Aau3711 Module With Past Year Exam Summary

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AAU3711 Workbook for student
Auditing (KOLEJ MUTIARA)

TEACHING AND LEARNING MODULE
DIPLOMA IN ACCOUNTANCY
AAU 3711
AUDITING
ROSLIANA BINTI RAZAB

OCTOBER 2021
TOPIC 1
INTRODUCTION
(TEST 1)
TOPIC COVERAGE
Introduction
1) Definition of auditing
2) Objectives of financial statements audit
3) Distinction between auditing and accounting
4) Management and auditor‘s responsibilities
5) Demand for auditing
6) Types of audits
a. Financial statement audit
b. Compliance audit
c. Operational audit
d. Forensic audit
7) Types of auditors
a. Chartered accountants
b. Internal auditors
c. Auditor-General
d. Forensic auditors
8) Chartered accounting firms
a. Structure of the firms
b. Professional services
 Assurance services
 Non-assurance services
1) DEFINITION OF AUDITING
Definition 1
―Auditing is a systematic process of objectively obtaining and evaluating
evidence regarding assertions about economic actions and events to ascertain
the degree of correspondence between those assertions and established
criteria and communicating the results to interested users.‖
(source: American Accounting Association Committee on Basic Auditing Concepts (1973, p. 8)
Keywords
 Systematic process: audits are structured activities that follow a logical
sequence
 Objectively: a quality methods by which information is obtained and also a
quality of the person doing audit.(unbiased)
 Obtaining and evaluating evidence: a matter of examining the underlying
support for assertions or representations
 Assertions about economic actions & events: An assertion is essentially a
proposition that can be proved or disproved.(representations made by a
responsible party in an accountability arrangement that pertains to economic
actions and events)
 Degree of correspondence…established criteria: an audit establishes the
conformity of assertions with specified criteria.
 Communicating results: to be useful, the results of the audit need to be

communicated to interested parties by either oral or written means
Definition 2
Audit is an independent examination of, and expression of opinion on, the
financial statements of an enterprise by an appointed auditor (competent
independent person) in pursuance of that appointment and in compliance with
any relevant statutory requirements.
Keywords:
 Independent examination: using audit procedures and carrying out tests to
accumulate self-generated evidence, third – party evidence, etc which are
independent from management before arriving at the conclusions on which
the audit opinion is based
 Expression of opinion: to form an opinion on the truth and fairness of
financial statements
 Financial statement: all statements and financial information identified within
the scope of an audit normally balance sheet, profit & loss accounts, notes to
the accounts, cash flow statements, group accounts, etc
 Enterprise: any form of entity whether profit orientated or not
 Appointed auditor: Section 263 of Companies Act 2016 – an approved
company auditor or the Audit Firm – a chartered accounting firm ranges from
sole proprietorships to partnerships providing broad categories of services
such as attestation services including audits, tax services, accounting service
and management advisory services.
 In pursuance of auditor’s appointment: as per statutory requirements and
other regulations including letter of engagement
 In compliance with any relevant statutory requirements: Companies Act
(Malaysia) 2016, Banking Act, Industrial Act, etc.
AUDIT OF FINANCIAL STATEMENTS OF A COMPANY

REASON FOR AUDIT OF COMPANY

 The audit of company is a statutory requirement under Companies Act 2016
 To increase the confidence level of the shareholders
 To reduce information risk i.e. risk that information provided is misleading /
inaccurate.
 Helps owners assess how well managers have discharged their stewardship
duties.
2) OBJECTIVES OF FINANCIAL STATEMENTS AUDIT
(a) To obtain reasonable assurance about whether the financial report as a whole
is free from material misstatement, whether due to fraud or error, thereby
enabling the auditor to express an opinion on whether the financial report is
prepared, in all material respects, in accordance with an applicable financial
reporting framework; and
(b) To report on the financial statements, and communicate as required by the

Auditing Standards (ISAs), and in accordance with the auditor‘s findings.
⚫ The phrases used to express the auditor‘s opinion are ―give true and fair
view‖ or ―present fairly, in all material respects,‖ which are equivalent
terms.
⚫ Both terms indicate financial statement are actually free from material
misstatement.
⚫ Auditor needs to obtain a degree of reasonable assurance that the accounting

& other records are not affected by material misstatements resulting from
fraud & error.
⚫ Materiality – information is material if its omission or misstatement could

influence the economic decision of users taken on the basis of the financial
statements
⚫ Misstatement – a mistake in financial information which would arise from

errors and fraud.
⚫ A misstatement in the financial statements can be considered material if

knowledge of the misstatement would affects a decision of a reasonable user
of the statements
Meaning of “TRUE AND FAIR VIEW”
⚫ True and Fair View is a legal concept but there is no legal definition made by the
court. The decisions of courts are available only based on the concept in action
⚫ Basically, to be true, account must be in accordance with facts and reality. Fair is
interpreted to mean that the accounts should be unbiased, just and equitable.
⚫ The accounts will be true and fair when the information they contain is sufficient in
quantity and quality to satisfy the reasonable expectation of the readers to whom
they are addressed
⚫ The court will treat compliance with the generally accepted accounting principles
(GAAP) as reflected in the Statements of Accounting Standard as prima facie
evidence that the accounting principles have been applied consistently.
SCOPE OF FINANCIAL STATEMENT AUDIT
The scope of Financial Statement audit is governed by:
Legislation Companies Act 2016 gives auditors the right to access the
accounts & other records deemed necessary, thus unlawful if
client impose restriction on any records or withholds info.
Regulations - Banks & Finance .companies incorporated under

Companies .Act 2016 but activities monitored by the Bank
Negara Malaysia (BNM).
- Other regulations pertaining to type of industries
Auditing Standards International Standard on Auditing (ISA) & Malaysian

Standard on Auditing (MASA)
3) DISTINCTION BETWEEN AUDITING AND ACCOUNTING
Auditing Accounting
Determine whether recorded info fairly Record transactions & provide financial
reflects actual transactions information
Auditor responsible to evaluate the Accountant responsible to develop a

system to determine its effectiveness system to ensure that transactions are
properly recorded
Auditor must understand accounting Accountant must understand

principles so that he/she would be able accounting principles so that
to detect non-compliance by the transactions were recorded according
Accountant to accepted standards
Auditor should possess expertise to Accountant should possess expertise to

accumulate & interpret audit evidence record transactions & to prepare
financial statements
4) MANAGEMENT AND AUDITOR’S RESPONSIBILITIES
MANAGEMENT’S RESPONSIBILITY
 Preparation of yearly financial statements

 To develop and maintain adequate accounting records and internal control systems
 Safeguarding of company‘s assets
 Prevention and detection of errors, irregularities & fraud
AUDITOR’S RESPONSIBILITIES
 To state an opinion on the financial statements in auditor‘s report based on his

independent examination.
⚫ AI 200 also noted that:
An audit in accordance with ISAs/MASA is designed to provide reasonable
assurance that the financial statements taken as whole are free from material
misstatements
⚫ To report on the effectiveness of internal control over financial reporting
⚫ To identify material weaknesses in internal control and provide recommendations to
overcome weaknesses (letter of weaknesses / management letter)
⚫ To perform audit with due care and professional competence.
⚫ To conduct audit with professional scepticism i.e with questioning mind and critical
evaluation of evidence
Reasonable assurance are:
 measure of the level of uncertainty that the auditor has obtained at the completion of
the audit
⚫ Reasonable but not absolute, indicates that the auditor is not insurer or guarantor of
the correctness of the FS
⚫ Reason for stating reasonable assurance:
1. Audit evidence resulted from testing a sample of population
2. Accounting presentations contain complex estimates
3. Fraudulent are often difficult to detect
AUDITOR’S RESPONSIBILITIES FOR DETECTING & REPORTING OF FRAUD &

ERROR
⚫ AI 240 Fraud & Error
⚫ What is a fraud?
⚫ Fraud : Intentional misrepresentations of financial information by 1 or more
individuals among management / employee or 3rd parties, involving:
1. Manipulation, falsification or alteration of records or documents
2. Misappropriation of assets
3. Suppression/omission of the effects of transactions from
records/documents
4. Recording of transactions without substance
5. Misapplication of accounting policies
⚫ Error : unintentional mistakes in financial information such as;

1. Mathematical or clerical mistakes in the underlying records and
accounting data
2. Oversight or misinterpretation of facts, or
3. Misapplication of accounting policies
WHO ARE RESPONSIBLE TO DETECT FRAUD & ERROR? MANAGEMENT OR

AUDITOR?
Responsible to prevent & detect F & E through the implementation &

Management continued operation of an adequate system of IC. H/over such system
will only reduce, not eliminating the possibility of F & E
Plan audit so that they would have reasonable expectation of detecting
Auditor material misstatement in the fin.info resulting from F&E such as

designing a sufficient audit program.
5) DEVELOPMENT FOR AUDITING
⚫ Formerly, involves checking of account for stocks & revenue

⚫ Now  professional assurance services
⚫ Auditing derived from Latin ―audire‖
⚫ Luca Pacioli
⚫ Industrial Revolution in mid 1800s
⚫ Joint Stock Companies
⚫ Regulation & Acts – compulsory for co. to have their account audited
AGENCY THEORY: AGENCY RELATIONSHIP
Asymmetric
information
Self hires Self

interest interest
Principals Agents
performs
Making it difficult for principals to

monitor and enforce contracts
⚫ Agency relationship is:

A contract under which one or more persons (the principal/s engage another person
(the agent) to perform services on behalf which involves delegating some decision-
making authority to the agent.‖
⚫ Agency relationship exists between owners (s/holders) & the management resulting
conflict of interest due to information asymmetry
⚫ Audit is needed to safeguard the interest of the s/holders.
AGENCY THEORY IN THE CONTEXT OF AUDITING
Demand for Auditing to reduce information asymmetry and also due to regulatory
requirements
A quality audit is defined in terms of the probability that the auditor discovers unfaithful
representation of the financial statements and having discovered such situation, the
auditor reports such findings to those charged with governance and ultimately reports to
shareholders when required adjustments are not made.
DEMAND FOR AUDITORS’ SERVICES
Relationship of External User to Management and Independent Auditor

Attest Function
Financial report for external users
External users Conflict of interest Prepare

Shareholders Separation between Management
Bankers Owners (shareholders) responsible for
Government agencies and management accuracy and
Potential shareholders adequacy of
Creditors Financial reports
Suppliers
Employees Need for protection of
absentee owners
Credibility gap
Need for assurance as to

reliability of financial report
Assurance provided by independent auditor
6) TYPES OF AUDITS
TYPES PURPOSE PERFORMED BY
FINANCIAL To determine whether FS reflects - Approved Company

STATEMENT AUDIT true & fair view, according to Auditor/External Auditor
accounting standards & Company - Government Auditor
Act 2016
OPERATIONAL To evaluate effectiveness & - Internal auditor

AUDIT efficiency of - Government Auditor
operating/Procedures
COMPLIANCE To determine whether specific - Internal auditor

AUDIT procedures/rules & regulations - Government Auditor
were being complied with
FORENSIC AUDIT To detect/ deter fraudulent - Forensic auditor

activities
7) TYPES OF AUDITORS
Type Nature
External - Independent from the co.

- Appointed by shareholders during AGM
- Audit fee agreed by auditor & management
- Section 264, Companies Act 2016
- approved by Ministry Of Finance
Internal - Employee of the co. thru interview process

- Salary fixed by the co‘s mgt.
- Review the accounting & internal control systems
- Examination of financial & operating information
- Review of the economy, efficiency & effectiveness of operations
including non-fin controls of an entity
- Review of compliance with laws, regulations and other external
requirements and with management policies and directives and
other internal requirements
Government - Responsible for federal & state acc, public authorities & stat
bodies
- Remuneration fixed by govt
Forensic - Employed by co./govt agencies/public acc.firms/ investigative firm

- Well trained in detecting/investigating/deterring fraud
Internal Auditing
The Institute of Internal Auditors USA (IIA) provides the definition of internal auditing as
follows:
Internal auditing is an independent, objective assurance and consulting activity designed to

add value and improve an organisation’s operations. It helps an organisation accomplish its
objectives by bringing a systematic, disciplined approach to evaluate and improve the
effectiveness of risk management, control and governance processes
Internal audit acts as a control mechanism of board of directors as well as senior

management to:
- Review the effectiveness of corporate governance mechanism
- Ensure proper risk management process
- ensure an adequate internal control structure;
- review the reliability of records;
- prevent and detect fraud or material misstatement;
- fulfil statutory duties where they exist;
- monitor the reporting procedures;
- enforce management decisions;
- undertake value-for-money appraisal exercises.
DIFFERENCES BETWEEN INTERNAL AUDITING & EXTERNAL AUDITING
Characteristics Internal Auditing External Auditing
Performance/ By employee within By practising professional

Status the outside the
organization/compan organization/Chartered
y Accounting Firm
Primary concern To serve the needs of To serve the needs of third

theorganization parties, eg: shareholders
Objective of review To develop To determine reliability of

improvements &induce Financial Reports
compliance with
established policies &
procedures
Independence Independence Independence in fact and

organizationally but ready to appearance
respond to needs &desires of
management
Detection of fraud Directly concerned with Incidentally concerned with

prevention & detection of fraud prevention & detection of fraud
Period/Frequency Continuous Periodic evaluation/financial

review/throughoutthe year year ended
or as requested by
management
Scope of audit Determined by the Laid by the Statutory

management
Appointment Appointed by the Appointed by the company‘s

company‘s management shareholders through voting at
through formal interview AGM (or other types of
process appointment as per
Companies Act 2016)
Salary/remuneration Salary; fixed internally Agreed by the auditors &

management ; as per
Companies Act 2016
Reporting To the board of directors or To the company‘s

Responsibility tothe audit committee or to shareholders
the management
Rights and duties Defined by company‘s As laid down by Companies

management Act 2016
DEVELOPMENTS IN MALAYSIA
The Malaysian Institute of Accountants The Malaysian Institute of Certified

(MIA) Public Accountants (MICPA)
- Regulatory Body , established by - Formed in 1958

Accountants Act 1967 - A professional body
- Business managed by council members - Managed by Council elected by members
- Issue auditing standards and Code of - Conducts professional exams
ethics
- Does not conduct professional exams
INFLUENCES ON THE DEVELOPMENT OF AUDITING
International Federation of Accountants (IFAC)
Develops and implements international auditing standards. The International Statement of

Auditing (ISA) and International Statement of Quality Control (ISQC) are adopted and used
by most jurisdictions including Malaysia
The Quality Standards recommended by IFAC includes the following:

 having audit policies and a methodology for conducting transnational audits in
accordance with International Standards of Auditing
 complying with the IFAC Code of Ethics
 maintaining training programmes to keep partners and staff up to date on

international developments in financial reporting
 maintaining quality control standards and conducting regular quality assurance

reviews to monitor compliance with the firm‘s policies and methodology
Other regulatory requirements;
⚫ Companies Act 2016
⚫ Securities Commission Act
⚫ Capital Market and Services Act
⚫ Bursa Malaysia requirements
⚫ MIA by laws
BODIES RELATING TO AUDITING IN MALAYSIA
 Malaysian Institute of Accontants (MIA)

⚫ National acc body, est. under Accountants Act 1967
⚫ Member of IFAC, adopts ISAs as the basis for developing stds & issuing
pronouncements on auditing matters
⚫ Issued BY-laws (On Professional Conduct, Ethics & Practice)
 Malaysia Accounting Standard Board (MASB)
⚫ Standard setting authority for establishing accounting standards for financial

accounting and reporting in Malaysia
 Securities Commission (SC)
⚫ Statutory body set up in 1993 under SC Act 1993

⚫ Regulates securities & futures industries in Malaysia
The Accountancy Profession

Admission Requirements to be a member of MIA
1. Passed any of the final examinations specified in *Part I of the First Schedule of the
Accountants Act, 1967 and undergo the Chartered Accountant‘s Relevant
Experience (CARE) for a minimum period of 36 months up to a rolling period of 60
months. This programme requires the Graduates who aspire to become MIA
members to go through a structured assessment programme which is based on the
mentor – mentee approach that monitors the practical experience of the mentees;
and/or
2. Member of any of the recognised bodies specified in **Part II of the First Schedule of
the Accountants Act, 1967; and/or
3. Passed the MIA Qualifying Examination and undergo the CARE programme as
explained in part 1; and/or
4. Company auditor per S8(2) and (6) of the Companies Act 1965 without limitations or
conditions.
CONTINUING PROFESSIONAL DEVELOPMENT
The MIA in its Statement 1.500 Continuing Professional Development, paragraph 18, for
example, has stipulated that all members (except retired members) are required to:
• complete at least 120 hours of relevant CPD activity in each rolling three-year period,
of which 60 hours should be verifiable;
• complete at least 20 hours (of the 120 hours required in (a) above) each year; and
• track and measure learning activities to meet the above requirements.
Routes to Qualify as a Professional Accountant through the MIA Qualification Program
Recognized Professional Recognized Accountancy Degree Other accounting, business or

