Week 1:

Current Issues in Auditing, Audit

Responsibilities and Objectives,
Others
Current Issues in Auditing
 Nature of Auditing
• Auditing is:
– The accumulation and evaluation of evidence about
information.
– Performed by a competent, independent person

• The definition of auditing includes the following key

words and phrases:
– Information and established criteria
– Accumulating and evaluating evidence
– Competent, independent person
– Reporting
ASSURANCE ❖ Assurance: Analysis and improve quality of
information for the individuals making the
decision. Helping clients verify their
records are accurate from start to finish by
ATTESTATION verifying records. eg Sustainability Report
❖ Attestation : Attestation is a legal
acknowledgment of the authenticity of a
document and a verification that proper processes
were followed eg Notary

AUDIT
❖ Audit: Review of accounting information
provided in a company’s financial statements
• Accuracy and authenticity
• Follows accounting standards and
principles
• Presented in an ethical and fair
manner
OUR VISION: TO BE A WORLD CLASS UNIVERSITY
 DIFFERENCE BETWEEN AUDIT AND ASSURANCE

AUDIT ASSURANCE

Involves the evaluation of the accounting Is a way to analyse and assess the procedures,
1 information available in financial statements operations and processes

The basic aim is to present fair and accurate It ensures that the presented accounting information is
financial information that follows accounting accurate, ie there is no misrepresentations or
2 principles and standards irregularities in such a report to all stakeholders

The audit is performed under international auditing The practitioner may restrict to a specific area due to the
3 standards and hence has extended rights assurance terms, therefore has fewer rights

4 All stakeholders of a company are engaged Assurance may restrict to one type of stakeholder

Resources and time necessary for conducting an Resources and time required for assurance are relatively
5 audit are relatively higher lower

Audit points out any dishonest activity or misuse Assurance is done after the audit and provides essential
6 of the funds in financial statements information for better decision making.
ASSURANCE REPORT
 Distinguish Between Auditing and
Accounting

• Accounting is the recording, classifying, and

summarizing of economic events for the purpose of
providing financial information for decision making
• Auditors focus on determining whether recorded
information is accurate and properly reflects the economic
events that occurred during the accounting period
Economic Demand for Auditing

• Auditing can have a significant effect on information

risk
• Information risk is the possibility that the information
upon which the business decision was made was
inaccurate.
• A likely cause of the information risk is the possibility of
inaccurate financial statements.
Causes of Information Risk
• Reasons that increase the likelihood of decision
makers receiving unreliable information:
– Remoteness of information
– Biases and motives of the provider
– Voluminous data
– Complex exchange transactions

• There are three main ways to reduce information risk:

– User verifies information
– User shares information risk with management
– Audited financial statements are provided
Relationships Among Auditors,
Client, and External Users
 Nonassurance Services
• Nonassurance services are services rendered by accounting
firms that generally fall outside the scope of assurance services
such as:
– Accounting and bookkeeping services
– Tax services
– Management consulting services
 Types of Audits

Professional Accountants perform three

primary types of audits:
– Operational audit
– Compliance audit
– Financial statement audit
Types of Audits
The table below summarises the purpose and nature of
each type of audit:
Examples of the Three Types of Audit
(1 of 2)

Type of Audit Example Information Established Available

Criteria Evidence

Operational Evaluate whether Number of Company Error reports,

audit the computerized payroll records standards for payroll records,
payroll processed in a efficiency and and payroll
processing for a month, costs effectiveness in processing costs
Chinese of the payroll
subsidiary is department, department
operating and number of
efficiently and errors made
effectively
Examples of the Three Types of Audit
(2 of 2)

Type of Audit Example Information Established Available

Criteria Evidence

Compliance Determine Company Loan agreement Financial

audit whether bank records provisions statements and
requirements for calculations by
loan the auditor
continuation
have been met

Financial Annual audit of Apple’s financial Generally Documents,

statement Apple’s financial statements accepted records, and
audit statements accounting outside sources
principles of evidence
Audit Responsibilities and
Objectives
Objective of Conducting an Audit of
Financial Statements

