An Introduction to Auditing

Students should be able to:

1.Define audit, state audit objectives and explain need for
audit.
2.Describe auditor’s responsibility and management
responsibility
3.Distinguish between auditing and accounting
4.Describe types of auditors and auditing
5.Qualifications, disqualifications, appointment,resignation
and removal of auditors
— “ Auditing is the accumulation and evaluation of
evidence about information to determine and report
on the degree of correspondence between the
information and established criteria.”
— “ Audit is an independent examination of, and
expression of opinion on, the financial statements of
an enterprise by an appointed auditor ( a competent
independent person) in pursuance of that
appointment and in compliance with any relevant
statutory requirements”
— Accumulation and evaluation of evidence
Evidence is any information used by the auditor to
determine whether the information being audited is
stated in accordance with the established criteria

— Information and established criteria

To do an audit, there must be information in a
verifiable form and some standards (criteria) by which
the auditor can evaluate the information
— Report
The final stage in the auditing process is preparing the
Audit Report, which is the communication of the auditors’
findings to users
— Competent and independent person
The auditor must be qualified to understand the criteria
used and must be competent to know the types and amount
of evidence to accumulate to reach the proper conclusion
after the evidence has been examined. The auditor must also
have an independent mental attitude. The individual is said
to be competent if he is fair in the accumulation and
evaluation of evidence.
— To form and express and independence expert opinion
based on the audit work that the Financial Statements
which are to be relied upon the users (shareholders,
creditors, investors, etc) are free of material
misstatements.

— The phases used to express the auditor’s opinion are

“give true and fair view” or “present fairly, in all
material respects”
— Forming and expressing an opinion on compliance
with statutory requirement and other regulations.
— To provide assistance to the client improving financial
controls and financial reporting within the business.
— To detect and prevent fraud and error in accounting
records
• The relationship between an owner (shareholders) and
manager produces a natural conflict of interest
because of the information asymmetry that exists
between the manager and the absentee owner.
• Information asymmetry means that the manager
generally has more information about the “true”
financial position and results of operation than does
the owner.
• It is at this point that the demand for auditing arises.
— To state an opinion on the financial statements in
auditors report based on his independence
examination.
— To provide reasonable assurance that financial
statements are free from material misstatement.
— Audit performed with due care and professional
competence
q Preparation of financial statements
q To maintain adequate accounting records and internal
control system
q Safeguarding of companies assets
q Preventing and detecting of errors, irregularities and
fraud.
 Accounting Auditing

1. Definition
Recording, classifying and Auditing is the accumulation and
summarizing of economic events in evaluation of evidence about
a logical manner for purpose of information to determine and report on
providing financial information for the degree of correspondence between
decision making. the information and established criteria

2. Objective
To make sure that the entity’s Determining whether recorded
economic events are properly information properly reflects the
recorded on a timely basis and at a economic events that occurred during
reasonable cost. the accounting period.
3. Expertise
In preparing financial reporting In the accumulation and interpretation
to the company of audit evidence

4. Duties and responsibilities

preparation of financial • To state an opinion on the financial
statements statements in auditor’s report based on
• To maintain adequate accounting his independent examination.
record and internal control • To provide reasonable assurance that
system. financial statements are free from
• Prevention and detection of errors material misstatements.
, irregularities and fraud. • Audit performed with due care and
professional competence.
 Financial Statement Audit
— The audit is conducted to determine whether the overall
financial statements and the quantifiable information are
being verified and stated in accordance with specific
criteria.
— The specific criteria are Financial Reporting Standard
(FRS).
— The auditor performs appropriate tests to determine
whether the statements contain any material errors or
other misstatements
— It is more efficient to have an independent auditor to
perform audit and draw conclusions on that FS.
 Operational Audit
§ Is an review of any part of an organization’s operating
procedures and methods (such as accounting, organization
structure, computer operations, production methods and
any other area in which the auditor is qualified)
§ It is for the purpose of evaluation on efficiency and
management itself.
§ Recommendations to mgt for improving the operations are
normally expected at the completion of an operational
audit.
§ It may be carried out by the internal auditor of the
company or external consultant.
 Compliance Audit
§ The purpose is to determine whether the management
is following specific procedures, regulations or rules
set down by some higher authority.
§ In private or government organization, a compliance
audit may be required to check whether the
organization has complied with prescribed policies,
contractual agreements or legal requirements.
§ Result of compliance audits are generally reported to
someone within the organizational units being
audited rather than to a broad users.`
 Forensic Auditing
§ The audit which obtains
and develops information
as legal evidence or for
use by expert witnesses in
the court of law.
§ Forensic auditing requires
the use of critical analyses
and investigative skills,
integrated with
accounting knowledge
and business experience.
 External Auditor
v Is an approved company auditor under Sec. 8
Company Act 1965 to audit every company
incorporated under the act.
v The primary responsibility is to provide a true and fair
opinion on the financial information recorded on
financial statements.
v Audit of financial statements; internal control,
compliance audit.
 Internal Auditor
§ An employee of the company
carries out an appraisal out an
appraisal on the accounting and
other operations and the results
are reported to management.
§ Operational audit and
compliance audit
 Government Auditor
q A government employee reporting to Auditor General
Department.
q Audits of government department and government
agencies.
q Audit duties would include both audit of financial
statements and compliance audit.
q The final reports are to be reported to the responsible
Ministry and Parliament
 Forensic Auditors
o Are trained in detecting , investigating and deferring
fraud and white collar crime.

