Chapter 3 Edited

3
Objectives and Scope of

Financial Statement Audit
Learning Outcomes
After studying this chapter, you should be able to:

Discuss audit objectives and conduct audit
procedures
Explain the auditing work with the underlying
principles governing it
Describe the auditor’s and the management’s
responsibilities
FUNDAMENTALS OF AUDITING All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2017 1– 3
Introduction
 An audit is an independent check of a company's

financial statements that is carried out by a third
party who has nothing to do with the business.
 An audit provides assurance that management has
presented a ‘true and fair’ view of a company’s
financial performance and position.
 It underpins the trust and obligation of stewardship
between those who manage the company.

Audit Objectives and Basic
Principles Governing an Audit
Basic Principles Governing an Audit

An auditor should comply with the MIA By-Laws (On
Professional Ethics, Conduct and Practice) and the Code
of Ethics for Professional Accountants issued by the
IFAC as the general principles in conducting audit work.
Ethical principles governing the auditor’s professional
responsibilities are:
(a) Integrity: To be straightforward and honest in all
professional and business relationships.

Audit Objectives and Basic
Principles Governing an Audit
(b) Objectivity: To not allow bias, conflict of interest

or undue influence of others to override
professional or business judgements.
(c) Professional competence and due care: To
maintain professional knowledge and skill at the
level required.
(d) Confidentiality: To respect the confidentiality of
information acquired.
(e) Professional behaviour: To comply with relevant
laws and regulations.
Auditor’s Responsibility for
Detecting Fraud
 The auditors do not only focus on preventing and

detecting fraud and errors, but also assess the truth
and fairness of the firms’ financial statements.
 ISA 240 is to establish basic principles and
essential procedures, and to provide guidance on
the auditor’s responsibility to consider fraud in an
audit of financial statements.

Detecting Fraud (cont.)
 The standard distinguishes fraud from error and

describes the two types of fraud that are relevant to
the auditor, that is, misstatements resulting from
misappropriation of assets and misstatements
resulting from fraudulent financial reporting.
 It describes the respective responsibilities of those
charged with governance and the management of
the entity for the prevention and detection of fraud.

 It also describes the inherent limitations of an audit

in the context of fraud and sets out the
responsibilities of the auditor for detecting material
misstatements due to fraud.
 In addition, it requires the auditor to maintain an
attitude of professional scepticism, recognizing the
possibility that a material misstatement due to fraud
could exist.

 ISA 240 requires the auditor to:

(a) Perform procedures to obtain information that is
used to identify the risks of material misstatement
due to fraud;
(b) Identify and assess the risks of material
misstatement due to fraud at the financial statement
level and the assertion level; and for those
assessed risks that could result in a material
misstatement due to fraud.

(c) Determine overall responses to address the risks of

material misstatement due to fraud at the financial
statement level and consider the assignment and
supervision of personnel.
(d) Design and perform audit procedures to respond to
the risk of management override of controls.
(e) Determine responses to address the assessed
risks of material misstatement due to fraud.

(f) Consider whether an identified misstatement may

be indicative of fraud.
(g) Obtain written representations from management
relating to fraud.
(h) Communicate with management and those
charged with governance.

 The term ‘error’ refers to an unintentional

misstatement in financial statements, including the
omission of an amount or a disclosure, such as the
following:
(a) A mistake in gathering or processing data from
which financial statements are prepared.
(b) An incorrect accounting estimate arising from
oversight or misinterpretation of facts.

(c) A mistake in the application of accounting

principles relating to measurement, recognition,
classification, presentation or disclosure.
The term ‘fraud’ refers to an intentional act by one or
more individuals among management, those charged
with governance, employees, or third parties, involving
the use of deception to obtain an unjust or illegal
advantage.

Responsibilities of the Auditor for Detecting

Material Misstatement Due to Fraud
Audit procedures are designed to detect material
misstatements in the financial statements and focus on
the financial aspects of transactions and events.
Examples of fraudulent financial reporting include:
(a) Manipulating, falsifying or altering records or
documents.

(b) Omitting transactions (e.g. not disclosing a legal

suit in the notes to financial statements).
(c) Intentionally misapplying accounting principles (e.g.
treating an operating lease as a finance lease).
(d) Recording fictitious journal entries.
(e) Inappropriately adjusting assumptions and
changing judgements used.

(f) Omitting, advancing or delaying recognition of

events and transactions (e.g. recognizing December
2016 sales in January 2017).
Examples of misappropriation of assets involving the
theft of an entity’s assets and often committed by
employees include:
(a) Embezzling receipts (money not tally to total in the
receipts report).

(b) Stealing physical or intellectual assets.

(c) Causing the company to pay for goods and
services not received (e.g. committed by accounts
payable clerk).
(d) Using an entity’s assets for personal use.
The auditor is not and cannot be held responsible for
the prevention of fraud and error.