Qualification from professional Holders from Malaysian Universities finance degree
bodies (Part II of the First Schedule (Part I of the First Schedule of the
of the Accountants Act 1967) Accountants Act 1967)
MIA Qualification examination
Membership Requirements:
 Pre-entry Education
 3 years‘ Practical Experience under the MIA Chartered
Accountant‘s Relevant Experience (CARE) program
Chartered Accountants
Continuing Professional
Development
INTRODUCTION TO AUDITING STANDARDS
The council of the Malaysian Institute of Accountants (MIA) has determined that approved
Auditing Standards for members comprise:
 International Standards on Auditing (ISA) issued by the International Auditing

Practices Committee (IAPC) of the International Federation of Accountants (IFAC)
and approved by the MIA
 Malaysia Approved Standards on Auditing (MASA) issued by the MIA
⚫ IAPC believes the issue of such standards will help improve the degree of uniformity
of auditing practices throughout the world.
⚫ MASA are produced and issued by the Malaysian Institute of Accountants (MIA) as
parts of its effort to define standards of auditing and harmonise auditing practices in
Malaysia and are intended to cover topics not dealt within an ISA or topics where
particular features of the Malaysian environment warrant a domestic standard.
⚫ In addition to these promulgated standards, Auditing Technical Release and other

statements issued by the Council relating to auditing are to be regarded as opinions
on best current practice and thus form part of Generally Accepted Auditing
Principles (GAAP)
COMPLIANCE WITH APPROVED AUDITING STANDARDS

 Independent auditors are required to use approved Auditing Standards in the conduct
of their audits
 Audit reports should contain a positive statement to the effect that the audit has been
conducted in accordance with approved Auditing Standards
8) CHARTERED ACCOUNTING FIRMS

a. Structure of the firms
b. Professional services
Auditing & Assurance Services
 Financial Statement Audit
Other Audit & Assurance Services
 Compliance Audit
 Operational Audit
 Forensic Audit
Related Services (Non-assurance Services)
 Management Advisory Services

 Accounting & Compilation Services
EXERCISES
1. Definition of Auditing
―Auditing is a of obtaining and
evidence regarding about economic actions and events to
ascertain the of between those assertions and
established criteria and the results to interested
.‖
(source: American Accounting Association Committee on Basic Auditing Concepts (1973, p. 8)
2. Objective of Audit
To obtain about whether the financial statements

as a whole are from , whether due to
or , thereby enabling the auditor to express an opinion on whether
the financial statements are prepared, in all material respects, in accordance with an
applicable financial reporting framework; and
(b) To report on the financial statements, and communicate as required by the ISAs,
in accordance with the auditor‘s findings.
3. Distinction Between Auditing And Accounting
Auditing Accounting
4. Management And Auditor‘s Responsibilities
Management‘s responsibility Auditor‘s responsibilities
5. Types Of Audits
Types of audits Explanation
a Financial statement audit

b Compliance audit
c Operational audit
d Forensic audit
6. Types Of Auditors
Types of auditors Explanation
a Chartered accountants
b Internal auditors
c Auditor
General/Government
Auditors
d Forensic auditor
TOPIC 2
AUDIT REGULATION
TOPIC COVERAGE
1) Companies Act 2016

 Sec. 261 : Auditor‘s statement
 Sec. 263 : Company Auditors
 Sec. 264 : Company auditors (Disqualification)
 Sec. 266 (1) – (3) : Duties of auditors
 Sec. 266 (4) – (7) : Powers of auditors
 Sec. 267 : Appointment of auditors of private company
 Sec. 271 : Appointment of auditors of public company
 Sec. 274 : Fixing of auditor‘s remuneration
 Sec. 281 : Resignation of auditors
 Sec. 282 : Notice of resignation of auditor to Registrar
 Sec. 283 : Rights of resigning auditor of a public company
 Sec. 276 : Resolution to remove auditor from office
 Sec. 277 : Special notice required for resolution to remove auditor from office
2) MIA‘s By-Laws (On Professional Ethics, Conduct and Practice)

Part I:By-Laws on Professional Ethics
Part A:General Application
o 100 Fundamental principles and conceptual framework
 110 Integrity
 120 Objectivity
 130 Professional competence and due care
 140 Confidentiality
 150 Professional behavior
 150.2 Advertising, marketing and promotions
 100.8 Threats and safeguards
o 290 Independence
o 500 Method of Practice
o 240 Audit Fees
o 240 Commission
o 240 Referral
 Standards on auditing
 International Standards on Auditing
 Malaysian Approved Standards on Auditing
1) COMPANIES ACT 2016

(TEST 1)
⚫ The primary statutory source of authority in Malaysia is the Companies Act 2016.
⚫ The duties, functions, responsibilities and liabilities are further defined by the
Malaysian Institute of Accountants (MIA), which sets out the Malaysian Standards on
Auditing (ISAs), and Practice Notes (PNs) issued from time to time.
Sec. 261 : Auditor‘s statement

Sec. 263
Company Auditors
Sec. 264 :
Company auditor
(Disqualification)
Sec. 266 (1) – (3) Sec. 266 (4) – (7)

Duties of auditors Sec. 267 : Appointment of Powers of auditors
auditors of private
company
Sec. 271 : Appointment of

auditors of public company
Sec. 274 : Fixing of

auditor‘s remuneration
Sec. 281 : Resignation of

auditors Sec. 276 : Resolution to
Sec. 282 : Notice of remove auditor from
resignation of auditor to office
Registrar Sec. 277 : Special notice
Sec. 283 : Rights of required for resolution to
resigning auditor of a remove auditor from
public company office
Sec 261: Auditor’s Statement

Sec 261(1): A company that is not required by this Act (Sec 255) to lodge Financial
Statements with the Registrar shall lodge with the Registrar a statement relating
to the Financial Statement of the company required to be circulated to its
members, signed by the auditor of the company:-
a) stating whether the company has in his opinion kept proper accounting records
and other books during the period covered by those accounts;
b) stating whether the Financial Statement have been audited in accordance with
this Act;
c) stating whether the auditor's report on the Financial Statement was made
subject to any qualification or opinion under any applicable auditing standards,
or included comment made under subsection 266(3) and, if so, particulars of
the qualification or comment, and;
d) Stating whether as at the date to which the Financial Statements has been
made up, the company appeared to have been able to meet its liabilities as and
when the liabilities fall due.
Sec 263 Approved Company Auditor
Sec 263 (1): Any person may apply to the Minister charged with the responsibility for finance
to be an approved as a company auditor for the purposes of this Act.
Sec 263 (2): The Minister charged with responsibility for finance may, if he is satisfied that
the applicant is of good character and competent to perform the duties of an
auditor under this Act, upon payment the prescribed fee, approve the applicant
as a company auditor
Sec 263 (4): Renewal of approval shall be in force for a period of two years.
Sec 263 (7): The ―person‖ means a chartered accountant as defined under the Accountants
Act 1967.
Membership as chartered accountants

15. An applicant shall, before admission as a chartered accountant, satisfy the
Council that:-
a) he has passed any of the final examinations specified in Part I of the First
Schedule and has not less than three years' practical accounting experience
in the service of a chartered accountant or in a Government department, bank,
insurance company, local authority or other commercial, financial, industrial or
professional organisation or other undertaking approved by the Council;
b) he is a member of any of the recognised bodies specified in Part II of the First
Schedule;
c) he is eligible to sit for and has passed the Malaysian Institute of Accountants
Qualifying Examination and has not less than three years practical accounting
experience in the service of a chartered accountant or in a Government
department, bank, insurance company, local authority or other commercial,
financial, industrial or professional organisation or other undertaking approved by
the Council; or
d) he has authority under subsection 8(2) and (6) of the Companies Act 1965 [Act
125] to act as a company auditor without limitation or conditions.
Sec 264: Disqualification of Company Auditors
Sec 264 (1) (c): A person shall not prepare any report required by the act if:-
(i) he is not an approved co auditor
(ii) he is indebted to the company amount exceeding RM25,000
(iii) he is:-
(A) or his spouse is an officer of the company;
(B) a partner, employer/employee of an officer of the company;
(C) a partner or employee of an employee of an officer of the

company; or
(D) a shareholder or his spouse is a shareholder of a corporation

whose employee is an officer of the company;
(iv) he is responsible for the keeping of the register of the member or

register of the debenture holders of the company;
(v) he is undischarged bankrupt within or outside Malaysia; or
(vi) has been convicted of any offense involving fraud or dishonesty with
imprisonment of 3 months or more.
Sec 264 (2): For the purposes of subparagraph (1)(c)(iii), a person shall be deemed to
be an officer of a company if he is an officer of a corporation that is deemed
to be related to the company by virtue of section 7 if he has been an officer
or promoter of the company or such a corporation at any time within the
preceding period of twelve(12) months, unless the Minister directs
otherwise.
Sec 266: Duties of Auditors
Sec 266 (1): shall report to the members on the Financial Statement and on the
company accounting and other records related to the Financial Statement.
(2) : state whether the Financial Statement are properly drawn up in accordance
with the Approved Accounting Standard, given a true & fair view, and to
report any defect or irregularities.
(3) : to form an opinion whether;
- he obtained all the info;
- proper accounting and other records have been kept;
- return received from branches are adequate; and

- whether the consolidation methods taken were appropriate.
Sec 266: Powers of Auditors
Sec 266 (4): Right of access to the accounting books and other records including
registers of the co and entitled to require information and explanation
as he desires for the purpose of the audit from any officer of the co and
auditor of related company.
(5) : auditor for holding co may access the accounting books and other records
of its subsidiary and right to require information and explanation from any
officer or auditor from subsidiary.
(6) : the auditor‘s report shall be attached to the Financial Statement or

Consolidated Financial Statement, and be read at the general meeting.
(7) : shall entitled to attend any general meeting, and to receive notices and any
other communications in relation to the general meeting. Auditor also
entitled to be heard (due to removal) at any general meeting.
Sec. 267: Appointment of Auditors (Private Company)
Sec 267 (1): A private company shall appoint an auditor for each financial year.
Appointment by Directors
Sec 267(3) (a) in the case of newly incorporated companies, at least thirty days before
the end of the period for the submissionof the first financial statements
to the Registrar; or
(b) to fill the casual vacancy in the office of the auditor
Appointment by Members
Sec 267(4) (a) at each subsequent years following the 1st submission of Financial
Statement.
(b) when the board fails to appoint under sec 267 (3)
Appointment by Registrar/CCM
Sec 268: If a company does not appoint an auditor as required under the Act, the
Registrar may make the appointment upon writing application by the members
of the company
Sec. 271: Appointment of Auditors (Public Company)
Sec 271 (1) A public company shall appoint an auditor for each financial year.
Appointment by Directors
Sec 271(2): the Board shall appoint an auditor –
(a) at any time before the 1st Annual General Meeting (AGM); or
(b) to fill the casual vacancy in the office of the auditor

Appointment by Members
Sec 271(4): The members shall appoint an auditor by ordinary resolution—
(a) at the Annual General Meeting;
(b) if the company should have appointed an auditor at an annual general

meeting but failed to do so; or
(c) if the Board fails to appoint an auditor under subsection (2).
Appointment by Registrar/CCM
Sec 272: If a company does not appoint an auditor as required under the Act, the
Registrar may make the appointment upon writing application by the members
of the company.
Sec 274: Fixing Auditor’s Remuneration
Sec 274 (1): Remuneration of the auditor shall be:-
(a) fixed by the Members by ordinary resolution;
(b) fixed by the Board, (if not fixed by the company); or
(c) fixed by the Registrar (if the company fail to do so)
Sec 281 & Sec 282: Resignation of Auditor
Sec 281 (1): An auditor may resign by giving a written notice to the office at the
registered office.
Sec 281 (2): the notice under sec 281 (1) shall bring the end of the auditor‘s office after
21 days of the date of the notice.
Sec 282 (1): the company shall send a copy of the notice to the Registrar within 7 days
from the received date.
Sec 283: Rights of resigning auditor
Sec 283 (2): the auditor may give the notice of resignation (sec 281) and request the
directors to immediately convene a general meeting for the purpose of
receiving and considering an explanation.
Sec 283 (4): the company shall –
(a) state the notice has been received and send the copy to every
member of the company.
(b) send a copy of the statement to every member of the company to

whom notice of the meeting is or has been sent.
Sec 283 (5): The directors shall hold the general meeting required under this section
within twenty-eight (28) days from the date of the receipt of the notice of a
requisition made under subsection (2).
Sec 276: Removal of auditor
Sec 276 (1): The company may remove the auditor at any time –
(a) by ordinary resolution at a general meeting
(b) in accordance with section 277 – Special Notice
Sec 276 (3): The auditor may not be removed from office before the expiration of his
term of office except by resolution
Sec 277: Special notice required for resolution to remove auditor
Sec 277 (1): special notice shall be required for a resolution to remove auditor from
office at general meeting.
Sec 277 (2): upon receipt of the special notice, the company shall send a copy to the
Registrar
Sec 277 (3): the auditor may make a representation in writing within 7 days from the
receipt of the special notice
2) MIA’S BY-LAWS (ON PROFESSIONAL ETHICS, CONDUCT AND PRACTICE)

(FINAL EXAM)
Part i: By laws on Professional Ethics

Part A: General Application
1. 100 FUNDAMENTAL PRINCIPLES AND CONCEPTUAL FRAMEWORK
 110 Integrity
A professional accountant should be straightforward and honest in all
professional and business relationships.
 120 Objectivity
A professional accountant should not allow bias, conflict of interest or undue
influence of others to override professional or business judgments
 130 Professional Competence And Due Care

A professional accountant has a continuing duty to maintain professional
knowledge and skill at the level required to ensure that a client or employer
receives competent professional service based on current developments in
practice, legislation and techniques. A professional accountant should act
diligently and in accordance with applicable technical and professional standards
when providing professional services.
 140 Confidentiality
A professional accountant should respect the confidentiality of information
acquired as a result of professional and business relationships and should not
disclose any such information to third parties without proper and specific authority
unless there is a legal or professional right or duty to disclose.
 150 Professional behavior

A professional accountant should comply with relevant laws and regulations and
should avoid any action that discredits the profession
2. 210 PROFESSIONAL APPOINTMENT
 Client Acceptance
The auditor should investigate the background and business activities of the
audit client and he should consider:
 Whether the acceptance of the nomination would create any threats to
compliance with the fundamental principles; for example any blood
relationship between auditor and audit client; or
 Whether there are any client issues that would threaten compliance of
fundamental principles; for example the audit client involves in illegal
business activities such as money laundry etc.
 To accept the appointment, the auditor needs to eliminate or reduce
the threats to an acceptable level with proper safeguards. Otherwise,
the auditor should decline the appointment.
 Engagement Acceptance
The auditor should only accept audit engagements that he is competent to
perform. He should consider whether acceptance would create any threats to
compliance with the fundamental principles. After identified the threats, the
auditor need to eliminate or reduce threats to an acceptable level, by applying

the following safeguards:-
 Acquiring understanding of the nature and complexity of the client‘s
business
 Acquiring knowledge of relevant industries
 Obtaining experience with regulatory & reporting requirements
 Assigning sufficient stat with the necessary competencies
 Using expert where necessary
 Agreeing on the realistic time frame for performance of the
engagement
 Comply with quality control policies and procedures..
 Changes in Professional Appointments
Potential Auditor:
 A member who is asked to accept nomination as auditor is required to
communicate with the existing auditor (with the permission the
prospective client), for the purposes:
 To obtain information about client
 To know the professional reasons for such changes before proposed
auditor accept the appointment.
 If the client does not grant the permission, the potential auditor shall
decline the appointment.
Existing Auditor:
 The existing auditor, on receipt of a communication, within 14 days to
reply that, the existing auditor should get permission from the client.
3. 240.Fees & Remuneration
Professional fees charged by members should be a fair reflection on the value of

work performed for the client, taking into account of
 The skill and knowledge required for the type of work involved
 The level of training and experience of the persons involved
 The time necessarily spent by each person engaged on the work and
 The degree of responsibility and urgency that the work entails
The factors that may create self-interest threats

 A large portion of the audit firm‘s total earning from one client
 Overdue fee of an audit client
 Pricing – under charged; and
 Contingent fee
Referral Fee or Commission

The auditor should not receive or pay a referral fee or commission (create self-
interest) unless he/she established safeguards to eliminate or reduce them to an
acceptable level by:
 Disclosing to the client the fact of receive and pay a referral fee or
commission
 Obtaining advance agreement from the client.
4. 250 Marketing Public Practice Services