• The purpose of an audit is to:

– Provide financial statement users with an opinion
by the auditor on
▪ Whether the financial statements are presented
fairly, in all material respects, in accordance with
the applicable financial accounting framework,
which enhances the degree of confidence that
intended users can place in the financial
statements
Management’s Responsibilities

• Management’s responsibility includes:

– Adopting sound accounting policies
– Maintaining adequate internal control
– Making fair representations in the financial statements
– Certifying the quarterly and annual financial
statements
Auditor’s Responsibilities
The overall objectives of the auditor are to:
– Obtain reasonable assurance about whether the
financial statements as a whole are free from material
misstatement, whether due to fraud or error
– Express an opinion on whether the financial
statements are presented fairly, in all material respects,
in accordance with an applicable financial reporting
framework
– Report on the financial statements, and communicate
as required by auditing standards, in accordance with
the auditor’s findings (consider laws and regulations
relevant to the client)
Professional Skepticism (1 of 2)

• Audit must be planned and performed with an

attitude of professional skepticism
• Professional skepticism consists of two
primary components:
– A questioning mind
– A critical assessment of the audit evidence
Professional Skepticism (2 of 2)

• Elements of professional skepticism include:

– Questioning mindset
– Suspension of judgment
– Search for knowledge
– Interpersonal understanding
– Autonomy
– Self-esteem
Financial Statement Cycles
• Audits are performed by dividing the financial
statements into smaller segments or components
• The division makes the audit more manageable
and aids in the assignment of tasks to different
members of the audit team
• A common way to divide an audit is to keep
closely related types (or classes) of transactions
and account balances in the same segment
Transaction Flow from Journals to
Financial Statements
Relationships Among Cycles

• Transaction cycles are an important way to

organize audits (revenue,expenditure,production,
human resource and financing)
• Auditors treat each cycle separately during the
audit
• Although auditors need to consider the
interrelationships between cycles, they typically
treat cycles independently to the extent practical
to manage complex audits effectively
Steps to Develop Audit Objectives- Transaction/Balance
Sheet
Setting Audit Objectives

• Audit objectives include:

– Transaction-related audit objectives
(Interim)
– Balance-related audit objectives
(Year end)
Comparison between Transaction &
Balance Audit Objectives ***
Transaction related Balance related
Objective Audit Objective Audit Objective
Occurrence X
Existence X
Completeness X X
Accuracy X X
Posting &
X
Summarization
Classification X X
Timing X
Cut-off X
Detail tie-in X

Realizable value X
Rights and
X
obligations
Presentation X X
Management Assertions
• Management assertions are implied or
expressed representations by
management about:
– Classes of transactions and the related
accounts and disclosures in the financial
statements and
– They are directly related to the financial
reporting framework used by the
company, in accordance with accounting
standards
Transaction-Related Audit Objectives Comparison between
Transaction & Balance Audit
(1 of 2)
Objectives

