Intro to auditing lect 1

AUDIT AND ASSURANCE

Introduction To Auditing

BM051-3.5-2-AAS Audit & Assurance Introduction To Auditing

LEARNING OUTCOME• To understand the meaning of auditing• To explain the need of auditing• To identify the different types of audit and auditors

• To describe the difference between the external auditors and internal auditors

• To identify the provisions relating to audit of financial statements under the Companies Act 1965 and other relevance statutory provision

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Topic & Structure of the lesson

• What is auditing• Purpose of auditing• Types of Auditors• Types of Audit• External auditors vs Internal Auditors

• Major phases of an audit• Role and responsibilities of an auditor

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Key Terms you must be able to use

• Accounting• Auditing• Compliance audit• Government audit• Financial statement audit• Internal auditors• Operational audit

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Introduction

• Auditing is The accumulation and evaluation of evidence

Against established criteriaDone by a competent and independent party

To express an opinion

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The purpose of an audit

• To enable the auditor to express an opinion whether the financial statements present a true and fair view in accordance with the identified financial reporting framework

• This will enhance the credibility of financial statement

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Types of Auditors

• External auditors• Internal auditors• Governments auditors• Forensic auditors• Information System/Technology Auditors

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Types of audits

• Financial Statement auditCompulsory audit to be carried out annually

In compliance with the Financial Reporting Standards(FRS)

Companies ActInternational Standards on Auditing(ISA)

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Types of audits(con’t)

• Compliance AuditConformity in fulfilling official requirement

Specific procedures or rulesBy management or regulatory authority

E.g tax audit, internal audit

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• Operational AuditEvaluating effectiveness and efficiency

Use of resourcesPerformance and improvemente.g computer usage, IT auditors

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• Forensic auditPN4 Companies (PN means Practice Note)

Business fraud, Criminal investigation

e.g Due diligent audits, investigations

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EXTERNAL AUDITORS VS INTERNAL AUDITORS

• Independent• Objective, Function, Scope• Methodology• Employment• Education background and Expertise

• Conflict of interest

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MAJOR PHASES OF AN AUDIT

Preliminary Obtain Establish Planning

Engagement understanding materialityActivities of the entity and assess

risk

Issue audit report Review Test of control and substantive test

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ETHICS

• Code of conduct on moral duties and obligation

• How we should behave• MIA By-laws

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INDEPENDENCE

• Auditor able to maintain an unbiased and objective attitude of mind and appearance

• Auditor must be independent and seen as independent

• 3 types of independence:Independence of mind/factIndependence in appearance

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THREATS TO INDEPENDENCE• Self interest• Self review• Advocacy-trying to influence outcome of issues

• Familiarity• Intimidation• Contingent fees-pay fees if result is favourable

• Opinion shopping-shop for positive opinion

• Lowballing -discount audit fees

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SAFEGUARDS OF INDEPENDENCE (15 Sept

2011)• Audit committee• Auditors’ Rotation• Restrict non-audit service• Quality control• Peer review – review by another accounting firm

• MIA by-laws

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TRUE AND FAIR

• This is the phrase used to express the auditor’s opinion

• This phrase is also used in the auditing standards- the cornerstone of financial reporting & auditing

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ACCEPTANCE• Factors to be considered:o Independenceo Ascertain the reasons for change of auditorso Availability of resourceso The need to rely on other experts or outside consultants

o Professionally qualified and not prohibited by law

o Previous auditor was correctly removed in accordance to the company law

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FIRST APPOINTMENT

• Must be appointed by the directors within 3 months of the incorporation of the company

• Auditors to hold office until the first annual general meeting(AGM) of the company

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SUBSEQUENT APPOINTMNET

• To be appointed by shareholders at each AGM (M’sian Co Act 1965 Section 172)

• Auditors to hold office from the date of appointment to the conclusion of next AGM

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APPOINTMENT OF AUDITORS

• The auditors must hold the office as auditors of the company immediately before the meeting or notice of his/her nomination was properly given

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SHAREHOLDERS’ RIGHT

•Shareholders are entitled in AGM to appoint an auditor other than existing auditor

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NOMINATION OF AUDITORS-PROCESS

Section of 172 of the Companies Act 1965

Notice of nomination given to members of the company 21 day before AGM

Notice of nomination to be sent to the person nominated 7 days before AGM

Fine RM5,000

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CASUAL VACANCY

• Death of sole auditor• Outgoing auditor decline reappointment at AGM

• Directors of the company may appoint an auditor to fill any casual vacancy

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FAILURE TO APPOINT NEW AUDITOR

• Companies Commission of Malaysia can appoint an auditor for the company under section 172(8) of the Companies Act 1965

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AUDITORS’ PERSPECTIVE ON APPOINTMENT

• Communicate with existing auditors

• By way of letter of professional clearance

• Within reasonable time

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ENGAGEMENT LETTER

• Sent by auditor to client• Formalises the arrangement reached between the auditor and the client

• Serves as a contract, outlining the responsibility of both parties and preventing misunderstanding between the two parties

• ISA( I’ntl Std of Auditing) 210 ‘Term of Audit Engagements” provides guidance

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DISQUALIFICATION OF AUDITORS – Sec. 9 Co. Act

1965• A person prohibited to act as auditor of co if:

Owe the company or its related corporations more than RM2,500

An officer of the companyA partner, employer or employee of an officer of the company

A partner, employee of an employee of an officer of the company

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RESIGNATION OF AUDITORS

• Auditors will only resign from office : If he is not the sole auditor of the company

At a general meeting of the company• Written notice by the auditors• Directors must call a general meeting as soon as is practicable to appoint another auditor

• The auditor’s resignation will take effect once another auditor is appointed

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REMOVAL OF AUDITORS

• By a resolution of the company at a AGM after a special notice is given

• Auditors may make representations within 7 days after receiving notice, in writing to the company dealing with the resolution for removal

• Lodge written notice of removal to registrar

• New auditors to be immediately appointed

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ETHICAL CONSIDERATION• Too large/small for the client• Ethical impediment• Change in control or ownership of client company

• Fees/Unpaid fees• Non-audit work• Loss of confidence by the Board/Shareholders

• Dispute – accounting policies• Personality clash• Resources and competency

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Question & Answer

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Next Session (19 Sept 11)

Internal Control, Control Risks, Assessment and test of controls

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Intro to auditing lect 1

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