o Forensic auditing requires the use of critical analyses

and investigative skills, integrated with accounting
knowledge and business experience
This by-law prohibits a member from using a trade name or fictitious name
to practice the professional.
By-Laws 3-1(2) provides that a member in public practice shall practice as
an auditor or licensed accountant:
o In his own name or
o In the name or names of his partner or partners being auditors or
licensed accountant or
o In the name of a existing at the time of coming into operation of the
Accountant Act 1967 or formed thereafter provided that the partner in
Malaysia are eligible to he registered as auditors or licensed accountants
 Advertising is the use of various media such magazines and
radio to communicate favourable information about the
services of the CA firm.

Publicity may he similarly defined.

Solicitation consists of various means that CA firms use to engage

new clients, other than accepting new clients that approach the
firms.
Fees And Commission
By-Law 11-1 provides that the professional fees
should be fair reflection of the value of the work
performed for the client, taking into account:
o The skill and knowledge required for the type
of the work involved
o The level of training and experience of the
persons necessarily engaged in the work
o The time necessarily occupied by each person
engaged in work and
o The degree of responsibility and urgency that
the work entails
During the audit or other types of engagements, practitioners obtain a
considerable amount of information of a confidential nature.
The MIA By-Law on confidentiality prohibits a member using confidential
information acquired in the course of the professional work for his or her
personal advantage or for the advantage of a third parties.
A member should not disclose that information except with the consent of
client
However, under the following situation, a member may disclose confidential
information without the consent of the client
(By Law 12-2):
o The purpose of discharging his duties to his client
o In accordance with the provision of any written law or where disclosure is
compelled by the process of law.
o Where disclosure is reasonable necessary to protect the member’ interest
q Qualification of Auditors
— Sec. 8 Company Act 1965 requires a company to
appoint an approved company auditor

— Approved company auditor is qualified person

approved by the Ministry of Finance to act as an
auditor, is good of character and competent to perform
the duties of an auditor.
q Qualification of Auditors
— A person planned to be an approved auditor must have
a professional accountancy qualification with adequate
practical training before being recognize as MIA
member holding the designation of public or licensed
accountant.
— Public accounting firms are generally organized either
as proprietorship or partnership ranging from big,
medium and small size which can be described as big
four , medium size and small local firm.
q Disqualification of Auditor
Sec 9(1) Company Act 1965, a person shall not be appointed as auditor
for any company if
— S 9 (1)(a)- if he is not an approved company auditor
— S 9 (1)(b)- if he is indebted to company, its holding or subsidiaries
company in an amount exceeding RM2,500
— S 9 (1)(c)
- an officer of the company
- A partner, employer or employee of the officer of the company
- A partner or employee of an employee of an officer of the company
- A shareholder or his spouse is a shareholder of a company whose
employee is an officer of the company.
— S (1)(d)- if he is responsible for or if he is the partner, employer,
employee of a person responsible for keeping of the register of member
or debenture holder.
— Sec 172(1)- power of director to appoint auditor before 1st
annual general meeting (AGM). If the directors do not
appoint the first auditor, the member are entitled to do so
in the AGM.
— Sec 172(2)- a company shall appoint auditor at each AGM.
The term of office of auditor starts from appointment at the
present AGM until the conclusion of the next AGM.
— Sec 172(3)- power to director to appoint auditor to fill any
casual vacancy (termination of biz, winding up) in the
office until the conclusion with exception to
resignation/dismissal
— Sec 172(10)- power to CCM to appoint auditor after the
dismissal/ removal of auditor if the company does not
appoint another auditor on the application in writing of
any member of the company to make an appointment
— Sec 172 (4)- dismissal of auditor at AGM of which special
notice of a ordinary resolution to remove an auditor has
been given.
— Sec 172 (5)- on receipt of the special notice, the company
must sent a copy of special notice to the auditor concerned
and CCM. The auditor may within 7 days after receipt of
the special notice by him, make representations be sent by
the company to all members entitled to receive notice of
the general meeting
— Sec 172 (8&10)- a company shall inform in writing of the
removal of auditor to CCM. The power of CCM to appoint
auditor after dismissal / removal of auditor if the company
does not appoint another auditor.
— Sec 174 (14) – an auditor may resign if he is not sole
auditor of the company or at the AGM of the company
— .
— Sec 172 (15) – an auditor shall give notice of resignation
to directors and the resignation will only effective on
the appointment of another auditor.
— 1.Define auditing.
— 2.Explain the need for auditing.
— 3.State the primary objective of audit.
— 4.State the responsibility of management.
— 5.State the responsibility of auditor.
— 6.Describe types of auditor.
— 7.Explain types of auditing.
— 8. Describe the appointments of auditors.
— 9. How an auditor could be removed? Explain.
— 10. How an auditor may resign? Explain.