• Occurrence Transaction related Balance related

– Recorded or disclosed transactions Objective Audit Objective Audit Objective
Occurrence X
exist Existence X
Completeness X X
• Completeness Accuracy X X
– Existing transactions are recorded and Posting &
X
Summarization
disclosures are included Classification X X
Timing X
• Accuracy Cut-off X
– Recorded transactions are stated at the Detail tie-in X
correct amounts and disclosures are Realizable value X
appropriately measured and described Rights and
X
obligations
Presentation X X
Transaction-Related Audit Objectives Comparison between
(2 of 2) Transaction & Balance Audit
Objectives
• Posting and Summarization Transaction related Balance related
Objective Audit Objective Audit Objective
– Recorded transactions are properly included in the
Occurrence X
master files and are correctly summarized
Existence X
• Classification Completeness X X
Accuracy X X
– Transactions Included in the client’s journals are
Posting &
properly classified X
Summarization
Classification X X
• Timing Timing X
– Transactions are recorded on the correct dates Cut-off X
Detail tie-in X
• Presentation
Realizable value X
– Transactions are appropriately aggregated or
Rights and
disaggregated and described, and disclosures are X
obligations
relevant and understandable
Presentation X X
Management Assertions and Transaction-Related Audit
Objectives Applied to Sales Transactions
 Comparison between
Balance-Related Audit Objectives Transaction & Balance Audit
Objectives
(1 of 3)
Transaction related Balance related
Objective Audit Objective Audit Objective
• Existence Occurrence X
– Amounts included exist Existence X
Completeness X X
• Completeness Accuracy X X
– Existing amounts and related disclosures are Posting &
X
Summarization
included
Classification X X
• Accuracy Timing X
Cut-off X
– Amounts included are stated at the correct
Detail tie-in X
amounts, and disclosures are appropriately
measured and described Realizable value X
Rights and
X
obligations
Presentation X X
 Comparison between
Balance-Related Audit Objectives Transaction & Balance Audit
(2 of 3) Objectives
Transaction related Balance related
• Cutoff Objective Audit Objective Audit Objective
Occurrence X
– Transactions near the balance sheet Existence X
date are recorded in the proper period Completeness X X
Accuracy X X
• Detail tie-in
Posting &
X
– Details in the account balance agree Summarization
with related master file amounts, foot Classification X X
to the total in the account balance, and Timing X
agree with the total in the general Cut-off X
ledger Detail tie-in X
Realizable value X
• Realizable value
Rights and
– Assets are included at the amounts obligations
X
estimated to be realized Presentation X X
 Comparison between
Balance-Related Audit Transaction & Balance Audit
Objectives
Objectives (3 of 3) Transaction related Balance related
• Classification Objective Audit Objective Audit Objective
Occurrence X
– Amounts included in the client’s listing are Existence X
properly classified Completeness X X
Accuracy X X
• Rights and obligations
Posting &
– Assets are owned or controlled by the entity, X
Summarization
and liabilities are obligations of the entity Classification X X
Timing X
• Presentation Cut-off X
– Amounts are appropriately aggregated or Detail tie-in X
disaggregated and described, and disclosures X
Realizable value
are relevant and understandable Rights and
X
obligations
Presentation X X
Management Assertions and Balance-Related Audit
Objectives Applied to Inventory
Four Phases of a Financial Statement Audit
Four Phases of a Financial Statement Audit
 Audit Oversight Board Assertions
• Responsible for the registration of auditors of public
interest entities or schedule funds under Part IIIA of
the Securities Commission Malaysia Act 1993
(SCMA).
• The AOB describes five categories of
management assertions:
– Existence or occurrence
– Completeness
– Valuation or allocation
– Rights and obligations
– Presentation and disclosure
Malaysia – Auditing Standards
• Malaysia Institute of Accountants’ (MIA)
• Auditing and Assurance Standards Board (AASB) issues
auditing standards for Malaysia.
• The Malaysian Approved Standards in Auditing (MASA)
• All companies incorporated in Malaysia requires an annual
audit, except for:
– private exempt companies
– dormant companies
– zero revenue companies (current + 2 prior years)
– threshold qualified companies (revenue < RM100k)
OTHERS:
Sustainability
Bursa Malaysia
ADA
AI
Blockchain
SOX
Sustainability
• Sustainability is meeting the needs of the current generation
without compromising the needs of future generations. Ensuring a
balance between economic growth, environmental care and social
well being
• Sustainability is crucial as our future depends on it. Environmental
measures practices which saves both time and money.
• The most important KPI’s to track when considering sustainability:

➢Energy consumption
➢ Carbon footprint
➢Product recycling rate
➢Saving levels due to conservation and improvements efforts
➢Supplier environmental sustainability index
➢Water footprint
➢Waste reduction rate
➢Waste recycling rate
Sustainability
ESG
ESG

Sources of Greenhouse gas

emissions (GHG)
ESG
ESG
Sustainability

Upto 58% of US consumers prefer purchasing and services

from companies practicing sustainable habits. These customers
are more likely to purchase from ESG companies.

People want to work with environmentally conscious

companies.

Energy efficient lighting, efficient heating and cooling system

and better insulation are expensive to implement but is more
worthwhile in the long run.

