AUDIT 1

INTRODUCTION TO AUDIT &

OTHER ASSURANCE SERVICES
masnizasupar

TOPIC OUTLINES

1) Introduction
2) Distinction between auditing and accounting
3) Definition of audit
4) Economic demand for auditing
5) Assurance services
6) Types of audit
7) Types of auditors

(1) Introduction

Principal Agent Conflict

The practice of audit began when one individual assumed

stewardship over another partys property / assets

Information reported to assets owners must be accurate and

reliable. To ensure this, a critical review must be done

Audit provides assurance by an independent party that the

information given is reflective of true events

An examination and verification of a companys financial and

accounting records and supporting documents by a professional
such as Certified Public Accountant

Relationships Among Auditors, Client, and External

Users

Client or audit
committee hires
auditor

Auditor

Auditor issues
audit report relied
upon by users to reduce
information risk

Provides capital

External
Users

Client
Client provides financial
statements to users
4

(2) Distinguish Between

Auditing and Accounting
Accounting is the recording, classifying,
and summarizing of economic events
for the purpose of providing financial
information used in decision making.
Auditing is determining whether
recorded information properly
reflects the economic events that
occurred during the accounting period.
5

Audit vs Accounting
Accounting

Audit

Record, classify and summarize

economic events in accordance to
MFRS

Provide assurance that the economic

events are properly recorded

Create financial information or

reports for management or
stakeholders

Evaluate the relevance and reliability

of the systems and processes that are
used to prepare the financial
statements

Accountants have thorough

understanding of principles and rules
as a basis of preparation
Accountants must have a system
that ensure the entitys economic
events are properly recorded on a
timely basis within reasonable cost.

Gather evidence that economic

events are real and the value
attached is appropriate
Analytical analysis to gauge that the
balances are properly reported
6

(3) Definition of Audit

Audit is an exercise which primary objective is to enable auditor to
express a reasonable assurance whether the financial statements
prepared is true and fair view of the companys affairs at the financial
year end and the financial statements have been properly prepared in
accordance to approved accounting standards.

Audit improves the quality of financial information for better

decision making
Audit can detect errors and suggest ways for improving
controls within an accounting system
7

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.

Competent, Independent Person

Judgment and
Experience

Competence
Independence

Evaluation of
Evidence

Proper Conclusion
9

Accumulating Evidence and Evaluating Evidence

Evidence is any information used by the auditor
to determine whether the information being
audited is stated in accordance with the
established criteria.
Transaction
data

Client inquiry

Written and
electronic
Communications
with outsiders

Observations

10

Sarbanes-Oxley Act
Enron

WorldCom

The Act established the Public Company

Accounting Oversight Board.
It also requires auditors to report on the
effectiveness of internal control over
financial reporting.

Tyco

Adelphia
11

(4) Economic Demand for Auditing

Information risk
The possibility that the information upon which
the business decision made was inaccurate, thus
lead to inaccurate financial statements.

12

(5) Assurance Services

- An independent professional service that improves the
quality of information for decision makers.
- Types of assurance services
# Attestation services
# Other assurance services
(Figure 1-2 : pg.12)

Attestation services
-CA

firm issue a report about the reliability of an assertion that

is made by another party
- Categories of attestation services:

#
#
#
#

Audit of historical financial statements

Effectiveness of internal controls over financial reporting
Review of historical financial statements
Others, that may be applied to a broad range of subject matter
13

Assurance Services (cont.)

Other assurance services
The CA firm does not required to issue a written report and the
assurance does not have to be about the reliability of another
partys assertion about compliance with specified criteria.
# Assurance services on info technology
# Assurance services on other types of info (table 1-1)
Non-assurance services
# Accounting & bookkeeping services
# Tax services
# Management advisory services (MAS)

14

Assurance, Attestation, and

Non-assurance Services

Assurance, Attestation, and

Nonassurance Services
15

(6) Types of Audit (cont.)

Operational Audit
Compliance Audit
Financial Statement Audit
Forensic Audit

16

(6) Types of Audit (cont.)

Financial Statement Audit
The audit of financial statements (FS) by an
independent auditors which comprise of all elements of
financial statements.
Operational Audit
Independent appraisal activity undertaken for the
benefit of the management to determine the
effectiveness and efficiency of the departmental
operations.
This would includes evaluating the various
management processes and functions.
Usually done by internal auditor.
17

(6) Types of Audit (cont.)

