash flow statement.
5. TYPES OF AUDIT AND AUDITORS

TYPES OF AUDITS
 Compliance Audits

A compliance audit determines the extent to which

rules, policies, laws, covenants, or governmental
regulations are followed by the entity being audited.
5. TYPES OF AUDIT AND AUDITORS
TYPES OF AUDITS
 Operational Audits

An operational audit involves a systematic review of an

organization’s activities, or a part of them, in relation to
the efficient and effective use of the resources. The
purpose of an operational audit is to assess performance,
identify areas of improvement, and develop
recommendations. Sometimes this type of audit is
referred to as performance audit or management audit.
5. TYPES OF AUDIT AND AUDITORS
TYPES OF AUDITS
 Forensic Audits

The purpose of a forensic audit is for the detection or

deterrence of a wide variety of fraudulent activities. The use of
auditors to conduct forensic audits is more relevant where the
fraud involves financial issues.
 Some example where a forensic audit might be conducted
includes business or employee fraud; criminal investigations;
shareholder and partnership disputes; business economic
losses; or matrimonial disputes.
5. TYPES OF AUDIT AND AUDITORS
TYPES OF AUDITORS

1. External auditors
2. Internal auditors
3. Government auditors
4. Forensic auditors
5. TYPES OF AUDIT AND AUDITORS

TYPES OF AUDITORS
 External Auditors

External auditors are often referred to as independent

auditors. Such auditors are called ‘external” because
they are not employed by the entity being audited.
External auditors audit financial statements for public
listed and private companies, partnerships, registered
businesses, clubs and societies and other types of
entities.
5. TYPES OF AUDIT AND AUDITORS

TYPES OF AUDITORS
 External Auditors (Cont’d)

They may also conduct compliance, operational and

forensic audits for such entities. An external auditor
may practice as a sole proprietor, or as a member/
partner of a public accounting firm.
5. TYPES OF AUDIT AND AUDITORS

TYPES OF AUDITORS
 Internal Auditors

Auditors employed by individual companies,

partnerships, statutory bodies, and other entities are
called internal auditors. In major corporations, the
internal audit staff may be very large and the director of
internal auditing is usually a major job title within the
entity.
5. TYPES OF AUDIT AND AUDITORS
TYPES OF AUDITORS
 Internal Auditors (Cont’d)

The Institute of Internal Auditors (IIA)[1] has developed a set of

standard that should be followed by internal auditors and has
established a certification program. An individual meeting the
certification requirements set by the IIA, can become a certified
internal auditor. The internal auditors also can be involved in
all four types of audits; however their primary activities are to
conduct compliance and operational audits within the
organizations.
5. TYPES OF AUDIT AND AUDITORS
TYPES OF AUDITORS
 Internal Auditors (Cont’d)

[1] Established in 1941, The Institute of Internal Auditors (IIA) is an

international professional association with global headquarters
in Altamonte Springs, Fla., USA. The IIA is the internal audit
profession's global voice, recognized authority, acknowledged
leader, chief advocate, and principal educator. Members work
in internal auditing, risk management, governance, internal
control, information technology audit, education, and security
(Accessed on February 29,2008 via:www.theiia.og)
5. TYPES OF AUDIT AND AUDITORS
TYPES OF AUDITORS
 Government Auditors

The government auditors perform audits for the Office of the Auditor
General (OAG) established under the Audit Act, 1957(In case of
Malaysia). The OAG headed by the Auditor General (AG) whose
appointment is provided under the Malaysian Constitution. Under
the provisions of the Audit Act, 1957, the AG is responsible for
auditing the financial statements of the Federation and all the States
as well as those of the public authorities and statutory bodies.
Function: to enhance accountability and expenditure of public funds.
5. TYPES OF AUDIT AND AUDITORS
TYPES OF AUDITORS
 Forensic Auditors

Forensic auditors are trained in detecting, investigating and deterring

fraud and white-collar crime. This type of auditors may be employed
by corporations, government agencies, public accounting firms or
consulting and investigative services firms. Some of the tasks are to
analyze the financial transactions involving unauthorized transfers
cash of between companies; proving money-laundering activities by
reconstructing cash transactions; and embezzlement investigation
and documentation, and negotiation of insurance settlement.
6. FINANCIAL STATEMENTS AUDIT –
OBJECTIVES & PRINCIPLES

 Financial statement audit is a systematic

process in which the auditor objectively
obtains and evaluates evidence regarding
management’s assertions about transaction
and events to ascertain whether the
financial statements are presented in
accordance with the established criteria.
6. FINANCIAL STATEMENTS AUDIT –
OBJECTIVES & PRINCIPLES

 Malaysian Companies Act, 1965; every

company regardless of size, registered
under the Act is required to have its
financial statements audited annually.
6. FINANCIAL STATEMENTS AUDIT –
OBJECTIVES AND PRINCIPLES

 The audit process is a well-planned and thorough

approach. The auditor must objectively search for
and evaluate the relevance and validity of
evidence. The evidence gathered by the auditor
must relate to managements assertions about the
entity’s transactions and events, contained in the
financial statements.
6. FINANCIAL STATEMENTS AUDIT –
OBJECTIVES AND PRINCIPLES

 The auditor compares the evidence gathered to

management’s assertions in order to assess the
degree of correspondence between those
assertions and established criteria.
6. FINANCIAL STATEMENTS AUDIT –
OBJECTIVES AND PRINCIPLES

 In all assurance engagements, the practitioner expresses a

conclusion as to whether the subject matter information
conforms in all material respects with the identified criteria.
 Auditor’s report often represents the only communication
between the auditor and the users of financial statements. The
audit report provides reasonable assurance that the financial
statements do not contain material misstatement or omission,
and such a conclusion can enhance the degree of confidence
that intended users can have about the reliability of the
information in the financial statements.
6. FINANCIAL STATEMENTS AUDIT –
OBJECTIVES AND PRINCIPLES

“Audits conducted in accordance with codified auditing standards

are designed to provide reasonable assurance to the users of

FS do not contain material misstatement or omission”

6. FINANCIAL STATEMENTS AUDIT –
OBJECTIVES AND PRINCIPLES

 OBJECTIVE audit financial statements is to enable

auditor to form an opinion on the view presented in
the financial statemnts.
 Hence, auditor does not guarantee that material
misstatement will be detected!!!!
6. FINANCIAL STATEMENTS AUDIT –
OBJECTIVES AND PRINCIPLES

 Auditor cannot provide absolute assurance because

there are certain inherent limitations in an audit that
affect’s the auditor’s ability to detect material
misstatements.
 Those factors are:
1. Use of testing

2. Inherent limitations of internal control

3. Audit evidence is persuasive and not conclusive

4. Use of judgement.
7. PROVISION OF AUDIT IN COMPANIES ACT

 Sections 172 -175 of the Act; appointment, powers

and responsibilities of auditors
 Section 8; Only the approved company auditor is
permitted to act as the auditor of the company
1. Shareholder of a corporation whose employee is an
officer of the company

2. Responsible for keeping member’s register or the

register of debenture-holders of the company
7. PROVISION OF AUDIT IN COMPANIES ACT
 Section 9(1): Prohibits from acting or accepting an appointment as
an auditor on certain conditions;

1. Indebted to the company

2. Officer of the company

3. Partner, employer, officer of the company

4. Partner, employee of an employee of an officer of the company

5. Shareholder of a corporation whose employee is an officer of

the company

6. Responsible for keeping member’s register or the register of

debenture-holders of the company
Thank You