Work places with sufficient natural light, good ventilations and

features of green offices help employees to be more
productive.
Sustainability

To save resources and prevent waste by recycling,

reusing and reducing materials can greatly impact
the company and management

Companies which comply with regulations find it

easier to implement government local requirements
and can act timely and efficiently.

All these factors lead to increased revenue by reducing

cost,improve brand awareness and reputation, adapting
innovative strategies and attracting employees and investors.
In a 2007 study by Goldman Sachs, companies incorporating
ESG outperform the stock market by 25% and 72% of these
companies had undisputable advantage over its competitors
Sustainability Reporting

GRI – Global Reporting Institute (Bursa Malaysia is in line with

GRI recommendations)
- GRI is an independent, international, non-profit organization is head
quartered in Amsterdam, Netherlands
- most comprehensive and widely accepted of sustainability reporting
standards. It has a set of 10 reporting principles that should be
adhered to, with respect to report the content and report quality.

TCFD - Task Force on Climate Change Financial Disclosure

IFRS- Sustainability Disclosure Standard
International Sustainability Standards Board
(ISSB)
➢ IFRS S1 –General requirements for disclosure of sustainability related
financial information. (Context, Materiality: Difft from Financial, wider stakeholder
groups). (Need to account for interconnectivity eg risk and opportunity)
▪ Covers governance, strategy, risk management, financial position, performance
and cash flow, resilience and metrics

➢ IFRS S2 – Climate related disclosures.

▪ Climate related risks and opportunities that will affect entity’s business model, strategy and
cash flows, access to finance and cost of capital over time.( Time are short term, medium
and long term is dependent of cycle eg property development)

* Effective 1 January 2024

IFRS S1 – Connectivity from Integrated Reporting
(Positive and Negative) (Risk and Opportunity)
Sustainability Audit
• A sustainability audit is a process that evaluates the performance of an
organization in relation to its sustainable development goals
• An audit of a company’s practices consist of self evaluation of three
specific areas:

❖ Investment practices – invests in companies which are committed to

sustainability

❖ Audit evaluates whether the business has reduced its energy

consumption, implemented recycling programs on site or for its
customers and if it is currently recycling

❖ Whether the company is educating its customers about sustainable

practices and whether there are any new products being made from
recycled materials

❖ Statement of Assurance required on/after 31 Dec 2023

Companies going Green
• Nike Inc – Came up with a way to weave efficiently. Reduced raw materials and labour
time to make a shoe. Savings in transportation, raw materials and waste disposal.

• Clarion Hotels - Forgo daily sheet change and daily towel change can take 25% off
hotel annual energy costs.

• Exxon Mobil – Energizes its operations in Texas with solar and wind energy.

• Google, Facebook & Amazon – Energy for its data centres using wind and solar
energy.

• Nestle – Ever thinner plastic bottles and using recycled bottle

• Coca-Cola Inc – using aluminium cans

• Nestle and PepsiCo – converting their supply chains to regenerative farming practices.
(farming system that aims to conserve and restore farmland and its ecosystem.
Maintains, sustains and restores what has been degraded in the past)
Charting a Course for net zero - The Ethical Corporation (June-July
2024 issue)

• Some 70% of emissions coming from industries are difficult to abate (reduce)
because they are energy and carbon intensive.
• Some of these industries are steel, microchip (one of the biggest CO2
emissions in Taiwan, which supplies more than 90% of the world’s advanced
microchips), automotive industries and the food system where beef and dairy
suppliers are grappling (wrestling) with their biggest contributor to methane (a
greenhouse gas which is 80 times more potent than CO2.
• Food systems are also the biggest contributor to increasing biodiversity loss
and account for 70% of freshwater withdrawals.
Connecting sustainability and financial information (ICAEW, 15th Jul 2024)

Bridging the gap between financial and sustainability is an objective of the main
corporate sustainability reporting regulations such as the CSRD (Corporate
Sustainability Reporting Directive), SEC climate disclosure rules, ESRS (European
Sustainability Reporting Standards and the SDS (the IFRS Sustainability Disclosure
Standards)
• Strongly recommend disclosures:
❖ for the same reporting period