Compliance Audit
Appointment of an auditor to determine whether the
business is conforming to certain procedures and
regulations set by the regulatory body.
Forensic Audit
An audit whose purpose is to useaccounting procedures
tocollect evidence for the prosecution
orinvestigationoffinancialcrimessuch
astheftorfraud.
Forensicauditorsare trained to present their findings in
legal proceedings.

18

Audit of Historical Financial

Statements
Example

Annual audit of financial

statements

Information

Financial statements

Established
Criteria

Generally accepted accounting

principles

Audit of Historical Financial

Available
Documents, records, and outside
Statements
Evidence
sources
of evidence
19

Operational Audit
Example

Evaluate computerized payroll system

for efficiency and effectiveness

Information

Number of records processed, costs of

the department, and number of errors

Established
Criteria

Company standards for efficiency and

effectiveness in payroll department

Available
Evidence

Operational Audit

Error reports, payroll records, and

payroll processing costs
20

Compliance Audit
Example

Determine whether bank requirements

for loan continuation have been met

Information

Company records

Established
Criteria

Loan agreement provisions

Available
Evidence

Compliance Audit
Financial statements and
calculations by the auditor

21

(7) Types of Auditor

1. Certified Public Accounting Firms (CA)
- CA firms are responsible for auditing the published FS of
all publicly traded companies and many smaller companies
as well as non-commercial organisations.
- Often call as external auditors or independent
auditors (to distinguish them from internal auditor)

- Auditors who express audit opinion on FS must be

licensed as CA firms.

22

Types of Auditor (cont.)

2. Internal Auditors
- Employed by individual companies to audit for management
- Responsibilities and size of internal audit department will vary to
individual requirements of companies
- Focused on operational auditing and evaluation of computer
systems
- The head of internal auditor must report directly to the audit
committee
- External users are not keen on internal auditors' report due to
independence issues (employer employee relationship)
- Many internal auditors pursue certification as certified internal
auditor (CIA).
23

Types of Auditor (cont.)

3. Government Auditors
- Work for Auditor General's office (Audit Act 1957)

- Audit federal and state government agencies,

statutory bodies and other public authorities on their financial
statements especially on receipts and expenditures.

- Evaluate the operational efficiency and effectiveness

of various federal programmes

- Report presented in Parliament

24

Types of Auditor (cont.)

4. Inland revenue assessment officers
- Enforce Income Tax Act 1967

- Main duty is to audit taxpayers' returns to ensure compliance

with tax laws

- Highly complicated and voluminous especially auditing of

multinational corporations.

- Required ability to interpret tax laws and auditing skill to conduct

effective audit.

25

(8) Chartered Accountants (CA)

1. External auditors or independent auditors
2. Regulated by Malaysian Institute of Accountants (MIA) through the
Accountant Act 1967
3. Requirement to be CA (Subject to CSAP result)
i. minimum 3 years' experience in recognised audit firms
ii. at least 75% of work experience is an auditor
4. Types of MIA membership issued by Minister of Finance (Sect 8(6)
Companies Act 1965)
Chartered Accountants in practices
Chartered Accountants not in practices
Associate members
5. CA examination in Malaysia is conducted by Malaysian Institute of
Certified Public Accountants (MICPA).
26

Homework 1
Instructions :
1.Write an essay of more than 100 words. Please indicate the
number of words at the end of essay.
2.Use handwriting only
3.Please submit on your 1st class
Question
Your essay should contain the following :
1.Why I like to learn accounting
2.What should I do to get an A for Audit
3.Do you want to become an auditor? (Yes/no and give reason
for your answer)
27

TUTORIAL WEEK 1
1.

What do you understand with the term expectation

gap?

2.

Discuss the difference between Internal and External

audit.

3.

List the parties who will rely upon auditor's report for
decision making?

4.

Differentiate between financial statements audit,

compliance audit and operational audit. (explain in term
of purpose, user, nature and who perform)

28

TUTORIAL WEEK 1
5.

ABC Sdn Bhd is a newly incorporated company that has

approached your firm to be its new auditors. While you are
discussing the terms of engagement, the managing
director commented Why is that your audit report states
that you only obtain reasonable assurance for your audit
work? Arent you supposed to be absolutely sure that the
financial statements are true and fair?
Required:
1.

The managing director's view that the audit should provide

absolute assurance on the financial statements is an example
of "expectation gap" between audit objective and user
expectation. Do you believe this is a reasonable expectation?
Give reasons for your answer.

2.

What are the limitations faced by the auditors?

29

It does not matter how slowly

you go as long as you do not stop
Confucius

30