 Definition of advertising:
The communication to the public of information as to the services or skills
provided by professional accountants in public practice with a view of
procuring professional business.
 Publicity is the communication to the public of facts about a professional
accountant.
 Advertising and Publicity use of various media such as magazines, radio to
communicate favourable information about the good and service of the firm.
 Solicitation : various means that accounting firms use to engage new clients
other than accepting new clients that approach the firm. Examples include
taking potential client to lunch to explain firm‘s services.
 Solicitation of potential clients personally or through direct mail is acceptable
within reasonable limits. Once potential client said ―NO‖ for the invitation, no
more further solicitation is allowed
 In general, an auditor is allowed to advertise or publicize his business and to

solicit for audit clients, pursuant to section 18A of the Accountants Act 1967.
However any advertising, publicity and solicitation shall:
 Not discredit to member, MIA and profession;
 Contain matters of fact which are true and not misleading;
 Look professional;
 Not contain exaggerated claims of services offered, qualifications
possessed or the experience gained;
 Avoid claiming superiority over others; and
 Carried in accordance with the relevant legislation, where applicable
 advertising, publicity and solicitation by auditor can be in the following manner

(example):-
 Members can issue circulars to persons whom he has already been
established a professional connection.
 Member is allowed to publish the firm name and address for purposes
such as advertisement for job vacancies or to announce change of
address
 Advertise for seminars or conferences for the publics. Publication of
audit report, can announce admission or retirement from practice of a
partner and may send greeting cards confined with the message of
his greetings, his name and add of the firms
 Member can print their business card But ensure that the business
card or firm stationery or name plate foes not include a claim that he is
a specialist in any particular aspect of public practice
 260 Gifts and Hospitality

 Accepting gifts from audit clients may create self-interest and
familiarity threats, but generally is permissible if the value is clearly
insignificant.
 However, if the gifts are significant and cannot be reduced to an
acceptable level by application any safeguard, the auditor should not
accept such gifts.
 280 Objectivity – All Services

 An auditor is required to be fair, intellectually honest and free of
conflict of interest when rendering services. It is the duty of auditor to

present or report on information without bias and free from any
influence.
5. 290: Professional Independence

 Definition Professional independence:
Attitude of mind characterized by integrity and objective approach to
professional work. Auditor should be and be seen to be free from any conflict
of interest.
 The auditor must be independent from client in order to act professionally.
The conceptual approach to independence requires that there is
independence in mind and in appearance.
 Definition Independence in mind/fact:

It means opinion is formed without compromising professional judgment. It
requires auditor to exercise skepticism and act with integrity and objectivity.
 Definition Independence in appearance:

It is more to the interpretation of users of financial statement of the auditors‘
independence. Example; avoid receiving significant gifs and hospitality
without proper safeguards as it will create threat to independence.
Threats to independence
 Self - interest threat
The auditor has a direct financial interest or material indirect financial interest
in the audit client
 Self- review threat

The auditor is also involved in the preparation of accounting records and
financial statements of the audit client
 Familiarity threat
The audit firm‘s long association with the audit client may be over influencing
the auditor‘s professional judgement with regard to the audit
 Intimidation threat
The pressure to reduce inappropriately the extent of work performed in order
to reduce the audit fees
 Advocacy threat
The auditor is dealing in, or being a promoter of, shares or other securities in
the audit client.
6. 500 : Method of Practice

 This By-Law prohibits a member from using a trade name or a fictitious name
to practice.
 Member shall practice as a chartered accountant or licensed accountant:-
 in his own name
 in his partner‘s name
 In the name of a existing firm
 Any branch of the firm should be under the management and control of a
member of the Institute
 Member only can report on the financial statement which examined by his
staff or a member is in public practice.

 Members may use these designations:
 ―Chartered Accountant‖ C.A(M) or
 ―Licensed Accountant‖ L.A.(M) or
 ―Associate Member‖, A.M.(M)
7. 540 Referrals
 The service of an auditor with special skill may be hired by a client based on
the recommendation or referral of the auditor currently providing service to
the client.
 If the member receives an assignment through referral from another member,
the member should not undertake any other professional services for the
same client without informing the referring member. He should not do
anything to impair the position of the referring members in continuing to
provide his service to client in order to retain cordial relationship among the
professional members
FINAL EXAMINATION QUESTIONS
MIA BY-LAW-theory questions
Professional Ethics and Mia By-Laws
1. Mac 2014 Q1A(d)

Identify any three (3) functions of the Malaysian Institute of Accountants (MIA) in
regulating the profession.
2. Mac 2005 Q1 (a)

Explain the need for a code of professional ethics for the members of MIA.
3. Mac 2005 Q1 (b)

What are the ways that the accountant’s code of conduct be similar to and
different from that of the other professional groups, such as solicitors and
doctors?
4. Apr 2006 Q1B.(a), Apr 2010 Q2Bi

What is the main objective of the MIA By-Laws?
5. Sept 2015 Q1 A b
Briefly explain two reasons why a chartered accountant is required to comply
with the MIA By Laws
6. Mac 2016 Q1A(c)

Explain any two (2) main purposes of MIA By-Law
7. Mac 2017 Q1A(a)

State the importance of the MIA By-Laws (On professional Ethics, Conduct and
Practice) in the auditing profession.
8. Jan 2018 Q1 A(c)

Discuss the statement: “I am a member of MIA. Am I bound by ethical guidelines
of the Institute?”
Fundamental Principle
1. Mac 2016 Q1A(a), Oct 2016 Q1A(a), Jan 2018 Q1 A(a), Dec 2018 Q1A(a), Dec 2019
Q1Aa
State/List any two (2) fundamentals principles a professional accountant needs to
comply with.
2. Sept 2013 Q1B(a)
Briefly explain any two (2) fundamental principles of ethics.
3. Dec 2019 Q1Ab

Each of the fundamental principles identified above, explain briefly the implications
on the auditing profession if such principles are not complied with
Fundamental Principle - Confidentiality
1. Mac 2014 Q1B(b) (ii)

Illustrate the following fundamentals principles of MIA by-laws (on Professional
Ethics, Conduct and Practice)-Confidentiality
2. Jan 2018 Q1 A(b)

Explain briefly the term ‗confidentiality’ as stipulated under the MIA By-Laws.
3. Oct 2006 Q1
One of the MIA By-Laws is on ―Confidentiality‖. Briefly explain the importance of
this By-Laws to the auditing profession.
4. Sept 2002 Q2 (e)

Ahmad has fear that the external auditor may leak any info to outsiders. Explain
auditors‘ responsibility with regards to confidentiality (By-Law 12) and
circumstances that permit the auditor to disclose client‘s information.
5. Sept 2015 Q1 B a
Explain two circumstances where an auditor may disclose confidential information of
the client.
6. Dec 2018 Q1A(c)

Determine any two situations that may allow the auditor to disclose the confidential
information to the third party
Fundamental Principle - Professional Competence
1. Mac 2014 Q1B(b)

Illustrate the following fundamentals principles of MIA by-laws (on Professional
Ethics, Conduct and Practice)-Competency
2. Mac 2012 Q3B

Explain each of the following terms in the MIA By-Law
Professional competence
3. Mac 2017 Q1A(b)

Explain briefly the term competence
4. Jun 2018 Q1Ab

Distinguish the difference between competence and due care.
Fundamental Principle – Integrity

1. Jun 2018 Q1Aa

Define the meaning of integrity.
2. Mac 2012 Q3B

Explain each of the following terms in the MIA By-Law
Integrity
Fundamental Principle - Objectivity
1. Sept 2013 Q1B(C)

Explain the meaning of objectivity
2. Sept 2015 Q1 A c
Explain the meaning of objectivity in relation to the external auditing function.
Independence
1. Sept 2002 Q2 (c), Apr 2010 Q1A(i)

Explain to Ahmad the concept of independence in audit and its importance.
2. Apr 2009 Q1B(i)

Define independence in mind
3. Jun 2019 Q1Aa

State the two types of independence relating to the auditing profession
4. Mac 2013 Q1B(a), Dec 2019Q1Ba

Differentiate/Difference the term of independence in fact and independence in
appearance
5. Mac 2016 Q1B(a)

Define independence in mind and independence in appearance.
6. Apr 2010 Q1A (iii)

Which type of independence is more important?
7. Apr 2003 Q1 (a) (ii), Oct 2003 Q2 (e)

Why do auditors need to be independent?
8. Oct 2007 Q 1 C
Explain why independence is essential in performing audit work and what is meant
by independence in fact and independence in appearance.
9. Sept 2013Q1A(a)
Briefly explain the importance of auditor’s independence.
10. Oct 2003 Q2 (f)

List 4 factors which are likely to impair an auditors’ independence?
11. Mac 2017 Q1A(c)

Explain possible implication if an auditor is not independent from his audit client.
12. Jun 2018 Q1Ac

Possible implications if the external auditor is not independent from his audit
client.
13. Jun 2019 Q1Ab

Explain briefly any two consequences if the auditor is not perceived to be
independent by the public.
14. Apr 2010 Q1A (ii)

Implication if audit not performed by independent auditor.
15. Oct 2016 Q1B(a)

Explain the possible threats that may arise
i. An audit client indicates that a planned non-assurance contract will not be
awarded to the firm if the firm continues to disagree with the client‘s
accounting treatment for a particular transaction.
ii. An audit firm enters into a contingent fee arrangement related to an
assurance engagement with client.
16. Dec 2019 Q1Ac

Explain briefly the possible categories of threats to auditor‘s independence
i. Mr Chu, a sole proprietor in public practice olans to establish a separate
department that will provide internal audit services engagements to his audit
clients
ii. Serene Bhd has traditionally been presenting the members of the audit team
with New Year gifts. This year each audit team member is given a book
voucher worth RM2.000 because of the company‘s good performance
17. Oct 2006 Q1 (a)

State four (4) circumstances or activities by a member that would pose
significant threat to his professional independence as an auditor.
18. Dec 2018 Q1A(b)

Explain briefly any TWO (2) types of threats that may compromise the auditor‘s
independence.
19. Oct 2016 Q1A(b)

Two ways to help safeguards the auditor’s independence.
20. Jun 2019 Q1Ac

A member of the audit team has a close family member who has direct financial
interest in the audit client. Determine any two safeguards to eliminate the self-
interest threat arising from the above situation
21. Jun 2019 Q1Ba i

Accepting a loan from an auditee. Explain one requirement as per MIA By Law
that an auditor has to comply with.
Advertising/Marketing Public Services
1. Dec 2018 Q1B (a)

Explain any two conditions for chartered accountant to involve in advertising,
marketing and promotional
2. Apr 2007 Q1 B (a)

State any two (2) conditions as stipulated in the MIA By-Law A-9.1 that every
member must comply with in advertising their services.
3. Jan 2018 Q1 B (a)

Explain any two (2) rules for Advertising, Marketing and Promotions as
incorporated in the MIA By-Laws.
4. Mac 2016 Q1A(b)

Briefly explain any two (2) examples of specific potential clients where the
auditors are permitted to promote their services.
5. Jun 2019 Q1Ba ii

Advertising and promoting his professional services. Explain one requirement as
per MIA By Law that an auditor has to comply with
Fees
1. Mac 2005 Q1 (c)

Identify the factors recommended by the code of ethics in the determination of
professional fees charged by members in public practice?
2. Oct 2016 Q1A (c)

Two matters that should be taken into consideration when deciding to charge
the professional fees.
3. Mac 2012 Q3B

Explain each of the following terms in the MIA By-Law-Contingent fee
4. Jun 2018 Q1Ba

Two factors to consider in deciding audit fee.
TOPIC 3
AUDIT PLANNING & FIELDWORK 1
(FINAL EXAM)
TOPIC COVERAGE
1) Pre-plan: client‘s acceptance

2) Scope of audit work
a. Engagement letter
b. Fraud, error
c. Setting audit objectives
Management assertions
i. Transaction-related audit objectives
ii. Balance-related audit objectives
3) Knowledge of client‘s business and industry
a. Industry and external environment
b. Business operations and processes
4) Client business risk
INTRODUCTION
What is audit planning?
 Audit planning involves general strategy and detailed approach for the expected
nature, timing and extent of an audit.
What is the purposes/benefits of audit planning?
Purposes/benefits of audit planning are:
 To conduct audit in an efficient and timely manner

 To obtain sufficient & appropriate evidence
 To ensure adequate attention is paid to the critical aspects of the audit
 To help keep audit costs at reasonable minimum level
 To minimise legal liability
 To help avoid misunderstanding with the client
1. MAC 2016 Q2Ab, SEPT 2015 Q2Aa, DEC2018 Q2Aa

Purpose/reasons for audit planning
2. JUN 2019 Q2Ab

Two consequences if audit engagement is not properly planned properly‘
3. JUN 2018 Q2 Bd
Spending time in planning an audit engagement is actually not a cost-effective
approach for the auditor since most of the audit procedures still need to be
performed regardless of whether the audit was planned properly or not‘.
Discuss whether you agree or not with the above statements. Support your
answer with reasons.
1) PRE-PLAN: CLIENT’S ACCEPTANCE
According to the International Standard of Auditing (ISA) 220 on
ISA 220 described that “The engagement partner should be satisfied that appropriate
procedures regarding the acceptance and continuance of client relationships and
specific audit engagements have been followed, and that conclusions reached in this
regard are appropriate and have been documented”.
ISQC 1 further explained that the firm should establish policies and procedures for
the acceptance and continuance of client relationships and specific engagements,
designed to provide it with reasonable assurance that it will only undertake or
continue relationships and engagements where it:
a) Policies and procedures for the acceptance and continuance of
clients:-
i. Has considered the integrity of the client
ii. The auditor is competent to perform the engagement and has capabilities,
time and resources to do so
iii. Can comply with ethical requirements
1. JAN 2018 Q2Aa

Three (3) policies & procedures governing acceptance and continuance
2. JUN 2019 Q2Abc

Two (2) procedures for the acceptance and continuance of client
relationships.
b) Procedures for evaluating prospective clients:-
i. Integrity of those in charged with governance (directors and management)

ii. Obtaining and reviewing financial information of prospective clients
iii. Information from third party (legal advisors)
iv. Communication with predecessor auditor.
v. Evaluate audit firm‘s independence & ability to service the client‘s
requirements
1. DEC 2019 Q2Aa

State three procedures for evaluating prospective client
2. MAC 2017 Q2Aa

Three (3) considerations in client‘s acceptance
3. OCT 2016 Q2Ab

Reasons auditor to investigate new client
4. JUN 2018 Q2Ac

Two (2) factors that should be considered by auditor before deciding to
accept a new audit client.
c) Procedures for evaluating existing clients :-
Same i – v and additional 3 circumstances (vi-viii)
vi. Major change in management, director, ownership, legal advisors,

financial condition, litigation, nature of client‘s business.
vi. Scope of the engagement
vi. Business risk
1. JAN 2018 Q2Ab

Identify any TWO (2) additional circumstances
2. DEC 2018 Q2Ad

Evaluating an existing client is not as crucial as investigating a new client.
Hence, in order to minimize the audit cost, auditor may spend minimum
time for evaluating an existing client. Discuss whether you agree or
disagree with the above statement. Support your answer with reasons
2) SCOPE OF AUDIT WORK
a) Engagement letter
What is engagement letter?
• Letter from auditor to the client

• Agreement between auditor & client for the conduct of audit & other
services
• Sent to client upon engagement before commencement of the audit
1. JUN 2018 Q2Ab

Explain the term ‗engagement letter‘
What is the purpose of engagement letter?
• To provide written confirmation of the acceptance of

appointment
• To clearly define the auditor‘s responsibility & objectives and
scope of audit
• To minimize possibility of misunderstanding between client &
auditor
1. SEPT 2015 Q2Ac

Why it is important to issue engagement letter?
2. DEC 2019 Q2Ab

Explain briefly one consequence if the engagement letter was not
prepared, agreed and signed by the auditor and client.
3. DEC 2019 Q2Ac

In recurring audit, the auditor may send a new letter of engagement
when there are, (if any) material changes in the client‘s business.
Explain any TW0 (2) situations that have to be considered by the
auditor in order for the auditor to send a new letter of engagement
The Content of the Engagement Letter includes as follows:
i. the objective and scope of the audit

ii. The responsibilities of the auditor
iii. management‘s responsibility for the financial information
iv. Identification of the applicable financial reporting framework for the
preparation of financial statements
v. Reference to the expected form and content of any reports (ISA701
Communicating Key Audit Matters [KAM])
vi. A statement that there may be circumstances which the report may be
differ
vii. the terms of the engagement, including a statement that because of the
test nature and other inherent limitations of the audit there is an
unavoidable risk that some material misstatements may remain
undiscovered
viii. access to whatever information the auditor requires
ix. a request for the client to confirm the terms of the engagement by
acknowledging receipt of the letter
x. Any other matters relevant-fees, assistance from client‘s staff
xi. For recurring audit, new letter may be send if there is a change in the
nature and size of the client‘s business
1. OCT 2016 Q2Aa, MAC 2016 Q2Aa and JUN 2018 Q2Aa
Three (3) elements /contents/components of engagement letter
Comprehensive exercise
Fill in the blanks with the details required to complete the engagement
letter
Letterhead of
To:
Content:
1.
2.
3.
4.
Signed by:
Acknowledged and agreed by:
b) Fraud and error
International Standard On Auditing 240 mentioned about The Auditor’s