❖ at the same time and in the same document

❖ explaining the connection between sustainability and financial performance

• Essential connections of :
❖ connect information about performance (financial repercussions to sustainability issues)

❖ use the same words and concepts (eg sustainability information are non financial information about
sustainability matters

❖ embrace financial accounting mindset (long term strategic forecast of revenues, costs, ROI)

❖ leverage existing reporting standards (measuring and reporting – capital investment, water scarcity)
Bursa Malaysia
❖ Bursa Malaysia (Kuala Lumpur Stock Exchange KLSE)

❖ Frontline regulator of the Malaysian capital market

❖ Responsibility of encouraging investor confidence by ensuring

efficient, cost-effective, fair and orderly market operations are
carried out.

❖ Enforce regulations and supervise listed companies (impose

fines), membership

❖ Treasury management (capital raising)

Bursa Malaysia

Bursa Malaysia comprise of 3 markets ie 3 levels for companies of

different size and industries

❖ MAIN market – at least 25% of its issued shares must be to the

public

❖ ACE market – industry companies, mainly technology

companies

❖ LEAP market – SMEs (10% of shares issued to the public)

 Bursa Malaysia
• 26th Sept 2022 - Bursa announced the enhanced sustainability
reporting requirements in the MAIN and the ACE Market Listings.
• MAIN market will be required to disclose in their sustainability
statements:
❖A common set of prescribed sustainability matters and indicators that are
deemed material for all listed issuers (“common sustainability matters”)
❖Climate change-related disclosures that are aligned with Task Force on
Climate related Financial Disclosures (“TCFD”) recommendations.
Narrative statement of material economic, environmental and social risks
and opportunities in the annual reports
❖At least three financial years’ data for each reported indicator,
corresponding targets (if any) as well as a summary of such data and
corresponding performance in a prescribed format (“ enhanced quantitative
information”)
❖A statement on whether the sustainability statement has been reviewed
internally by an internal auditor or independently assured (“statement of
assurance”)
Bursa Malaysia – Extract (26th Sept 2022)
 AI
In the world of ubiquitous AI
• Baseline knowledge matters more.
• Expertise matters more.
• Training matters more.

• Large language models (LLM) like ChatGPT from microsoft and OpenAI
Playground from Open AI are now available
• However there have been instances where they are found to share false
data, made up citations and incorrect information
• Learn to use as an effective tool
• Think critically about content and articulate thoughts for improving clarity.
USE OF AI

• PAIR – 4 steps
➢ Problem formulation – define problem
➢ AI tool selection – explore and compare generative AI
tools eg ChatGPT, Gamma AI, Google Bard or Microsoft
Bing
➢ Interaction – experiment with different inputs and
outputs
➢ Reflection – evaluation suggested AI proposals and
assess and reflect through personal beliefs, thoughts.
Ascertain the experiences with the AI tool – helpful or
hindrance.
ARTIFICIAL INTELLIGENCE (AI) AND AUDIT DATA ANALYTICS (ADA)
➢ AI and ADA are both technologies used in audit

➢ Purpose – AI is the simulation of human intelligence in machines that are programmed

to think and learn like humans. Used to automate tasks, perform data analysis and
predictions or recommendations based on patterns in data.
ADA focus on using data analytics to perform audits. It involves the analysis
of large sets of data to identify anomalies, patterns, and trends that may indicate
potential issues or risks.

➢ Capabilities – AI encompasses machine learning, natural language processing,

predicting future trends based on historical
ADA focus on data analysis techniques. Involves the use of statistical
methods, data mining and tools to examine data for irregularities

➢ Scope – AI has a broader scope and can be applied to various fields beyond audit
ADA assists auditors in analyzing financial data and detecting fraud

➢ Integrating with Audit Process – AI can be integrated with data collection and
extraction to analysis and reporting
ADA focuses specifically on data analysis.
AI
 BLOCKCHAIN
Blockchain was introduced as the core technology for Bitcoin in 2008

What is blockchain technology ?

