Introduction to Auditing 1
Definition of Auditing • A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic events to ascertain the degree of correspondence between those assertions and establish criteria and communicating the results to interested users. (American Accounting Association)
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Definition of Auditing – Cont’d • This definition consists of several important key points: • Systematic process- audit are structured activities. • Objectivity – freedom from bias. • Obtaining and evaluating evidence - allows the auditor to determine the support for assertions of representations. • Assertions about economic actions and events – describes the subject matter of an audit. • Degree of correspondence…established criteria – the purpose of the audit is to determine conformity with some specified criteria • Communicating results- the results must be communicated to interested parties. 3
Distinction Between Auditing and Accounting ACCOUNTING • The process of recording, classifying and summarising economic events in a logical manner for the purpose of providing financial information for decision making by the various users of financial statements. • The preparer is an accountant who must : • Have a through understanding of accounting principles and rules that provide the basis for preparing the financial statements • Ensure the economic events are recorded on a timely basis and at reasonable cost 4
Distinction Between Auditing and Accounting – Cont’d AUDITING
The auditor : 1. Must thoroughly understand accounting principles and rules as the criteria for evaluating the accounting information 2. Ensure accounting information is properly recorded and properly reflects the economic events that occurred during the accounting period. 3. Must posses expertise in the accumulation and interpretation of audit evidence, determining the proper audit procedures, sample size, particular items to examine, timing of the test and evaluating the results and problems 4. Able to give an independent opinion which will add credibility to the financial statements. 5
Management and Auditor’s Responsibilities AUDITOR’S RESPONSIBILITIES To state an opinion on the financial statements in auditor’s report based on his independent examination. To provide reasonable assurance that financial statements are free from material misstatement. To perform audit with due care and professional competence.
MANAGEMENT RESPONSIBILITIES Preparation of yearly financial statements To maintain adequate accounting records and internal control systems Safeguarding of company’s assets Prevention and detection of errors, irregularities and fraud 6
Demand for Auditing • Demand for auditing arises because users are not in a position to establish the credibility of the information they are presented with. This may be due to: • Conflict of interest – manager may present biased information, as they are also evaluated on the information. • Consequences- information provided forms the basis of many user’s decisions. • Complexity- many users do not have the expertise required to determine the quality of information presented. • Remoteness – the separation of owners from management prevents users from assessing information quality.
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Types of Audit 1. Financial Statement Audit 2. Compliance Audit 3. Operational Audits 4. Forensic Audit
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Financial Statement Audit • To determine whether the overall financial statements and quantifiable information are being verified and stated in accordance with specific criteria. • Carried out by independent auditor (external auditor from certified public accounting firm). • The independent audit will draw conclusions on financial statements that can be relied upon by the different groups of users for the different purposes.
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Operational Audit • An evaluation of any part of an organization's operating procedure and methods • Assessing the efficiency and effectiveness of management • Providing recommendation to management for improving the operations. • Carried out by the internal auditor or management consultancy works by external auditor
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Compliance Audit • to determine whether the management is adhering to specific procedures, regulations or rules implemented by higher authority. • to examine whether the organization has complied with the prescribed policies, contractual agreement or legal requirements. • Report for compliance audit is usually used for the internal purpose.
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Forensic Audit • This audit activity is specifically for detecting or deterring a wide variety of fraudulent activities financial issues.
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Types of Auditor • Chartered Accountant • Internal Auditor • Auditor General • Forensic Auditor
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Chartered Accountant • An approved company’s auditor work in a public accounting firm • The primary responsibility is to provide a true and fair opinion on the financial information recorded on financial statements
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Internal Auditor • An employee of the company • Carries out an assessment on the accounting and other operations • The results are reported to management (operational audit and compliance audit)
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Government Auditor • An employee reporting of the Auditor General Department. • Carry out audit of government department and agencies. • Include both the Financial Statement and Compliance audits. • The final reports are to be reported to the responsible Ministry and Parliament.
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Forensic Auditor • Trained in detecting, investigating and deterring fraud and white-collar crime. • Employed by corporations, government agencies, public accounting firms or consulting and investigative services firms.
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Chartered Accounting Firms • Four large accounting firms (“The Big Four”) in the world KPMG Ernst & Young Deloitte PricewaterhouseCoopers
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Structure of the Firm - Set up as partnerships / proprietorships - Size: range from two to 100 partners and many staff - Unlimited liability for the partners - Firms are constantly seeking limitation of exposure to liability - Components of Audit Teams: 1. 2. 3. 4.
- Partner - Manager - Senior Associate - Associate
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Professional Services • Assurance services
• Non-Assurance services
- Audit
- Tax service
- System and process
- Management advisory Services
- Risk
- Accounting and compilation Service
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Audit regulation • Different countries have its own rules and guideline for auditing. In Malaysia for instance, auditing is regulated by the Company Act 2016 and also guided by the By-Laws (on professional ethics, conduct and practice) 2011 of the Malaysian Institute of Accountants. • Globally, the International Auditing Standards is also still acceptable as a guideline to regulate auditing. • Students can view the Malaysia Company Act 2016, the MIA By-Laws 2011 and also the International Auditing Standards at the download material under this chapter.
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Audit regulation  The existence of a legal act such as the Company Act and also the By-Laws (code of professional conduct & ethics) is important as it is expected to govern the role of auditor. The role of auditor demand their position to be an independent party and act professionally with high value of integrity.  Other legal ruling that regulate the practice of auditor are Securities Commission Act 1963 and Capital Market and Services Act 2007.  Audit regulation is established for the auditors to gain public confidence in the quality of their service. 22