Responsibilities Relating To Fraud In An Audit Of Financial Statements
What is a fraud?
Fraud is an Intentional misrepresentations of financial information by one or
more individuals among management or employee or third parties, involving:
⚫ Manipulation, falsification or alteration of records or documents
⚫ Misappropriation of assets
⚫ Suppression/omission of the effects of transactions from
records/documents
⚫ Recording of transactions without substance
⚫ Misapplication of accounting policies
What is a error?
Error is an unintentional mistake in financial information such as: -
⚫ Mathematical or clerical mistakes in the underlying records and

accounting data
⚫ Oversight or misinterpretation of facts, or
⚫ Misapplication of accounting policies
1. Sept 2015 Q2Ad

Discuss whether you agree or not
―The planned audit procedure should ensure that all fraud and error
are detected.‖
c) Setting audit objectives
 Audit objectives has to be align to management assertion which is the

expressed/implied representations by management about classes of
transactions, account balances and presentation & disclosure and are
reflected in financial statements.
• Auditors needs to obtain evidence that supports each of the assertions for
every material components of the financial report.
• Management assertion-expressed/implied representations by management
about classes of transactions, account balances and presentation &
disclosure and are reflected in financial statements.
Assertion is a strong statement
There are three (3) categories of assertions as described by the diagram

below
Three (3) categories of assertions
Assertions about
Assertions about classes presentation and disclosure
of transactions a. Occurrence and
a. Occurrence rights and
b. Completeness obligations
Assertions about account b. Completeness
c. Accuracy
balances
d. Cut-off c. Classification and
a. Existence
e. Classification understandability
b. Rights and
d. Accuracy and
obligations
valuation
c. Completeness
d. Valuation and
allocation
1. Mac 2004 Q2a
Match the situations to the management assertions

i. The account and transaction that should be included are
included and the financial statements are completed.
ii. Assets, liabilities, equity, revenues and expenses are
appropriately valued and are allocated to the proper
accounting period
iii. Amount of assets shown in the financial statement are properly
presented and disclosed.
iv. The assets are the right of the entity and the liabilities are its
obligations.
v. The assets and liabilities exist and the recorded transactions
have occurred.
2. Oct 2009 Q1Bi(a-d)
Given transactions related audit objectives, identify management

assertions
a. Business transaction is recorded on the date the transaction

takes place.
b. All transactions that should be recorded in the journals have
actually been included.
c. Recorded transactions are stated in the enterprise‘s books at
the correct amount.
d. Recorded transactions are properly included in the master files
and are summarized correctly
3. Sept 2015 Q3Ab

Describe any two (2) management assertions regarding financial
statements
3) KNOWLEDGE OF CLIENT’S BUSINESS AND INDUSTRY
a) Industry and external environment

b) Business operations and processes
Important element to ensure effective risks assessments and evaluation.

ISA 315 identify four broad areas of a client’s business and its environment:
i. industry conditions, regulatory environment and other external factors,
including the applicable financial reporting framework
ii. nature of the entity including business operations (eg products or services
and geographic dispersion), investments (eg acquisitions and mergers),
financing (eg debt structure) and financial reporting (eg accounting principles
and revenue recognitions)
iii. objectives and strategies and related business risks such as industry
developments, new products and services, expansion of the business and
use of IT, etc
iv. measurement and review of the entity’s financial performance
)

1. JAN 2018 Q2Ac
2 areas of client‘s business and its environment useful for auditor to
establish overall audit planning
2. MAC 2016 Q2Ac
2 main areas in client‘s business and its environment that should be
identified during planning
3. JUN 2019 Q2Aa
3 areas of a client‘s business and it‘s environment that the auditor
should understand in developing an audit plan.
4. DEC 2019 Q2Ad

Discuss any TWO (2) areas of the client‘s business and its
environment in developing strategy or pan for the audit engagement.
5. MAC 2017 Q2Ab

Importance of obtaining understanding of client‘s business and
industry
6. SEPT 2015 Q2Ab

Why auditor needs to understand the client‘s industry
7. JUN 2019 Q2Ab

Why auditor should have an understanding of the client‘s business
and its environment when developing an overall audit plan.
8. MAC 2017 Q2Ab

Examples of information regarding the client‘s business
Answer-annual report, website and newspapers
4) CLIENT’S BUSINESS RISK

Client‘s business risk is the exposure a company has to face that will lower its profits
or lead it to a failure
It could be circumstances that threatens a company's ability to meet its target or
achieve its financial goals.
The risks may come from sources within the company or from the external
regulators.
JAN 2018 Q2Ad

Actions to be taken by auditor if business risk is high or low
DEVELOPMENT OF THE AUDIT STRATEGY

• Business-like approach due to complexity of modern business
• Same as how company formulate their strategic plan
• Formulated based on appraisal of external and internal factors
• Framework with detailed aspects
• Documentation – Audit Planning Memo (APM)
)
• Factors auditors to consider when designing audit strategy:-

i. Identify characteristic of engagement
ii. The reporting objectives
iii. Factors significant in directing engagement team‘s effort
iv. Results of preliminary activities (from other relevant engagement)
v. Ascertaining the nature, timing and extent of resources
MAC 2017 Q2Ad
Criteria for selecting staff
Answer: The staff must be knowledgeable with technical skills, experience,
honest, hardworking and have good communication skills
OCT 2016 Q2Ac, DEC 2018 Q2Ac

Factors auditor shall consider when designing audit strategy
TOPIC 4
PRELIMINARY ANALYTICAL PROCEDURES, MATERIALITY, AUDIT

RISK & SAMPLING
(Test 2)
TOPIC COVERAGE
1) Preliminary analytical procedures

2) Materiality
a) Definition and concept of materiality
b) Types of materiality
i. Quantitative
ii. Qualitative
3) Assessment of Risk
a) Types of risks
b) Audit risk
4) Audit risk model
a) Inherent risk
b) Control risk
c) Detection risk
5) Sampling
a) Criteria - representative samples
b) Reasonable assurance
1) PRELIMINARY ANALYTICAL PROCEDURES

a) Purposes/Objectives :
 To assist in planning the nature, timing & extend of Audit procedures

 To identify potential errors
 To determine areas that require detailed checking & substantive tests
b) Analyze Significant Ratios & Trends
 Investigate the relationship in order to determine whether data / account

balances appear to be reasonable
 Computation of key ratios: Gross Profit, Current Ratio
2) MATERIALITY
a. Definition and concept of materiality
According to ISA 320

―Information is material if its omission or misstatement could
influence the economic decisions of users taken on the basis of
the financial statements. Materiality depends on the size of the
item or error judged in the particular circumstances of its omission
or misstatement. Thus, materiality provides a threshold or cut-off
point rather than being a primary qualitative characteristic which
46
information must have if it is to be useful.‖
 Materiality is a criterion for determining the items require attention & detail
examination.
 Auditor needs to consider both the quantitative & qualitative (nature) of
the misstatement
b. Types of materiality
i. Quantitative
 Common bases in judging materiality (quantitative))
 Example: Total Assets, Total Revenue, NPBT, GP
ii. Qualitative
 Use of inappropriate / inadequate accounting policy
 Cumulative small amount of misstatements  material
misstatement
 Fraud/non-compliance with laws & regulations
 Amounts that affect trend in earnings
3) ASSESSMENT OF RISK
a. Types of risks
(i) Audit risk

Risk that auditor gives inappropriate audit opinion on Financial
Statements that are materially misstated
(ii) Auditor’s Business Risk

Auditor‘s exposure to loss/injury from litigation, adverse publicity/ other
events arising in connection with audited Financial Statement and
reported on. Cannot be directly controlled
Example:
⚫ litigation
⚫ sanctions imposed by public or regulatory bodies (e.g. Bursa
Malaysia and the professional accounting bodies)
⚫ impaired professional reputation, which can occur as a result
of litigation or adverse publicity
b. Audit risk model
Audit Risk (AR) = Inherent Risk(IR) x Control Risk (CR) x Detection Risk (DR)
i. Inherent risk
 The susceptibility of an assertion to material misstatement in the
Financial Statement in the absence of internal control (IC)
 Also called Auditee Risk where it is influenced by the business
characteristics of the client & the industry it operates.
 The risk of such misstatement is greater for some transactions &
accounts than for others. For example, amount derived from a
complex calculations/accounting estimates pose greater risks of
material misstatement than accounts derived from routine, factual
data.
ii. Control risk

 Risk that material misstatements will not be prevented or detected or
corrected on a timely basis by an entity‘s Internal Control.
 That risk is a function of the effectiveness of the design and operation
of internal control in achieving the entity‘s objectives relevant to
preparation of the entity‘s financial statements.
 Some control risk will always exist because of the inherent limitations
of internal control.
iii. Detection risk

 Risk that auditor‘s substantive audit procedures performed will not
detect a material misstatement that exists in an account balances/
class of transaction
 It relates to the nature, timing & extent of the auditor‘s substantive
procedure. This risk can be controlled through the design & scope of
Audit Procedure.
 Detection risk is a function of the effectiveness of an audit procedure
and of its application by the auditor
 Detection risk cannot be reduced to zero because the auditor usually
does not examine all of a class of transactions, account balance, or
disclosure and because of other factors.
 These other factors ordinarily can be addressed through adequate
planning, proper assignment of personnel to the engagement team,
the application of professional skepticism, and supervision and review
of the audit work performed.
c. Relationship between Materiality and Audit Risks

⚫ concepts of risks and materiality go hand-in-hand in the sense that the
auditor collects evidence to determine the risk that a material
misstatement exists in the financial statements.
⚫ There is an inverse relationship between materiality and the level of
audit risk and in determining the nature, timing and extent of audit
procedures, auditors should take into account this inverse relationship.
⚫ If materiality level is lower, audit risk is increased
⚫ The auditor‘s assessment of materiality and audit risk when evaluating the
results of audit procedures may be different at the time of initially planning
the engagement because of a change in circumstances or because of a
change in the auditor‘s knowledge as a result of the audit.
d. How to Assess Audit Risk?
⚫ The Auditors assessment of Audit Risk & its components (IR/CR/DR)

represent a matter of professional judgement by the auditor
⚫ Inherent Risk (IR)
 Knowledge of client‘s business during 1st and recurring audit
 Management integrity
 Client motivation to make mistake
 Client knowledge of acc.std
⚫ Control Risk – segregation of duties & inherent limitation of IC
⚫ Detection Risk – Decide on nature, timing & extent
e. Examples of circumstances indicating increased Risk of Errors & Fraud
⚫ Analytical procedures disclose major differences from expectations

⚫ Unreconciled differences exist between a control a/c & sub. Records
⚫ Confirmation requests disclose significant differences or a lower than
expected response rate.
⚫ Transactions lack proper documentation or authorisation
⚫ Errors known to client personnel are not voluntarily disclosed to the
auditor
f. Steps to minimise Audit risk

1. Plan & delegate the audit with due care
2. Audit evidence are properly documented
3. Audit staff selected are competent to perform the audit with due care
4. Sample selected should rep. the population
5. Avoid misunderstanding with client
6. Use audit manual
7. Communication channel between audit staff must be good in order to
solve problem on timely basis
8. The audit fee should be based on the work done
4) SAMPLING
Audit sampling is the application of audit procedures to less than 100% of the items
within an account balance or class of transactions, to enable auditors to obtain and
evaluate audit evidence about some characteristic of the items selected in order to
form or assist in forming a conclusion concerning the population.
i. Precision and Reliability
Statistical samples are evaluated in terms of ―precision‖, which is expressed

as a range of values, plus or minus, around the sample result, and ―reliability‖
(or confidence), which is expressed as a proportion of such ranges from all
similar samples of the same size that would include the actual population
value
ii. Advantages Of Statistical Sampling
1. permits the auditor to calculate precision and reliability or confidence level

2. requires the auditor to plan the audit approach in a systematic and
scientific manner
3. permits the auditor to interpret the sampling results objectively on the
basis of values for precision and reliability (confidence level)
4. permits the auditor to rely on a smaller sample than would be the case for
judgement sampling
5. permits a more intensive examination of sample items since with smaller
sample sizes the auditor is able to thoroughly scrutinize each item that is
drawn
iii. Audit Process & Statistical Sampling

Important factors:
• Population and Sampling Units
• Non-sampling and Sampling Risk
• Risks in Compliance and Substantive Tests
iv. Methods of Sample Selection

• random selection
• systematic selection
• haphazard selection
• Monetary Unit selection
• Block selection
TOPIC 5
(FINAL EXAM)
TOPIC COVERAGE
1) Audit procedures
a. Terms used in audit procedures
b. Tests of controls
c. Substantive procedures
i. Analytical procedures
ii. Tests of details of classes of transactions
iii. Tests of details of account balances and disclosures
2) Audit evidence
a. Sufficient appropriate audit evidence (Persuasiveness of audit
evidence)
b. Types of audit evidence
i. Physical examination
ii. Observation
iii. Documentation
iv. Confirmation
v.Inquiries of client
vi. Analytical procedures
vii. Re-performance
1) AUDIT PROCEDURES
 Audit procedures are actions that an auditor takes in acquiring evidence.

 Specific procedures used to determine whether audit objective is met.
 Can be used in Test of Control and Substantive Test.
 A list of audit procedures is called an audit program
JAN 2018Q3Aa
Define audit procedures.
Audit Procedures
Tests of controls
Substantive
procedures
Tests of details of Tests of details of Analytical

classes of account balances procedures
transactions and disclosures
Test of Control
(Compliance Test)
• Procedures to test the operating effectiveness of controls in preventing, detecting

and correcting material misstatement.
• Provide reasonable evidence that IC procedures are being applied as prescribed
• An auditor performs tests of control to obtain evidence about whether the control
activities of the internal control system are effective. Involves obtaining evidence
about:
– design of policies or procedures
– operating effectiveness of these policies or procedures (implementation).
– The tests are designed to provide evidence to support an assessment of
control risk at a level below high (indicating reliance on the keys controls
• Substantive procedures/tests
• Procedures to detect material misstatements in account balances, a class of
transaction and disclosure of Financial Statement
• Designed to test for dollar (monetary) misstatement directly affecting the
correctness of financial statement balances.
• Performed on specific transactions and balances to see whether the dollar
amount of an account balance is materially misstated.
• These tests reduce detection risk
3 types
i. Substantive test of transactions/test of details of classes of transactions
 Transactions test for errors & fraud in individual transactions
ii. Substantive test for account balances/test of detail of account
balances& disclosures
 Ending general ledger balance for SOFP item
iii. Analytical review procedures
 Comparison of recorded amounts to expectations develop by auditor
 Involves the study and comparison of relationships between
accounting data and related information.
1. APR 2009 Q4B, MAC 2012 Q2B

Explain the types of audit test: test of control, substantive test of
transactions, test of details and analytical procedures
.
2. MAC 2017 Q3Bb, JUN 2018 Q3Ab
Describe the differences between test of control and substantive audit
procedures
3. OCT 2006 Q3A(i)

Given the specific audit procedures, you are required to match the
procedures to the types of substantive procedures
i. Inspect new machinery purchased during the year.
ii. Vouch purchases a/c with supplier‘s invoice.
iii. Confirm amount owned by customers.
iv. Calculate inventory turnover ratio and compare with industry
ratio.
v. Reconcile bank a/c at year end.
vi. Test count of inventories supplies on hand at year end.
vii. Inspect purchase invoice recorded after the year-end.
viii. Calculate the gross profit ratio and compare it with the
previous year‘s ratio.
4. SEPT 2015 Q3A (c) (i-v)

Given audit procedures, you are required to identify test of control,
substantive test of transactions, analytical test or test of details of
balances
5. JAN 2018 Q3Bb (i-v)

Given audit procedures, required to identify test of control, substantive
test of transactions, analytical test or test of details of balances
6. DEC 2019 Q3Ac (i-v)

Given audit tests, determine whether it is test of control or test of
substanstantive. (Payroll department)
2) AUDIT EVIDENCE
 Audit evidence is made up of underlying accounting data and corroborating
information. Underlying accounting data includes the client‘s journals, general and
subsidiary ledgers and various other records such as work sheets, which all
support cost allocations and bank reconciliations.
 All these records directly support the financial report assertions, which may be
either general or specific.