• Blockchain is a digital ledger which captures transactions since its
creation
• Multiple transactions are combined as a “block” and is added to the
ledger
• All participants uses the shared database as “nodes” connected to the
blockchain.
• Participating nodes can add new, time-stamped transactions
• Participants cannot delete or alter entries once the entries have been
validated and accepted by the network. Any modifications would not sync
with the network and will be excluded.
 BLOCKCHAIN (cont’d)
Characteristics of Blockchain
• Near real-time settlement
• Distributed ledger- peer-to-peer distributed network allows a public history
of transactions, hence secure proof that the transaction has occurred.
Database
• Irreversibility
• Censorship resistant – economic rules built into blockchain model
provides monetary incentives for independent participants to continue
validating new blocks. Therefore a blockchain grows without an “owner”
and is expensive to censor.
• Saves cost and transaction time
 BLOCKCHAIN (cont’d)
Impact on audit & assurance
An audit involves an assessment that the records are supported by evidence that is
relevant, reliable objective, accurate and verifiable.
Acceptance of a transaction on blockchain will satisfy audit evidence of occurrence,
however the records may be:
• Unauthorised, fraudulent or illegal
• Executed between related parties
• Linked to a side agreement which is “off-chain”
• Incorrectly classified in the financial statements
• Estimated values rather than historical cost

Auditors will also need to consider and test management’s estimates although the
transactions are recorded in a blockchain.
BLOCKCHAIN (cont’d)
Evolution of audits could include:
• Auditors will have real-time data access via read-only nodes on blockchains
• Information obtained for the audit would be in a consistent and recurring format,
hence audits would be more efficient
• Auditors could use more automation, analytics and machine-learning capabilities
about unusual transactions on a real-time basis
• Supporting documents such as purchase invoices, agreements etc could be
encrypted and securely stored on blockchain
• Audit could cover whole population testing rather than samples

• Focus the audit on testing controls rather than transactions

• Set up a continuous audit process
• Develop new advisory services
Auditors’ role with regards professional judgements with regards to accounting
estimates, evaluation and test of internal controls over data integrity and
sources of relevant information will continue to be required.
BLOCKCHAIN - Diagram
Sarbanes-Oxley Act of 2002 (SOX)
• The Sarbanes-Oxley Act (“Act”) of 2002 is a US federal law that established
sweeping auditing and financial regulations for public companies. Lawmakers
created the legislation to help protect shareholders, employees and the public
from accounting errors and fraudulent financial practices.
• The Act was passed due to the accounting scandals at Enron, WorldCom,
Global Crossing, Tyco and Arthur Andersen, that resulted in billions of dollars
in corporate and investor losses. These huge losses negatively impacted the
financial markets and general investor trust.
• Impact – more costly audits
• Audit companies that conduct audit cannot provide other services
• Compliance required
– financial data security
- prevent malicious tampering of financial data
- track data breach attempts and remediation efforts
- keep event logs readily available for auditors
- demonstrate compliance in 90-day cycles
 Case Study – Carillion

▪ Carillion plc was a British multinational construction and facilities

management company with headquarters in the Midlands in England
▪ It was created in 1999 and became the second largest construction
company in the UK
▪ Its debt issues started in 2015, it had project shut downs which cost UK
taxpayers upto 180million pounds
▪ The Company went into liquidation in January 2018.
▪ The company had a 900 million sterling debt and a 600 million sterling
pension deficit at the time of liquidation.
▪ The auditors were KPMG (external auditors) and Deloittes (internal
auditors.
▪ Both firms failed to highlight problems in the company. Financial
problems were disguised by aggressive accounting and working
capital management by the company.
▪ In May 2018 KPMG were criticized for “rubber stamping”
figures which misrepresented the reality of the business.
▪ In Jan 2019, KPMG suspended the partner that led the audit
and three members of his team. In 2022, this partner was
banned for 15 years and fined 400 thousand pounds by the UK
Financial Reporting Council (FRC). KPMG was fined 21 million
pounds by the FRC for mishandling Carillion’s accounts