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AUDITING

BAC2664 (New), BAC2287(Old)

Lecture 1
Topic 1
Introduction to Auditing

1
Introduction
• Pre-requisite:
1 BAC1614 Fundamentals of Accounting
2 Financial Statements for Limited Companies
3 Users/Purpose of Annual Report and Financial
Statements
4 Malaysian Accounting Standards (MASB,
FRS, IFRS)
5 Companies Act (CA)1965, relevant sections
and 9th Schedule
6 Relevant websites: CCM, MIA, MASB, MICPA,
ACCA
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Course Outcome, Assessment
• Group Assignment 20%
• Mid-term Test – Written Exam 15%
• Final Exam – Written Exam 65%

• Group (not more than 4 to a group)


Assignment (related to Internal Controls
and Accounting System), given in week
two (2).
• Submission dateline - week twelve (12).
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T1 – Introduction to Auditing
• Purpose of Audit
• Difference between Auditing and
Accounting
• Types of Audits and Auditors
• Audit Firm and the role and importance of
professional accounting body
• Statutory Audit and the Companies Act
1965
• Malaysian Auditing Standards
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Purpose of Audit
• Limited companies owned by shareholders, with ‘limited
liability’
• Companies managed by directors appointed by the
shareholders
• Accountability by directors to shareholders, of their
stewardship, by way of statutory financial statements
(FS), annual report (AR), and mandatory reports
• FS and AR relied upon by shareholders, users, and
stakeholders
• CA 1965 requires FS to be audited by an independent
auditor for credibility before being circulated to
shareholders, users, and stakeholders

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Purpose (Reasons) of Audit
• Credibility of FS and AR necessary. Why?
The FS may:
1 contain errors
2 not disclose fraud
3 be inadvertently misleading
4 be deliberately misleading
5 fail to disclose all relevant information
6 fail to conform or comply with and to statutory
regulations or other requirements (CA 1965,
MASB, FRS, Securities Commission, Stock
Exchange)……….
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Objectives of Auditing
• Primary Objective:
to produce an audit report by the auditor of his opinion of
truth and fairness of financial statements so that any
person reading and using them can belief in them.

• Secondary/Subsidiary Objective:
to detect errors and fraud, to prevent errors and fraud by
the deterrent and moral effect of the audit, to provide
spin-off effects (auditor able assist with accounting,
systems, taxation, financial and other problems)

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Difference between Accounting
and Auditing
• Accounting:
The process of measuring, recognising economic events and related
data, in monetary terms and then communicating the resultant
information (quantitative and qualitative information) to interested
persons, or decision makers.

• Auditing:
The process by which a competent, independent person
accumulates and evaluates (examination) about quantifiable
information (given in the financial statements) related to a specific
entity for the purpose of determining and reporting on the degree of
correspondence between quantifiable and established criteria (CA
1965 and MASB).

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Types of Audits and Auditors
• Statutory Audit - audits carried out because the law requires them
(CA 1965).

• Private Audit – conducted into a firm’s affairs by an independent


auditor because the owners desire it, not because the law requires it
(sole trader and partnership).

• Internal Audit - conducted by an employee of a business into the


aspect of its affairs.

• Managerial Audit - an enquiry into the effectiveness of management.

• Financial Statement Audit, Compliance Audit, Operational Audit,


Forensic Audit

• Independent Auditor (External Auditors), Internal Auditor, Government


Auditor (Auditor-General)
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Audit Firm

Auditing firms do not describe themselves as


auditors. They describe themselves as
Chartered Accountants or Certified Accountants
or Public Accountants.
Auditing firms are composed of accountants
(members of professional accounting bodies –
MIA, MICPA, ACCA, ICAEW, Australia, New
Zealand, India; and both audit firm and
accountants, must be licensed by Ministry of
Finance) who perform ‘audits’ for their clients.
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The role and importance of
professional accounting body
• Audit of FS of limited companies
• Perform other services: writing up books,
balancing books and records, preparing ‘final’
accounts, tax computations and negotiations,
government and statutory form filing, financial
advice and planning, management and ‘systems’
advice, liquidation and receivership work, fraud
and tax investigations, mergers and acquisition
exercise, listing on stock exchange…

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Statutory Audit and the Companies Act
1965
• Statutory Audit – conducted for companies and
are governed by the rules of the CA 1965.

• Companies Act 1965 – contains detailed


regulations (by way of a number of sections) on
(1) the conduct of an audit, (2) the accounting
records on which the auditor will work, (3) the
financial statements on which he will report and
(4) on the auditors’ relations with the company.

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Auditing Standards
The professional accounting bodies have among their
objectives, the provision of technical papers designed to
improve the competence and efficiency of members.
A series of statements on best auditing practice have been
adopted/formulated by The Malaysian Institute of
Accountants, known as MALAYSIAN APPROVED
STANDARDS ON AUDITING.
Auditors must comply with the Standards. Apparent failure
to comply may be enquired into by the appropriate
committee of the relevant accountancy body and may
lead to disciplinary or regulatory action (suspend or
withdraw registration of membership, cannot conduct
company audits, court actions for negligence).
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References
• Lecture Notes
• Tutorial Questions
• Past Mid-term and Final Exam Questions (last 4 exams)
• Companies Act 1965
• MASB – 2008 Malaysian Accounting Standards
• MIA – 2008 Malaysian Approved Standards on Auditing
• MIA – 2008 By-Laws on Professional Conduct and
Ethics. MIA. Kuala Lumpur
• Messier, W. F. and Margaret Boh, 2006, Auditing and
Assurance Service in Malaysia. 3rd ed. McGraw Hill,
Kuala Lumpur
• Relevant Articles, Journals, Newsletters, Magazines on
Auditing – ACCA, MIA, ICAEW
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