1. JUN 2018 Q3Aa
Define audit evidence
2. JAN 2018 Q3Ba
Discuss with example
a. SUFFICIENT APPROPRIATE AUDIT EVIDENCE (PERSUASIVENESS OF AUDIT

EVIDENCE)
i. Sufficiency
• Considerations that may affect the auditors‘ judgment as to the sufficiency of
evidence include materiality, risk, economic factors and, the size and
characteristics of the population.
• Quantity of audit evidence necessary to provide the auditor with a reasonable
basis for an opinion on the financial report. Quite often determined by reference
to sampling.
• Procedures selected should provide sufficient appropriate audit evidence for
the auditor to form conclusions concerning the validity of individual assertions
embodied in the components of the financial report and to give an audit opinion.
ii. Appropriateness
• Appropriateness relates to the relevance and reliability of the underlying data
and corroborating information.
1. Relevance requires that the evidence be pertinent to the auditor‘s decision

related to assertion being tested
.
2. Reliability of evidence is influenced by its source and by its nature.
• Circumstances that could affect the reliability of information
obtained:
• Audit evidence is increased when it is obtained from
independent sources outside the entity.
• Audit evidence that is generated internally is more reliable
when the related controls, imposed by the entity are
effective.
• Audit evidence obtained directly by the auditor (for
example, observation of the application of a control) is more
reliable than audit evidence obtained indirectly or by
inference (for example, inquiry about the application of a
control).
• Audit evidence in documentary form, whether paper,
electronic, or other medium, is more reliable than evidence
obtained orally (for example, a contemporaneously written
record of a meeting is more reliable than a subsequent oral
representation of the matters discussed).
• Audit evidence provided by original documents is more

reliable than audit evidence provided by photocopies or
facsimiles.
iii. Factors that influence the sufficiency and appropriateness of evidence:

i. Auditors‘ assessment of the nature and level of inherent risks.
ii. Nature of the accounting and internal control systems

 Materiality of the item being examined
 Experience gained during previous audits
 Results of audit procedures (any fraud or error that have been found)
 Sources and reliability of information available
1. DEC 2019 Q3Aa

Define the ‗sufficiency‘ with an example
2. MAC 2017 Q3Aa
Define appropriateness
3. SEPT 2015 Q3Aa
Two factors affecting appropriateness
4. OCT 2016 Q3Aa, DEC 2018 Q3Aa

Sources of audit evidence
Answer
 Obtain directly by auditor
 Evidence created by management
 Evidence created by third party
5. MAC 2017 Q3Ab/DEC 2019 Q3Ab

Two factors affecting reliability
6. JAN 2018 Q3Ab
Three factors determine reliability
7. OCT2016Q3Bai
Effective Internal Control vs weak Internal Control
8. DEC 2018 Q3Ba (ii)
Substantive test is performed to verify the efficiency and effectiveness
of the procedures in the internal control system of an organization.
Discuss whether ypu agree or disagree
9. MAC 2016 Q3B

Factors affect influence sufficient & appropriateness of evidence
10. OCT 2016 Q3Ab

Persuasiveness vs conclusive
11. MAC 2016 Q3Aa
Factors auditor being persuaded rather than convinced Financial
Statements are correct
12. DEC 2018 Q3A
Explain any two reasons for audit evidence to be considered as persuasive
rather than conclusive
Answer
 Time constraint, where sampling is used by auditors to gather
evidence
 The auditors are not there as the event unfold, thus evidence is not
perfectly reliable
 The client personnel might have left the company

b. Types of audit evidence
There are eight (8) methods for obtaining evidence in performing test of controls
and substantive procedures. These are usually called as the types of audit
evidence.
1) Physical examination/inpection of tangible assets

 Inspection / count of tangible asset is to test the existence and eventually
provide evidence towards valuation.
2) Documentation/inspection of records or documents

 Examination of client‘s documents and records to substantiate the
information that should be included in Financial Statements.
 There are 2 types of documents:
i. Internal Documents (ID)
Documents prepared & used within a company without going to
outside party Eg: punch card, duplicate of sales invoice, copy of office
receipt, internal report, purchase requisition
ii. External Documents (ED)
Document either originated by an outside/ third party
Eg: supplier‘s invoice, bank statement, validated deposit slip
DOCUMENTATION EXAMPLES
1. 3rd party Auditor Confirmation
2.
3rd party Auditor Bank Statement
Client
3.
3rd party Auditor Cancelled cheques
Client
4. 3rd party Auditor

Cancelled cheques
Client
5.
Client Auditor Letter of Representation
6.
Client
Auditor
Sales invoice
1. MAC 2017 Q3Ab

Distinguish between Internal Documents & External Documents
2. APR2009 Q3 C
Given 10 documentary evidence, classify whether documents are
internal or external documents and classify to the reliability (high,
moderate, low)
External/ High/medium/
internal low
1 Goods received notes
2 Supplier‘s invoice
3 Material requisition forms
4 Duplicate copies of sales invoice

5 Purchase orders
6 Bank statements
7 Shipping documents
8 Term loan agreements
9 Supplier‘s statement
10 Bank reconciliation statement
3. OCT 2004 Q2A (i-iv)

Given 4 evidences, classify whether documents are internal or external
documents
External/internal
1 Payroll time card
2 Purchase requisition
3 Duplicate copies of bills of lading
4 Loan agreement
4. MAC 2016 Q3Ac

Given 5 documentary evidences, you are to identify external and
internal documents
5. OCT2006 Q3A(ii)
Corroborative evidences gathered by an auditor in the course of an
audit include
External/ Reasons
internal
1 A letter from the bank confirming
the company‘s bank balance,
which is sent directly to the
auditor.
2 The account payable‘s monthly
statements from the company‘s
files
3 Copies of sales invoices sent to
customers from the company‘s
files.
4 A bank statement from the client‘s
files.
Required: State the level of reliability for each of the above audit
evidences (High, Moderate or Low). Give reasons to support your
answer.
3) Observation
 The use of the senses to evaluate certain activities.
 Usually used by the auditors during the study and evaluation of client‘s
internal control.
 Eg: Observe the handling of sash, observe whether the store room with
valuable items locked.
4) Confirmation from third party /external confirmation
 Receipt of written/oral response from an independent 3rd party verifying

the accuracy of the information requested
 Eg: Confirm client‘s cash b/c with bank, confirm Account Receivable
balances
 2 types of confirmation of Account Receivable : positive & negative
i. Positive confirmation - 3rd party respond to auditor regardless
whether the amount are the same or not
ii. Negative confirmation - 3rd party respond only if they disagree
with stated amount. If no reply received after certain period,
auditor may assume the information is correct
Positive confirmation Negative confirmation
Auditor Third party Auditor Third party


1. JUN 2019 Q3Aa
State the two type of audit confirmation requests
2. JUN 2019 Q3Ab

Distinguish each of the confirmation above.
3. JUN 2019 Q3Ac

Determine any 2 alternative audit procedures to veritfy the
existence of account receivable if no response is received
from the confirmation request.
5) Inquiry / interview the client

 Obtain written / oral info from client
 Eg: Inquire with the management whether there are obsolete stocks/
collectability of Account Receivable balances
6) Recalculation/recomputation
 The rechecking of a sample computations & transfers of info made by
client during the period under audit
 Eg: check the calculation of depreciation expenses,
accruals/prepayments; re compute invoices amount
7) Reperformance
 Auditor perform procedures in accordance with the client‘s manual of
procedures
8) Analytical procedures/analytical review/analytical review procedures

(ARP)
 The use of comparisons & relationships to determine whether the
accounts & other data are reasonable
 Eg: evaluate the reasonableness of receivables by calculating &
comparing ratios; compare expenses and percentage of net sales with
prior year‘s.

1. DEC 2019 Q3Ba
According to these analytical review procedures , discuss any
one possible misstatement that can be detected by auditor.

1. JUN 2018 Q3 Ba
Discuss whether you agree or disagree with the following statements:
i. The account payable’s monthly statement from the company’s file is more
reliable than a confirmation of an account payable balance mailed by and
returned directly to the auditor.
ii. Audit evidence obtained from inquiry with the Board of Directors is more reliable
than audit evidence obtained from minutes of the director’s meeting.
2. JUN 2019 Q3Ba

Audit evidence obtained from inspection of tangible assets is considered as more
reliable as compared to inquiry of the client. Discuss whether you agree or disagree.
AUDIT OBJECTIVES/FINANCIAL REPORT ASSERTIONS
 What to achieve from the audit work

 Directors and managers make assertions (embodied in the financial report) when
they present a financial report.
 Auditors obtains evidence from the test of control and substantive procedures to
support the assertions (representations) made by the management.
 There are three categories of assertions (AIII of ISA 315):
i. classes of transactions and events
ii. account balances
iii. Presentation and disclosure.
Compl Cut Classify Accurac Valuation & Occurrence Existence Rights & Presentatio
etenes off y allocation obligation n&
s Disclosure
Classes of √ √ √ √
transactio
ns
Account √ √
balance
Presentati √ √ √ √
on and
disclosure
1. DEC 2018 Q3 Bai

Vouching is a process related to inspection of documentation where the audit objective of
the procedures is to verify the completeness of the transactions. Discuss whether you
agree or disagree
2.OCT2016 Q3Baii
Documentation vs physical-existence of assets
3.SEPT 2015 Q3Ba

Physical vs documentation – ownership of assets
PAST SEM’S QUESTIONS TO LOOK AT THE RELATIONSHIP AMONGST AUDIT

PROCEDURES, TYPE OF AUDIT PROCEDURES AND AUDIT OBJECTIVES
A. AUDIT PROCEDURES
Given audit procedures in the questions, required to identify type of audit
evidence (PDOCIRRA):
1. DEC 2018 Q3Ac (i-v)

2. JUN 2018 Q2Ac (i-v)
3. JAN 2018 Q3AC (i-v)
4. MAC 2017 Q3A c (i-v)
5. OCT2016 Q3 A c(i-v)
6. MAC2016 Q3Ba(i-v)
7. SEPT2014 Q3Aa (paragraph)
8. MAC2013 Q3A(a)(i-iv)
9. OCT2008 Q3A(i)(1-6)
10. APR2008 Q3B(iii)(a-f)
11. OCT2006 Q4A(d)(i-iv)
12. NOV2005 Q2(a)(i-iv)
13. MAC2005 Q2D(a-c)
14. MAC2004 Q2(b)(i-v)
B. AUDIT OBJECTIVES/ASSERTIONS
Given the CAVEROPD in the questions, required to find audit procedures
1. JUN 2018 Q3bb (i-ii)

2. OCT2012Q3A(i-v) (stock) match
3. OCT2010Q3A (a-e) (stock) match
4. APR 2009 Q4A(iii) (1-5) match
5. MAC2012 Q2C
State an audit procedures for each of the following assertions
i. Ownership of motor vehicles
ii. Sales invoice to the customers for the shipment that have occurred
iii. Accuracy of the year end account payable balances
iv. Account receivable which represents the amounts that are realizable
6. OCT2009Q4(c)
For each of the following audit objectives, suggest an appropriate
audit procedures
i. Bank balance as per the company‘s record is accurate
ii. Inventory items in the inventory listing schedule exist
iii. Current year acquisitions of property,plant and equipment exist
iv. The client has right to current acquisition of property, plant and
equipments
v. Accounts receivable in the trial balance is accurate
vi. Account receivable is stated at net reliasable value
7. NOV2005 Q2(c)
For each of the following audit objectives, suggest an appropriate audit
procedures that should be performed:
i. Existence of computer equipments
ii. Ownership of motor vehicles
iii. Existence of contingent liablities
iv. Accuracy of bank balance
C. TYPE OF AUDIT PROCEDURES/TYPE OF AUDIT EVIDENCE / TYPE OF AUDIT

TECHNIQUE
Given PDOCIRRA in question, required to find audit procedures
1. SEPT2011Q1B(b)
Provide an example of the audit procedures for each of the following types
of audit evidence
i. Documentation
ii. Observation
iii. Physical examination
iv. Confirmation
TOPIC 6
(FINAL EXAM)
TOPIC COVERAGE
1) AUDIT PROGRAMME
 Types of audit programme: Standard and Tailored
2) AUDIT DOCUMENTATION
a. Types of files
i. Permanent files
ii. Current files
b. Preparation of working papers
c. Ownership and Confidentiality
3) INTERNAL CONTROL
a. Management and auditor‘s responsibilities
b. Objectives of internal controls
c. Components of internal controls
d. Evaluation of internal controls
e. Assessment and documenting understanding of internal controls
f. Letter of management
1) AUDIT PROGRAMME
a) Definition
 A listing of all audit procedures to be performed for each audit area. It is an
action plan for auditors on what procedures to be performed throughout the audit
process, from risk assessment to reporting
 The procedures selected in the planning stage form the basis of the audit
programme.
JAN2018 Q2Ba
Definition
b) The programme should state:

i. the nature, timing and extent of planned audit procedures to be used at the
assertion level for each material class of transactions, account balance, and
disclosure, and each programme should be tailored to meet the
circumstances of each client.
ii. Development of time budget
iii. Assignment of audit staff
iv. Scheduling of dates
SEPT2015 Q2Ba
3 items that should be included in audit program
c) Purposes
i. Guide staff in audit work
ii. Provide evidence of proper planning and recording of audit work
64
iii. Basis for coordinating and supervising audit work and controlling time spent
iv. To ensure the requirements of quality standards are achieved in performing
the audit.
JUN 2018 Q2Ba
3 advantages of using an audit programme
d) Types
i. Standard /Pre-prepared Audit Program
• Can be used for audit in all industry (similar-trading, services etc )
• Disadvantages - Auditor just merely follow the procedures without thinking
of the significant of the procedures
ii. Tailored Audit Program
• Suits to different type of industry.
• Construction, banking & finance, manufacturing etc
OCT2016 Q2Bb
2 types of audit programme
2) AUDIT WORKING PAPERS/ DOCUMENTATION/AUDIT FILES
a) Component
i. Audit documentation is the (1) principal record of auditing procedures applied,
(2) evidence obtained and (3) conclusions reached by the auditor in the
engagement
ii. Audit documentation should include all information necessary as to conduct
the audit adequately and to provide support for the audit report
DEC2018Q2Ba
3 components of audit working paper
b) Purposes/reasons/benefits/functions
i. As a basis for planning, designing and performance of the audit work.
ii. As a basis for review by supervisors and partners
iii. As a record of the evidence accumulated and the results of the tests
iv. Data for determining the proper type of audit report
MAC2016 Q2Bb
Purpose of audit documentation
c) Contents of working papers vary depending on :

i. Types of audit engagement
ii. Nature of business
iii. Complexity of business
iv. Form of auditor‘s report
OCT2016 Q2Ba, DEC 2019 Q2Ba

3 factors to consider in determining the content of working paper
d) Ownership : Working Paper is the property of the auditor
e) Confidentiality: need to maintain a confidential relationship with client (refer to MIA

By-Laws-confidentiality)
f) Two (2) Types of WP:
ii. Currentt Audit Files (CAF)

Permanent Audit Files (PAF) • Includes all working papers
• contain data of historical or continuing applicable to the year under
and permanent in nature relevant from audit
year to year. The files need updating • Examples
each year. o Copy of the financial
• Examples statements
o long term contracts o Audit programme
o company‘s advisors o Abstract of directors‘
o brief history of the company &
meetings
organisation charts o Supporting schedules
o evaluation of internal control o Management letters
systems and letters of
MAC2016 Q2Ba representation
3 documents included in PAF
JAN2018 Q2Bb
Importance of PAF & CAF and examples
MAC2016 Q2Bb, DEC 2019 Q2Bb

Differences between PAF & CAF
SEPT2015 Q2Bb, DEC2018 Q2Bb

Given documents, determine the type of working papers
g) Standardized Working Papers

i. to improve the efficiency of working papers in terms they are prepared and
reviewed
ii. may help to instruct the audit work
iii. to facilitate the delegation of audit work
iv. Examples
1) Standards letter to the bank for bank balance confirmation
2) Circularisation letters to ac receivable / ac payable for balance
confirmation
h) Characteristics of good audit working paper

i. Each audit file should be properly identified with info: client‘s
name,period covered, description of contents, initials of preparer, date
of preparation and index code
ii. Audit documentation should be indexed and cross-referenced to aid in
organizing filing
iii. Indexing and cross referencing are important to the documentation of
audit working papers for:
 For easy reference
 Easy to understand
 Avoid duplication of work (non -current assets & depreciation
can be audited together)
iv. Completed audit documentation must clearly indicate the audit work
performed such as ; written statement in the form of memorandum,
initialing audit procedures in audit program and notation in the

schedules (use of tickmarks eg: β,∞)
v. Audit documentation should include sufficient information to fulfill the
objectives for which it was designed
vi. Conclusions that were reached about each segment should be clearly
stated
MAC2017 Q2Bb, JUN 2018 Q2Bb & JUN 2019 Q2Bb

Implications if audit procedures are not properly documented
Answer: Difficult for auditor to maintain the quality of audit since
manager/supervisor unable to review the audit work.
Audit partner may decide on inappropriate audit opinion due to
incomplete information.
3) INTERNAL CONTROL (IC)
Definition- ISA 31
“the process designed and effected by those charged with governance,
management, and other personnel to provide reasonable assurance about the
achievement of the entity’s objectives with regard to reliability of financial reporting,
effectiveness and efficiency of operations and compliance with applicable laws and
regulations.
It follows that internal control is designed and implemented to address identified
business risks that threaten the achievement of any of these objectives”
a. Management and auditor’s responsibilities
i. Management‘s concerns about IC

 IC provides a way for management to meet its agency responsibilities
 IC system ensures that the information generated for decision-making
purposes are reliable
 Effective IC can ensure that assets are safeguarded from unauthorized
use
 Financial records are reliable to permit the preparation of financial
information
ii. Auditor‘s concern about IC

 Auditor needs to understand the IC systems of an entity in planning the audit
 If the IC system is strong , the FS & other data generated by the entity more
reliable & thus, the auditor could possibly reduce substantive tests
 However if the IC is weak, the auditor needs to perform more substantive test
& detailed checking during the audit.
• Who‘s responsible to maintain the ICS? Management / Auditor?