 In the planning stage, the auditor should assess the

risk that fraud and error may cause the financial
statements to contain material misstatements.
 Circumstances that may indicate the possibility of
financial statements containing misstatements as
stipulated in the MIA By- Laws are as follows:

(a) Discrepancies in the accounting records.

(b) Conflicting or missing evidence.
(c) Problematic or unusual relationships between the
auditor and management.
Based on the risk assessment, the auditor should
design audit procedures as to have reasonable
expectation of detecting material misstatement arising
from fraud or error.

Management’s Assertions
 Management’s assertions are claims made by

members of management regarding certain aspects
of a business.
 The auditors test the validity of these assertions by
conducting a number of audit tests. Assertions are
evaluated within three categories:
(a) Transaction-level assertions.

(cont.)
 Accuracy: Full amounts of all transactions were

recorded, without error.
 Classification: All transactions have been recorded
within the correct accounts in the general ledger.
 Completeness: All business events to which the
company was subjected were recorded.
 Cut-off: All transactions were recorded within the
correct reporting period.

(cont.)
 Occurrence: Recorded business transactions

actually took place.
(b) Account balance assertions.
 Completeness: All reported asset, liability, and
equity balances have been fully reported.
 Existence: All account balances exist for assets,
liabilities, and equity.

(cont.)
 Rights and obligations: The entity has the rights to

the assets it owns and is obligated under its
reported liabilities.
 Valuation: All asset, liability, and equity balances
have been recorded at their proper valuations.

(cont.)
(c) Presentation and disclosure assertions.

Accuracy: All information disclosed is in the correct
amounts, and which reflect their proper values.
Completeness: All transactions that should be
disclosed have been disclosed.
Occurrence: Disclosed transactions have indeed
occurred.

(cont.)
 Rights and obligations: Disclosed rights and

obligations actually relate to the reporting entity.
 Understand ability: Information included in the
financial statements has been appropriately
presented and is clearly understandable.

Conclusion
 The objective of an audit is to enable the auditor to

express an opinion as to whether the financial
statements are prepared, in all material respects, in
accordance with an identified financial reporting
framework.
 While the auditor’s opinion adds credibility to the
financial statements, it cannot be held responsible
for the prevention of fraud and error.


Chapter 3 Edited

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 3 Edited

Uploaded by

Copyright:

Available Formats

3

Objectives and Scope of

After studying this chapter, you should be able to:

FUNDAMENTALS OF AUDITING All Rights Reserved

 An audit is an independent check of a company's

FUNDAMENTALS OF AUDITING All Rights Reserved

Basic Principles Governing an Audit

FUNDAMENTALS OF AUDITING All Rights Reserved

(b) Objectivity: To not allow bias, conflict of interest

 The auditors do not only focus on preventing and

FUNDAMENTALS OF AUDITING All Rights Reserved

 The standard distinguishes fraud from error and

FUNDAMENTALS OF AUDITING All Rights Reserved

 It also describes the inherent limitations of an audit

FUNDAMENTALS OF AUDITING All Rights Reserved

 ISA 240 requires the auditor to:

FUNDAMENTALS OF AUDITING All Rights Reserved

(c) Determine overall responses to address the risks of

FUNDAMENTALS OF AUDITING All Rights Reserved

(f) Consider whether an identified misstatement may

FUNDAMENTALS OF AUDITING All Rights Reserved

 The term ‘error’ refers to an unintentional

FUNDAMENTALS OF AUDITING All Rights Reserved

(c) A mistake in the application of accounting

FUNDAMENTALS OF AUDITING All Rights Reserved

Responsibilities of the Auditor for Detecting

FUNDAMENTALS OF AUDITING All Rights Reserved

(b) Omitting transactions (e.g. not disclosing a legal

FUNDAMENTALS OF AUDITING All Rights Reserved

(f) Omitting, advancing or delaying recognition of

FUNDAMENTALS OF AUDITING All Rights Reserved

(b) Stealing physical or intellectual assets.

FUNDAMENTALS OF AUDITING All Rights Reserved

 In the planning stage, the auditor should assess the

FUNDAMENTALS OF AUDITING All Rights Reserved

(a) Discrepancies in the accounting records.

FUNDAMENTALS OF AUDITING All Rights Reserved

 Management’s assertions are claims made by

FUNDAMENTALS OF AUDITING All Rights Reserved

 Accuracy: Full amounts of all transactions were

FUNDAMENTALS OF AUDITING All Rights Reserved

 Occurrence: Recorded business transactions

FUNDAMENTALS OF AUDITING All Rights Reserved

 Rights and obligations: The entity has the rights to

FUNDAMENTALS OF AUDITING All Rights Reserved

(c) Presentation and disclosure assertions.

FUNDAMENTALS OF AUDITING All Rights Reserved

 Rights and obligations: Disclosed rights and

FUNDAMENTALS OF AUDITING All Rights Reserved

 The objective of an audit is to enable the auditor to

FUNDAMENTALS OF AUDITING All Rights Reserved

You might also like