• Auditor – will evaluate & ascertain the ICS in deciding the level of testing
required. A good ICS will reduce the amount of audit work required.
• Auditor – responsible to understand ICS
b. Objectives of internal controls

i. Occurrence
ii. Valid
iii. Authorized
iv. Completeness
v. Recorded
vi. Accuracy
vii. Valued
viii. Included & summarized
ix. Cut-off
x. Proper time
xi. Classification
xii. Properly classified
MAC2017 Q5Aa, SEPT2015 Q5Aa

General IC Objectives or assertions
JUN 2019 Q5AB

Explain the two management assertions related to the sales transactions.
c. Components of internal controls/the internal control structure
1. Control Environment
 Includes governance and management‘s overall attitudes, awareness and
actions regarding IC and its importance in the entity.
 Control environment sets the tone of an entity.
 It influences the control consciousness of all personnel and is the foundation
for the other components.
 Elements includes:
i. Communication and enforcement of integrity and ethical
values.
ii. Commitment to competence
iii. Participation by those charged with governance
iv. Management‘s philosophy and operating style
v. Organizational structure
vi. Assignment of authority and responsibilities
vii. Human resources policies and practices.
JAN2018 Q4
2 factors that determine the strengths of Control environment
MAC2016 Q5Ab
2 factors that can enhance the control environment in an
organisation
JUN 2019 Q4B

Discuss the importance of the control environment in reducing te
risk of material misstatement in the financial statements.
2. Risk assessment
i. An entity‘s risk-assessment process is its way of identifying and
responding to business risk.
ii. Once identified, management needs to consider their significance &
how it should be managed
iii. Management may introduce plans, programs or actions to
address specific risks or it may accept a risk on cost-benefit basis.
JUN 2019 Q4B

Discuss the importance of the risk assessment in reducing te risk of
material misstatement in the financial statements.
3. The information system

i. Information system (IS) includes its accounting system, which
comprises the methods and records established to initiate, record,
process and report exchange transactions and relevant events and
conditions, and to maintain accountability for the related assets,
liabilities and equity.
ii. IS includes infrastructure such as hardware and other physical
components, software, people, procedures and data. (EDP/IT or
manuals)
iii. An effective IS should consider establishing records and
methods that:
iv. Identify & records all valid transactions
v.Resolve incorrect processing transactions
vi. Process & account for system overrides
vii. Transfer information from transactions processing systems to
GL
viii. Capture information relevant to FR for events & conditions
other than transactions
ix. Present transactions and related disclosures properly in the FR
4. Control Activities/Procedures
• Policies & procedures established by management in order to ensure
that its directives are carried out.
• Control activities should be distinguished from accounting system.
• Control activities are added to ensure accounting system procedures
accurate and reliable data.
• Categories of Control activities will include policies and procedures
that pertain to:
i. Performance review
ii. Information processing
iii. Physical controls
iv. Segregation of duties (3 functions need to be segregated:
authorization, recording & custody of assets)
FINAL EXAMINATION EXAM
OCT2016 Q5Aa
Two key internal controls activities that should be
Implemented by management to ensure payment are not
made for fictitious employee
DEC 2019 Q5Aa
Identify two specific control activities that must be
implemented in the payroll and personnel departments
5. Monitoring.
i. Is a process used to assess the effectiveness of the performance of
internal control.
ii. It involves evaluating the design and operation of controls and taking
corrective action where necessary.
iii. Management may monitor controls through ongoing activities
such as supervisory activities and/or separate evaluations.( eg:
customer complaint)
iv. Internal auditors also contribute to the monitoring process.
Methodology for Study of Internal Control
Four steps may be identified in the study of a firm‘s internal control:
i. preliminary review;
ii. gathering information, understanding and preliminary evaluation of controls;
iii. tests of controls;
iv. final evaluation of controls
Limitation of Internal Control
ISA 315, “no matter how well internal control is designed and operated, it can provide an
entity with only reasonable assurance about achieving the entity’s financial reporting
objectives
 IC can only provide reasonable assurance that mgmt objectives are attained. The IC
are effective in reducing errors and fraud only to a certain extent, due to the inherent
limitations of IC i.e.
i. management override the IC
ii. Collusion among employees and with 3rd parties
iii. Personnel errors or mistakes – negligence/human error
iv. Cost constraints – cost vs benefit derived from control must justify the cost of
having staff with incompatible function
v. IC procedures may become inadequate due to changes in company size and
activities
SEPT2015 Q5Ab, MAC2016 Q5Ab, DEC2018 Q5Aa
Discuss any two Inherent limitation of internal control system
f.. Letter of management / Communication of Weaknesses in Internal Control
 Letter by auditor to mgmt at the end of his audit work, listing any weaknesses in the
design / operation of the IC system which may have come to his attention, explaining
the significance & the effect on current & future financial statement and
 make suggestions as the ways these weaknesses can be removed / reduced.
Management letter/ Letter of management
Letterhead:of
To:
Content:
1.
2.
3.
4.
Signed by:
Acknowledged and agreed by:
OCT 2016 Q3 B a i
Discuss whether you agree or disagree:
Evidence obtained from an effective internal control system is more reliable than the
evidence obtained from weak internal control system
OCT2016 Q4B Impact of not having a good internal control system in client‘s company.
Answer
• Increase potential misstatement
• Unable to obtain relevant information
• Increase amount of audit work
DEC 2019 Q4 B
Discuss the importance of internal control system to the client management.
TOPIC 7
AUDIT OF FINANCIAL STATEMENT CYCLES
(TEST 2)
TOPIC COVERAGE
Audit of Financial Statement Cycles

1) Types of financial statements cycles & related internal controls
a. Sales and collection cycle
b. Purchases and payment cycle
c. Payroll and Personnel cycles
2) Components in financial statements cycles
a. Classes of transactions
b. Accounts
c. Business functions
d. Documents and records
In summary all cycle involves the following steps:
Understanding the Preliminary

internal control assessment of Test of Control
structures control risk
Review of
preliminary
Substantive Tests
assessment of
control risk
A. SALES & COLLECTION CYCLE
a. Understanding the internal control structures
i. Overview of Sales & Collection Cycle:
ii. Sales & Collection Cycle Activities:
Receiving
Preparing Sales
Customer Granting Credit
Order
Orders
Recording and
Billing
Collecting Cash Shipping Goods
Customers
Receipts
Document / Record Activity
Sales
Customer order Accepting and processing customer order
Sales order Preparing sales order and organizing customer
information in a consistent format
Signed sales order Approving credit and authorizing the processing
of transaction
Delivery / Shipping document Delivery / Shipment of goods
Standard price list / Sales invoice Billing the customer
Daily sales summary Preparing summary report of daily sales (both credit and
cash sales)
Sales journal transactions Journalising the sales
Credit note Approving returns and allowances
Sales returns and allowances Recording entries in this journal for journal returns
and allowances if not accommodated in sales
journal
Bad debts authorization form Approving write-off of debtor as bad debt
Accounts receivable subsidiary ledger Posting the sales transactions
Monthly statement Mailing monthly statements to customers
Cash receipts
Remittance advices / Prelisting mail receipts
Cash register tapes Receiving payment by mail
Daily cash count sheets Collections from the cash sales
Cash counts and agreeing cash on hand with register totals
Daily sales summary Preparing summary report of daily sales (both credit and
cash sales)
Deposit slip Depositing cash in bank
Cash receipts journal Recording all cash receipts
Bank reconciliation statement Agreeing bank balances recorded in the books with
balances shown on bank statements
iii. Documents and Activities

iv. Internal Control Objectives & Control Procedures
Internal Control Objective Specific Control Procedure
Occurrence
Recorded sales are for shipments Each sales record should be supported by
made to bona fide customers. proper documents such as shipping
order, sales order and customer
purchase order.
Sales transactions are properly Approval should be obtained from the credit
authorized and collection personnel. Goods ready
Approving credit for shipment should be verified against
Shipment of goods sales order. There should be an
Billing customers approved price list and policies
concerning credit terms and discounts.
An employee independent of accounts

receivable prepares and mails monthly
customer statements, and follow-up on
customer complaints.
Completeness
All sales transactions are recorded All shipping documents and sales invoices
should be prenumbered, and numerical
sequences is routinely checked by
independent employee.
Accuracy
Recorded sales are for goods shipped There should be procedures for independent
and correctly billed internal verification of invoice preparation
(pricing, extensions and footings).
Goods shipped are independently counted

and descriptions and quantities on
shipping documents are compared with
sales order.
Cut-off
Sales are recorded in proper There should be procedures for invoicing and
accounting period recorded sales as soon as a transaction
is affected. Year-end sales cut-off should
be independently reviewed.
Classification
Sales are recorded in proper accounts Sales journal and general ledger should be
reviewed for proper classification.
All sales invoices should be coded by type of

product.

b.
Occurrence
Cash receipts record show only There should be separation of duties

amounts actually received from between handling cash and recordkeeping.
bona fide customers Monthly bank reconciliations should be
prepared by an employee independent of.
recordkeeping or handling of cash
Cash discounts, credit memos and bad There should be appropriate policies
debt write-offs are properly authorized regarding approval of cash discounts,
authorized returns and allowances and
bad debt write-offs
Completeness
All cash received are recorded in cash Adequate monitoring procedures over
receipts journal mailroom and cash register should be
maintained
Internal verification procedures should be

established:
to compare prelist of mail receipts with
cheques received
to compare daily cash summary with

prelist and cash counts taken
to compare entries in cash receipts

journal with daily cash summary
Accuracy
Cash receipts are recorded at proper There should be separation of duties

amount between handling cash and
recordkeeping
There should be policies and procedures for

approving cash discounts, returns and
allowances and write-offs of bad debts
Cut-off
Cash receipts are recorded in the proper There should be internal verification
accounting period procedures to compare entry dates and
the dates of daily cash summaries
Classification
Cash receipts are recorded in the proper Use a chart of accounts to ensure proper
Account classification.
Preliminary assessment of control risk
After obtaining an understanding of the internal control structure sufficient to plan the
revenue and receipts cycle audit, the auditor makes a preliminary assessment of
control risk for the financial report assertions related to the cycle‘s transactions and
account balances.
Tools:
o Internal Control Questionnaires (ICQ)
o Flowchart
o Narrative on the internal control structures
i. Internal Control Questionnaires (Sales)

1. Are customer orders reviewed for terms such as prices and quantities?
2. Are pre-numbered sales order used?
3. Are all credit sales approved by the credit department before shipping?
4. Is the credit department independent of the sales department?
5. Is there an approved customer list with credit rating and limits for approving
credit?
6. Are shipment checked against sales invoices for quantities, model, etc.?
7. Are pre numbered bills of lading use?
8. Are unused bills of lading safeguarded and checked periodically?
9. Is the numerical sequence checked for missing periodically?
10. Are sales invoice forms and credit memos pre-numbered?
11. Are unused sales invoices safeguarded and checked periodically?
12. Are sales invoices checked for arithmetical accuracy as to price, freight
allowances, extensions and totals?
13. Are all merchandise returns supported by pre-numbered documentation
forms?
14. Are all merchandise returns approved by a responsible officer?
15. Is there an overall checked for reasonableness of period sales data, e.g.,
statistical and ratio analysis?
16. Is there any periodic reporting of sales data to general ledger accounting
independent of accounts receivable accounting?
17. Does the accounting manual contain a chart of accounts and instructions
appropriate for classifying sales?
18. Are sales journals verified for correctness of entries made?
19. Are summary totals of journal entries checked monthly and approved before
posting
ii. Flowchart (Credit Sales)
c. Test of Control
Test of controls are the activities an auditor performs to ensure that internal control
procedures are effective as to both their design and operation.
Test of controls are performed in the following situations:
 Auditor satisfies that there are indications of effective internal control, based on
the results of preliminary assessment of internal control.
 Availability of resources (staff).
 Ample time to complete the test of control.
There are situations where the test of controls is not performed even though the
internal control is in existence.
There are also instances where test of controls and the substantive tests (test of
details) are performed simultaneously.
Common audit procedures are as follows:
Observation Inquiry
Inspection of
Reperformance
Documents
Test of Controls:
Audit Programme – Tests of Controls for Sales Transactions
1. Ask if sales invoice is independently matched with sales order and shipping document
and verify by checking for initials.
2. Ask about and observe mailing of monthly statements and examine customer correspondence
files.
3. Select a representative sample of entries from the sales journal vouch to customer order,
sales order, bill of lading and sales invoices.
4. Ask about and observe the use of prenumbered sales invoices and shipping
documents, and inspect evidence that numerical sequence has been accounted
for.
5. Select a representative sample of shipping documents:

(a) Vouch to sales invoices.
(b) Trace to entries in the sales journal.
(c) Trace to postings to accounts receivable ledger.
(d) Check for evidence that goods shipped have been independently counted,
and descriptions and quantities are compared to sales orders.
6. Select from the sales journal entries:

(a) Perform recalculations to check for arithmetical accuracy.
(b) Vouch prices to approved price list.
(c) Vouch to shipping documents.
(d) Vouch approval of credit.
7. Select a sample of credit notes:

(a) Inspect for authorisation.
(b) Check arithmetical accuracy of prices, extensions and footings.
(c) Vouch postings to customers’ accounts in subsidiary receivable ledger.
Audit Programme – Tests of Controls for Cash Receipts Transactions
1. Inspect evidence of independent bank reconciliation.
2. Review procedures for segregation of duties. Ask about and observe the mail room and
cash handling procedures.
3. Inspect evidence that entries in cash receipt journal have been independently compared
with daily cash summaries and postings to subsidiary receivable ledger.
4. Select a representative sample of recorded cash receipts:

(a) Vouch to validated bank deposit slips.
(b) Vouch to prelists and remittance advices.
5. Select a representative sample of daily cash summaries:

(a) Trace to entries in cash receipts journal.
(b) Perform recalculations to check for arithmetical accuracy.
(c) Trace postings to general ledger.
(d) Trace to bank statement
d. Review of preliminary assessment of control risk
The purpose of tests of controls is to evaluate the effectiveness of the design and
operation of the internal control structure policies and procedures, which in turn
enables the auditor to determine the assessed level of control risk for revenue and
receipts cycle assertions.
If the evaluation of deviations from prescribed controls, based on tests of controls for
the sales and cash receipts transactions, reveals that such deviations arise as a
result of control failure, the auditor may conclude that less reliance than planned may
be placed on specific internal controls.
As a result, the assessed level of control risk should be increased for those financial
report assertions to which they relate, and the auditor would then modify the nature,
timing and extent of planned substantive procedures to be performed.
e. Substantive Tests
Common Audit Procedures:
Inspection of Physical
Observation Inquiry
Documents Inspection
Analytical
Confirmation Recalculation Reperformance
Procedures
Type of Substantive Tests:

Test of Details (Transactions Analytical Procedures
/ Balances (Reasonableness Test)
Sales Sales vs Cost of Sales
Credit Notes Sales Commission
Allowance for Doubtful Sales Discount
Debts
Substantive Audit Procedures:

Audit Programme – Substantive Tests of Sales Transactions
1. Select a sample of individual entries in the sales journal and vouch to source documents.
2. Select a sample of shipping documents:

(a) Vouch to sales invoices.
(b) Trace to entries in sales journal.
(c) Trace postings to subsidiary receivables ledger.
3. Perform year-end sales cut-off test.
4. Verify arithmetical accuracy of sales invoices and sales journal.
5. Scan the sales journal for large or unusual items.
6. Perform analytical review procedures.
Audit Programme – Substantive Tests of Accounts Receivable
1. Confirm accounts receivable.
2. Obtain an aged trial balance of accounts receivable:

(a) Verify the arithmetical accuracy of subsidiary ledger accounts and agree
total to general ledger control.
(b) Examine the ageing of accounts receivable balance.
(c) Scan the trial balance for material credit balances.
3. Perform sales cut-off test.
4. Examine subsequent collections.
5. Scan individual accounts receivable for unusual transactions
6. Review minutes of board of directors’ meetings, and read contracts and agreements for any accounts
pledged.
7. Perform analytical procedures.

Substantive Audit Procedures: Accounts Receivable Confirmation
Positive Accounts Receivable Conformation Request

Hassan Engineering Bhd.
P. O. Box 100
Kuala Lumpur
Metal Products Sdn Bhd

786 Jalan Chan Sow Lin 2 July 2009
Kuala Lumpur Confirmation Request
Dear Sirs
According to our records, the balance outstanding on your account as at 31 June 2006 was RM23,456.78. If this
agrees with your records on that date, please sign this confirmation form in the space provided below and return
it in the enclosed business reply envelope direct to our auditors:
Nabil and Co
Chartered Accountants
P.O. Box 200
KUALA LUMPUR
If the balance does not agree with your records, please inform our auditor of the amount shown by your records,
giving full details of the details of differences, on the reverse side of this form.
Yours faithfully
Hassan Engineering Bhd.
The amount shown above is correct
Signed
(Company name)
By
B. PURCHASES & PAYMENT CYCLE
i. Overview of Purchases & Payment Cycle:
ii. Purchases & Payments Cycle Activities:
Receiving, Inspecting Preparing Payment

Requisitioning Goods Preparing Purchase
and Storing the Vouchers and
and Services Orders
Goods Recording
iii. Documents and Activities
Documents / Record Activity

Purchase requisition An authorized employee requests the purchasing department of
purchase goods by an authorized employee
Purchase order Requesting outside supplier to supply goods specified in the purchase
order
Receiving report Preparing a report upon receipt of the goods showing the description,
quantity received and date received
Debit note Preparing a memo authorizing purchase returns for damaged goods or
goods received not in accordance with specifications
Vendor’s invoice Billing by the vendor giving a description of goods, amount due and
payment terms
Vendor’s statement Prepared by vendor showing beginning balance, purchases, payments to
the vendor and ending balance
Voucher Summarizing details of a purchase transaction which serves as basis for
recording and approval of payment
Voucher register Recording all vouchers in this register (if a purchase journal has not been
used)
Cheque register Recording all payments in this register (if a cash payments journal has
not been used)
Creditor’s ledger Posting all purchases and cash payments transactions to individual
accounts in this accounts payable subsidiary ledger
Internal Control Objectives & Control Procedures

Purchases
Occurrence
Recorded purchases represent Vouchers for payment of purchases should be
items actually acquired supported by proper documents such as purchase
orders, receiving reports and vendor’s invoices
Purchase transactions are There should be procedures for authorizing and
properly authorized: approving requisitions, purchase orders
preparing requisitions (including prices and terms), receipt of goods
ordering goods and transfer of goods to inventory. An
receiving goods independent employee should review the
storing goods authorizations and match the vendor invoices
with supporting documents.
Completeness
All sales transactions are Purchase orders, receiving reports and vouchers
recorded should be pre-numbered. Numerical sequence is
periodically accounted for by an independent
employee. Copies of purchase orders and
receiving reports should be forwarded to the
accounting department to be matched with
vendor invoices.
Accuracy
Purchases are recorded at the There should be procedures for independent
proper amounts internal verification of vendor invoices as to
quantities received, prices, terms, extensions
and footings.
Journal entries and postings should be based on
approved supporting documentation.
Cut-off
Purchases are recorded in the There should be procedures for invoicing and
proper accounting period recording sales as soon as a transaction is
effected. Year-end purchases cut-off should be
independently reviewed.
Classification
Purchases are recorded in Purchases journal and general ledger should be
proper accounts reviewed.
Use chart of accounts to ensure proper
classification.
Payments

Occurrence
Recorded cash payments There should be separation of duties between handling
represent cash actually cash and record-keeping.
paid to vendors Prenumbered cheques should be used and numerical
sequence should be accounted for routinely,
including unissued cheques.
Cash payments are There should be procedures for approval of payment

properly authorized before signing of cheques by authorized persons.
Vouchers and supporting documents should be
cancelled for each issue.
Completeness
All cash payments are Cheques should be prenumbered and accounted for,
properly recorded both used and unused. Bank reconciliations should
be prepared by an independent employee. There
should be a system of review of any discrepancies in
the above procedures by a supervisory personnel.
Accuracy and Cut-off
Cash payments are There should be internal verification comparing
recorded at the proper cheques with payment records as to payee,
amount and in the proper amounts and date.
accounting period.
Classification
Cash payments are Account codes on vouchers should be reviewed.
recorded in proper
accounts
b. Preliminary assessment of control risk
revenue and receipts cycle audit, the auditor makes a preliminary assessment of
account balances.
Tools:
▶ Internal Control Questionnaires (ICQ)
▶ Flowchart
▶ Narrative on the internal control structures
c. Test of Control
Inspection of
Observation Inquiry Reperformance
Documents
Audit Programme – Tests of Controls for Purchase Transactions
1. Select a sample of purchase orders and inspect evidence that they have been
approve and matched with purchase requisitions, vendors invoices and
receiving reports, and are cancelled upon payment.
2. Review the client’s accounting for numerical sequence of purchase orders,
receiving reports and vouchers, and test-check a sample.
3. Select a representative sample from a file of receiving reports:
(a) Vouch to related purchase orders and purchase requisitions
(b) Vouch to vendor’s invoices
(c) Examine supporting documents for evidence of supervisory review and
approval.
4. Select a representative sample of transactions from the voucher register:
(a) Vouch prices to purchase order or approved vendor price list.
(b) Perform recalculations of extensions and footings
(c) Compare voucher register total to general ledger posting
5. Ask about and observe the inspection and counting procedures for receiving
and storing goods
6. Review appropriateness of segregation of duties.
Audit Programme – Tests of Controls for Cash Payments Transactions
1. Ask about and observe the use of prenumbered cheques, and test the numerical
sequence in the cheque register (or cash payments journal) and unused cheques.
2. Seek approval from the client to obtain a sample of cancelled cheques from the
bank:
(a) Examine for properly approved supporting voucher.
(b) Agree amount on cancelled cheque and supporting voucher.
(c) Examine supporting voucher for evidence of cancellation of the voucher and
vendor invoice.
(d) Examine cancelled cheques for authorised signatures.
(e) Trace cancelled cheques to cheque register (or cash payments journal) and to
accounts payable subsidiary ledger accounts
3. Test arithmetical accuracy of cheque register (or cash payments journal) and
compare totals to general ledger postings)
4. Review procedures for segregation of duties.
enables the auditor to determine the assessed level of control risk for the cycle‘s
assertions.
If the evaluation of deviations from prescribed controls, based on tests of controls,

reveals that such deviations arise as a result of control failure, the auditor may
conclude that less reliance than planned may be placed on specific internal controls.
Observation Inquiry
Reperformanc Analytical
Confirmation Recalculation
e Procedures
Test of Details
Analytical Procedures
(Transactions /
(Reasonableness Test)
Balances
Purchases Sales vs Cost of Sales
Debit Notes Commission related to
Purchases
Purchases Discount
Audit Programme – Substantive Tests of Purchases
1. Select a sample of transactions from the cash payments journal. Vouch to

supporting documents
2. Select a sample of receiving reports. Trace to entries in the voucher register and
cash payments journal.
3. Perform year-end purchase cut-off test.
4. Perform recalculations on supplier invoices to verify arithmetical accuracy.
5. Scan the purchases journal for large or unusual items.
Audit Programme – Substantive Tests of Accounts Payable

1. Obtain a trial balance of accounts payable
(a) Verify arithmetical accuracy of subsidiary ledger accounts and agree total
to general ledger control
(b) Segregate amounts due to others from segregate trade creditors
(c) Scan trial balance for material debit balances.
2. Test selected transactions in a sample of individual accounts payable:
(a) Vouch to purchase orders, receiving reports and vendors’ invoices.
(b) Trace credit entries in accounts to corresponding entries in purchases,
inventory, expenses, or other records.
(c) Trace debit entries to cash payments journal.
3. Confirm accounts payable balance with vendors or request vendor statements
of unpaid invoices.
4. Perform purchase cut-off test.
5. Review payments subsequent to audit date and unpaid invoices for evidence of
unrecorded liabilities.
6. Review client’s reconciliation of subsidiary ledger to general ledger control
account.
Substantive Audit Procedures – Accounts Payable Confirmation

C. PAYROLL & PERSONNEL CYCLE
i. Overview of Payroll & Personnel Cycle:
Payroll Transactions
Bank Payroll payable Wages control
Net salaries
Gross
Mandatory Provident salaries
Fund deductions
Direct labour
Mandatory
Provident Indirect labour
Fund
Payments Provision for
annual leaves
Payroll & Personnel Cycle Activities:
Authorizing Preparation Payment of

Timekeeping
Employment of Payroll Payroll
ii. Documents and Activities
Document / Record Activity

Personnel file Records in this file data related to employees including
details of date of employment, rates of pay,
authorized deductions, evaluations and termination
of employment.
Deduction authorization form Authorizes payroll deductions for MPF contribution and
superannuation.
Rate authorization form Authorizes rate of pay
Timecard Records the time employee starts and stops work during
a pay period. This card must be inserted into a time
clock as an employee commences or ceases work,
and the time will automatically be punched onto the
card.
Payroll cheque Prepares a cheque in the name of an employee for
services rendered. This overcomes the problem of
cash-handling (which can be time-consuming) and
provides greater control because the cheque butts can
be used as proof of payment.
Payroll register (pay sheet or Records the details of each employees pay, the amount of
wages sheet) gross pay and how it is computed, the amount of
deductions, and the amount of net pay for each pay
period. This register serves as a summary of the
amounts paid to employees during each pay period.
Employee earnings record Records the details of an employees pay for a whole
financial year. Pay details are entered on the card foe
each pay period. The preparation of employee group
certificates is made easier by totalling the columns
on the card instead of having to refer to the payroll
registers for each pay period to verify how much
each employee has been paid.
Labour (cost) distribution Prepares a summary identifying the gross factory
summary earnings for the various account classifications, e.g.,
by product or division.
Payroll tax returns Prepares tax forms for submission to the relevant
government agency or Taxation Office.
Group certificate Prepares this document to be given to an employee for
filing with Malaysia, showing annual earnings, MPF
contribution withheld, and other deductions
authorized by the employee, including
superannuation and union dues.
Control card Prepares a control card showing the total payroll for the
period. At the end of each pay period, the employee
earnings records cards are totalled and reconciled
with the control card. This control measure is similar
to that of the control account/subsidiary ledger.
iii. Internal Control Objectives & Control Procedures

Occurrence
Recorded payroll transactions There should be segregation of duties of personnel,
are for services actually timekeeping and payroll payments.
performed by non-fictitious There should be procedures for proper
employees. authorizations and approvals by the personnel
Payroll transactions are property department for hiring and terminating
authorized. employees, or for changes in employee status.
Timecards should be approved by supervisors
and approved timecards are compared with
absentee reports. There should be internal
verification comparing payroll with termination
lists.
Completeness
All payroll transactions are Payroll cheques should be prenumbered and
properly recorded. accounted for.
An independent employee should reconcile the
payroll bank account.
Accuracy
Payroll transactions are There should be internal verification entries,
recorded at the proper including the review of approved rates and
amount timecards.
Gross and net payroll amounts, and payroll totals
should be independently recalculated.
Cut-off
Payroll transactions are There should be procedures to compare dates on
recorded in the correct payroll cheques and entry dates in payroll
accounting period. register.
Classification
Payroll transactions are Procedures for classifying payrolls costs should be
recorded in proper reviewed.
accounts.
b. Preliminary assessment of control risk
payroll & personnel cycle audit, the auditor makes a preliminary assessment of
account balances.
Tools:
▶ Internal Control Questionnaires (ICQ)
▶ Flowchart
▶ Narrative on the internal control structures
c. Test of Control
Inspection of
Observation Inquiry Reperformance
Documents
Audit Objectives
The audit tests are designed to meet the control objectives and related assertions of
occurrence, completeness, accuracy, cut-off and classification.
• occurrence — all recorded payroll transactions have actually taken place;
• completeness — all payroll transactions are processed and recorded;
• accuracy, cut-off and classification — all payroll transactions are recorded at their
proper amounts, in the proper accounting period and proper accounts.
enables the auditor to determine the assessed level of control risk for revenue and
receipts cycle assertions.
If the evaluation of deviations from prescribed controls, based on tests of controls for
the sales and cash receipts transactions, reveals that such deviations arise as a
result of control failure, the auditor may conclude that less reliance than planned may
be placed on specific internal controls.
Observation Inquiry
Analytical
Procedures
Test of Details
Analytical Procedures
(Transactions /
(Reasonableness Test)
Balances
Salary / Bonus Salary / Bonus
Overtime Fee
Statutory deductions
Audit Programme – Substantive Tests of Payroll Transactions
1. Select a sample of entries from the payroll register.

(a) Vouch the hours worked to timecards.
(b) Vouch net pay to employee’s earnings record.
(c) For employees who have left, examine employee earnings records and subsequent
payroll registers to ensure no further payment has been made.
2. Obtain control of payroll sheets and observe the distribution of pay cheques.
3. Prepare a reconciliation of payroll bank statement with payroll register payments.
4. Recalculate the gross pay, net pay and payroll deductions for a sample of employees.
5. Recalculate the totals recorded in the payroll register, and agree the total payroll amount
to the amount of the cheque transferring cash to payroll bank account.
Audit Programme – Substantive Tests of Payroll Balances
1. Review the payroll accounts for the date that payroll was last paid and recalculate
accrued wages.
2. Review the payroll tax return to the Inland Revenue Department for compliance with
regulatory requirements.
3. Trace total accrued payroll to payroll records.
4. Perform analytical procedures.
AUDIT OF REVENUE (SALES) AND RECEIPTS (COLLECTIONS) CYCLE (CCH CHAP 13,pg 327)
Draw the flow of the documents in the cycle
CUSTOMERS/ACCOUNT
CLIENT‘S COMPANY RECEIVABLE
/BUYER/DEBTORS
CLASSES OF ACCOUNTS BUSINESS FUNCTIONS DOCUMENTS & RECORDS

TRANSACTIONS
AUDIT OF PURCHASE (ACQUISITION) AND PAYMENT (DISBURSEMENT) CYCLE (CCH CHAP 14,pg 367)
SUPPLIER/ACCOUNT
PAYABLE/CREDITOR/ CLIENT‘S COMPANY
VENDOR

TRANSACTIONS
AUDIT OF INVENTORY (STOCK) AND WAREHOUSING CYCLE / AUDIT OF PRODUCTION CYCLE (CCH CHAP 15,pg 401)
(Not included in the course information, however it is used prior understanding the purchase cycle)
CLIENT‘S CO
SUPPLIER/ACCOUNT
PAYABLE/CREDITOR/
VENDOR PURCHASING RECEIVING
DEPT DEPT
STORE
STORE ROOM
ROOM RAW
FINISHED
MATERIAL
GOODS
PRODUCTION/OPERATION/
FACTORY

TRANSACTIONS
AUDIT OF PERSONNEL (HUMAN RESOURCE) AND PAYROLL (PAYMENT OF SALARY & WAGES) CYCLE (CCH CHAP 16,pg 431)
STAFF/EMPLOYEE/
CLIENT‘S COMPANY WORKERS/
LABOUR

TRANSACTIONS
AUDIT OF FINANCIAL STATEMENT CYCLE

PAST SEMESTER’S FINAL EXAMINATION QUESTIONS. (Theory)
1. SEPT 2015 Q4B

Importance of strengths and weaknesses of client‘s Internal Control System in
determining the extent of audit procedures that auditor should perform
2. MAC 2016 Q 4B Importance of communicating the findings (weaknesses)
SALES & RECEIPT CYCLE
1. DEC 2018 Q3Bb

Determine the audit procedures to be performed by the auditor to verify that the
recorded sales are for shipments made to non-fictitious customers.
2. MAC 2016 Q3Bb

Explain two audit procedures to prevail any overstated of sales transactions.
3. MAC 2017 Q3Bb

Explain analytical procedures to detect potential misstatements in sales related
transactions.
4. JUN 2019 Q5Ab Identify one internal control procedure to ensure that all sales
transactions are correctly billed.
PURCHASES & PAYMENT CYCLE
1. DEC 2018 Q5Aa

Identify any two audit procedures that can be performed by the auditor to ensure
that the control procedures are properly implemented by the management within
the acquisition and payment cycle.
2. JUN 2019 Q3Bb

Determine any two audit procedures that should be performed to ensure that the
items recorded in the purchase journal represent purchase transactions that really
exist.
3. OCT 2016 Q3Bb

Explain audit procedures to ensure recorded acquisition are for goods and services
received.
4. DEC 2019 Q3Bb

Explain audit procedures for purchase transactions that may be performed by an
auditor.
PERSONNEL & PAYROLL CYCLE
1. JUN 2018 Q5Aa

Identify any two (2) errors or irregularities that may occur in payroll system
2. JAN 2018 Q5Aa

Two Internal Control Objectives related to payroll and personnel cycle
3. MAC 2017 Q4B

Examples of specific Internal Control procedures that should be implemented by
SPIRA Cosmetics Sdn Bhd in processing salary and allowance of its employees.
4. JAN 2018 Q5Ab

Two common test of controls to identify any significant deficiencies and
weaknesses in client‘s payroll system
5. DEC 2018 Q3Bb

Determine the audit procedures to be performed by the auditor to verify that all
payroll transactions are recorded at the proper amounts.
6. SEPT2016Q3Bb
Explain two audit procedures that may detect invalid payment for salaries
7. OCT2016Q5Ab
Determine 2 substantive procedures commonly performed by auditor to verify the
accuracy of payroll transactions
8. JUN 2018 Q5Ab

Determine any two (2) substantive tests that can be performed by the auditor to
verify the completeness of the payroll transactions.
9. DEC 2019 Q5Ab

Explain any two audit procedures that the auditor may use to test whether the
control is functioning.
TOPIC 8
AUDIT OF STATEMENTS OF FINANCIAL POSITION AN
COMPREHENSIVE INCOME
(TEST 2)
TOPIC COVERAGE
Audit of Statements of Financial Position and Comprehensive Income

1) Substantive audit procedures for statement of financial position – account
balances and disclosures
a. Property, plant and equipment
b. Cash
c. Income statement
i. Repair and Maintenance
ii. Entertainment
A. PROPERTY, PLANT & EQUIPMENT
PPE refers to the following items:

• Long-lived tangible assets
• Recorded at historical cost
The audit work requires a small proportion of audit time because the items are relatively
few, have a high value and the accounts are not subject to frequent changes.
i. Overview of Property, Plant & Equipment
ii. Internal Control

iii. Test of Control & Substantive Tests
Internal Control Objectives, Specific Control Procedures, Tests of Controls and Substantive Tests
for Fixed Assets.
Internal Control Specific Control Test of Controls Substantive Tests of

Objectives Procedure Transactions
Occurrence
Recorded fixed asset Separate detailed records Ask about how records Vouch plant asset
transactions are for should be maintained are kept and who has additions to minutes,
actual fixed assets under custody of custody of them. vouchers, invoices and
acquired. employee independent of Discuss with contracts.
directly. management about Vouch plant asset
adequacy of insurance retirements to cash
coverage. remittance advices and
sales agreements.
Review insurance
policies for termination
or reduction of coverage.
Fixed asset There should be Inspect evidence of
purchases, additions procedures for proper authorizations and
and retirements authorizations and approvals.
should be properly approvals by the board
authorized. of directors or senior
personnel for
acquisitions, major
repairs and disposals.
Major expenditures for Ask whether capital
fixed assets should be expenditure budget is
controlled by approved prepared.
capital expenditure
budgets.
There should be written Ask about written
policy as to the type and policy on capitalization.
minimum dollar amount
of expenditures that
should be capitalized.
Completeness
All fixed asset There should be formal Ask about formal Ask management about
acquisitions, procedures for procedures and inspect additions and
disposals and processing and recording evidence of whether retirements.
retirements are fixed assets transactions, these are followed. Review changes in
properly recorded. including depreciation. insurance coverage.
Review entries to repairs
and maintenance.
Accuracy, Cut-off
and Classification
Fixed asset There should be internal Inspect evidence of Vouch additions and
transactions are verifications of internal verifications. retirements to supporting
recorded at the calculations and documents.
proper amount, in amounts. Review entries to repairs
the proper and maintenance.
accounting period
and proper accounts.
In the following discussion the auditor focuses on tests of the account balances for plant and
equipment. The specific objectives and related assertions in the audit of these balances are:
• existence — the balance shown in the financial report represents the plant and equipment that
actually exist;
Audit Program – Substantive Test of PPE Balance
1. Obtain a schedule of PPE and arrange a tour of the plant:

i. Physically inspect these assets
ii. Note any additions and retirements not listed in the schedule
2. Examine the entries in the plant records for additions and retirements:
Vouch to title documents and contracts, certificate of title, insurance policies,
tax assessment notices, vendor invoices, payment vouchers & lease
agreements
3. Recompute depreciation provisions and review propriety of bases used
4. Perform analytical procedures
iii. Common Audit Procedures
Observation Inquiry
Analytical
Procedures
B. CASH
Cash consists of cash on hand and in bank.
The verification of cash balance requires large amount of time because of two (2)
reasons:
• Almost all business transaction will ultimately pass through the cash account
• Cash is the most liquid of all the assets, therefore there is a higher risk of defalcation
Specific objectives Explanation Substantive test

and related
assertions
1 Existence, Rights & The cash balance shown • Physical count
obligations and in the SOFP represents • Bank confirmation of
valuation and all the cash an entity balances
allocation claims to have
2 Completeness All cash transactions that • Cut-off tests (during the
should be recorded have test of bank
been recorded reconciliations)
3 Presentation and Restrictions on the use of Inquiry & examining:
disclosure cash are properly • Bank confirmation
disclosed, classified and • BOD meeting minutes
described • Terms of lease
• Loan agreements
C. INCOME STATEMENT
 Why is an income statement important? As the earnings is normally used to value the
company‘s securities.
 Verification of income statement accounts should be an integral part of the auditor‘s
examination of the balance sheet item. Usually depreciation expenses would be
audited together with the depreciable assets. The relationship between the major
Income Statement and balance sheet accounts, which are verified at the same time
is as follows:
Balance Sheet item Income Statement item

Revenue Expenses
1 Account receivable Sales Bad debts
2 Inventories Purchases/COS
3 Depreciable assets Gain Depreciation
4 Prepaid expenses i.e. Insurance
5 Accrued liabilities i.e. Wages, Commission
6 Long term debt Interest expenses
 Verification of the income statement
Substantive testing Repair and Entertainment

Maintenance
1 Analytical procedures (if Actual vs budget Actual vs budget

internal control can be
relied upon)
2 Detailed analysis (if • Trace the transaction • Trace the transaction

internal control is weak) to the suppliers‘ to the entertainment
invoices expenses claimed by
• Ensure no capital employees
expenditures • Trace the transaction
to the suppliers‘
invoices
• Ensure no personal
expenses
EXERCISES
1. PROPERTY, PLANT AND EQUIPMENT/FIXED ASSETS/NON CURRENT ASSETS (Chap 17, Page 457)
 Referred to as
 Includes:-
1.
2.
3.
4.
5.
 Value at
 Amount is capitalized if and
 Day-to-day repairs and maintenance should be as incurred.
 Significant proportion of
 Audit work is relatively of total audit time.
 Items are relatively and and
 Not as critical for PPE
 Verification of property, plant and equipment

Specific objectives and Explanation Substantive test
related assertions
1 Existence
2 Completeness
3 Rights & Obligations
4 Valuation and allocation
5 Presentation and disclosure
2. CASH (Chap 17, Page 462)
 The verification of cash balance requires large amount of time because of two (2) reasons:
1)
2)
 The audit of cash requires the auditor to obtain knowledge of the
and
 Verification of cash
Specific objectives and Explanation Substantive test
related assertions
1 Existence, Rights &

obligations and valuation
and allocation
2 Completeness
3 Presentation and
disclosure
3. INCOME STATEMENT (Chap 18, page 488)
 Why is an income statement important? (summarize 1.2.1)
 Verification of income statement accounts should be an integral part of the auditor‘s examination of the balance sheet item. Usually
depreciation expenses would be audited together with the depreciable assets. The relationship between the major Income Statement
and balance sheet accounts, which are verified at the same time is as follows:
Balance Sheet item Income Statement item

Revenue Expenses
Sales Bad debts
1 Account receivable
2 Inventories
Gain
3 Depreciable assets
4 Prepaid expenses
5 Accrued liabilities
6 Long term debt

 Verification of the income statement
Substantive testing Repair and Maintenance Entertainment

1 Analytical procedures (if
internal control can be
relied upon)
2 Detailed analysis (if

internal control is weak)
TOPIC 9
AUDIT REPORT
(FINAL EXAM)
TOPIC COVERAGE
Audit Report
1) Types of audit report
a. Unmodified audit report
i. Standard unmodified/unqualified
ii. Emphasis of matter paragraphs
b. Modified audit report
i. Qualified opinion – ―except for‖
ii. Adverse opinion
iii. Disclaimer opinion
2) Components of an unmodified audit report
3) Departures from an unmodified audit report
a. Inability to obtain sufficient appropriate audit evidence (qualified or
disclaimer opinion)
b. Financial statements are materially misstated (qualified or adverse
opinion)
 Final phase in the auditing process that involves:-

i. Review and evaluation of all audit evidence gathered for formulating an
overall opinion on financial report
ii. Communicating the opinion to interested parties.
 Ultimate product the review and assessment process.
 Contains auditor‘s expression of opinion on the fair presentation of the financial
report
 Gives credibility to the financial information prepared by management who is
responsible for the preparation of financial statements.
 The auditor‘s report should be in writing both in hard copy or electronic format
JAN 2018 Q4 A a
Why auditor‘s reports are important to user
JUN 2019 Q4Aa

Explain the significance of an auditor‘s report to the shareholders
Auditor‘s Reporting Responsibility
ISA 700 (Revised)

 Auditor able to express an unqualified / unmodified opinion and no modifications
is necessary.
 provides guidance on matters the auditor consider in forming opinion on general
purpose financial statements (ISA 200 - prepared in accordance with a financial
reporting
 Provides guidance on the form and content of audit report
ISA 701
 communicating key audit matters (KAM) that can enhance the communicative
value by providing greater transparency.
 KAM are those, in the auditor’s judgement, were the most significance in the
current year audit.
MAC 2016 Q4 A a
Explain the auditor‘s reporting responsibility as stated in the report.

Answer: Auditor‘s responsibility is to express and opinion on the financial
statements based on the audit. The audit should be conducted in accordance
with the ISAs. It is required by the standards to comply with the ethical
requirements, plan, and perform the audit to obtain reasonable assurance that
the financial statements are free from material misstatement.
DEC 2019 Q4 A a
Explain any one of an auditor‘s duty to report on financial statements.
1) Types of audit report
a. Unmodified audit report
i. Standard Unqualified/Unmodified Reports

• The auditor issues an unqualified opinion if the auditor believes the financial
statements that are audited fairly reflect the client‘s condition and performance
and conform to the Malaysian Approved Accounting Standards.
• The report is expressed in clear and affirmative language and contains no
reservations or important explanations, which may cast doubts upon the reliability
of the audited financial statement.
ii. Unqualified/Unmodified Reports emphasis of matter paragraph

 Emphasis of matter is a type of paragraph in auditor‘s report to indicate a
significant uncertainty or other matter, which is disclosed appropriately in the
notes which auditor consider important to warrant a mention in the report.
 The paragraph begin with ―Without qualifying our report….‖
b. Modified audit report
i. Qualified opinion – ―except for‖
ii. Adverse opinion
iii. Disclaimer opinion
2) Components of an unmodified audit report / Basic Elements
i. Title
ii. Addressee
OCT 2016 Q4 A a
Meaning of addressee.
iii. Auditor‘s opinion
iv. Basis for opinion
v. Auditor‘s independence
vi. Going concern basis of accounting
vii. Key audit matters
JUN 2018 Q4Aa
Meaning of KAM
viii. Management‘s responsibilities
ix. Auditor‘s responsibilities for financial statements
x. Name of engagement partner
xi. Auditor‘s signature
xii. Auditor‘s address

xiii. Date of the auditor‘s report
3) Departures from an unmodified audit report/ Circumstances when

departing from the required framework
 When financial statements is misleading and financial reporting framework do not

provide any guidance , the auditor may need to modify the auditor‘s report in order to
achieve the objective of fair presentation of financial statements.
 Any modification of the opinion in the auditor‘s report is in accordance with ISA 705
(Revised)
Two (2) circumstances:-
i. Inability to obtain sufficient appropriate audit evidence (qualified or disclaimer

opinion)-Limitation of scope
ii. Financial statements are materially misstated (qualified or adverse opinion)-
Disagreement with management.
Past semester‘s question-Qualified opinion
SEPT 2015 Q4 Aa
Meaning of scope limitation
SEPT 2015 Q4 Aa
Possible type of auditor‘s opinion due to scope limitation
DEC 2018 Q4Ab
Two examples of situations that relate to disagreement with management.
MAC 2016 Q4 A b
Types of auditor‘s opinion if auditor formed qualified opinion.
MAC 2017 Q4 A b
Two main circumstances auditor issue a qualified opinion.
OCT 2016 Q4 b
Circumstances where auditor issue qualified or ‗except for ‗ opinion.
JUN 2018 Q4Ab
Conditions that require the auditor to issue a qualified opinion in auditor‘s report.
JUN 2019 Q4Ab
Circumstances when the auditor may issue a qualified/modified auditor‘s report
DEC 2019 Q4ab

If auditor failed to obtain sufficient, relevant and reliable audit evidence to express an
opinion, the auditor would include a qualified opinion in the auditor‘s report. Discuss two
types of opinion that could be issued.
MATTERS THAT DO AFFECT THE AUDITOR’S OPINION (QUALIFIED / MODIFIED AUDIT REPORT)
SCOPE LIMITATION DISAGREEMENT WITH MANAGEMENT
MATERIAL NAME OF THE AUDIT REPORT: Qualified opinion NAME OF THE AUDIT REPORT: Qualified opinion
EXPLANATION: EXPLANATION:
 There is a limitation on scope of the auditor‘s work  There are a disagreement between auditors and
 Auditor unable to obtain sufficient appropriate audit management on acceptability of the accounting policies,
evidence the method of application or the adequacy of disclosure in
 Example 19.4.1 (Pg 534) financial statements
 Example 19.4.1 (Pg 533)
EXAMPLE OF THE AUDIT REPORT (extract): EXAMPLE OF THE AUDIT REPORT (extract):
Qualified Opinion Qualified Opinion

―In our opinion, except for the effect..... ―In our opinion, except for the effect.....
MATERIAL NAME OF THE AUDIT REPORT: Disclaimer of opinion NAME OF THE AUDIT REPORT:Adverse Opinion
AND
PERVASA EXPLANATION: EXPLANATION:
SIVE  Limitation of scope is so material and pervasive  When the disagreement between auditors and
 Example 19.4.1 (Pg 534) management is material and pervasive to the financial
statements.
EXAMPLE OF THE AUDIT REPORT (extract):  Example 19.4.1 (Pg 535)
Disclaimer of Opinion EXAMPLE OF THE AUDIT REPORT (extract):

Adverse Opinion
“We do not express an opinion on the financial statements. In our opinion, because of the significance of the matter
Because of the significance of the matter as described in the discussed in Basis dor Adverse Opinion section of our report, the
Basis for Disclaimer of Opinion section of our report,. ...... ‖ financial statements do not present fairly (or do not give a
true and fair view of the financial position. ...‖

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lOMoAR cPSD| 1591201

AAU3711 Workbook for student

Auditing (KOLEJ MUTIARA)

TEACHING AND LEARNING MODULE

ROSLIANA BINTI RAZAB

 Communicating results: to be useful, the results of the audit need to be

AUDIT OF FINANCIAL STATEMENTS OF A COMPANY

REASON FOR AUDIT OF COMPANY

2) OBJECTIVES OF FINANCIAL STATEMENTS AUDIT

(b) To report on the financial statements, and communicate as required by the

⚫ Auditor needs to obtain a degree of reasonable assurance that the accounting

⚫ Materiality – information is material if its omission or misstatement could

⚫ Misstatement – a mistake in financial information which would arise from

⚫ A misstatement in the financial statements can be considered material if

Meaning of “TRUE AND FAIR VIEW”

SCOPE OF FINANCIAL STATEMENT AUDIT

The scope of Financial Statement audit is governed by:

Regulations - Banks & Finance .companies incorporated under

Auditing Standards International Standard on Auditing (ISA) & Malaysian

3) DISTINCTION BETWEEN AUDITING AND ACCOUNTING

Auditor responsible to evaluate the Accountant responsible to develop a

Auditor must understand accounting Accountant must understand

Auditor should possess expertise to Accountant should possess expertise to

4) MANAGEMENT AND AUDITOR’S RESPONSIBILITIES

 Preparation of yearly financial statements

 To state an opinion on the financial statements in auditor‘s report based on his

Reasonable assurance are:

AUDITOR’S RESPONSIBILITIES FOR DETECTING & REPORTING OF FRAUD &

⚫ Error : unintentional mistakes in financial information such as;

WHO ARE RESPONSIBLE TO DETECT FRAUD & ERROR? MANAGEMENT OR

Responsible to prevent & detect F & E through the implementation &

Auditor material misstatement in the fin.info resulting from F&E such as

5) DEVELOPMENT FOR AUDITING

⚫ Formerly, involves checking of account for stocks & revenue

AGENCY THEORY: AGENCY RELATIONSHIP

Self hires Self

Making it difficult for principals to

⚫ Agency relationship is:

⚫ Audit is needed to safeguard the interest of the s/holders.

AGENCY THEORY IN THE CONTEXT OF AUDITING

DEMAND FOR AUDITORS’ SERVICES

Relationship of External User to Management and Independent Auditor

Financial report for external users

External users Conflict of interest Prepare

Need for assurance as to

Assurance provided by independent auditor

TYPES PURPOSE PERFORMED BY

FINANCIAL To determine whether FS reflects - Approved Company

OPERATIONAL To evaluate effectiveness & - Internal auditor

COMPLIANCE To determine whether specific - Internal auditor

FORENSIC AUDIT To detect/ deter fraudulent - Forensic auditor

External - Independent from the co.

Internal - Employee of the co. thru interview process

Forensic - Employed by co./govt agencies/public acc.firms/ investigative firm

Internal auditing is an independent, objective assurance and consulting activity designed to

Internal audit acts as a control mechanism of board of directors as well as senior

DIFFERENCES BETWEEN INTERNAL AUDITING & EXTERNAL AUDITING

Characteristics Internal Auditing External Auditing

Performance/ By employee within By practising professional