Polytechnic’s version

Nota
Audit 2

FbyHan
Nota Audit 2 FbyHan

CHAPTER 1: AUDIT ON consistency of depreciation methods and

rates.
FINANCIAL • Testing Asset Impairment: Evaluating the
STATEMENT carrying amounts of non-current assets for
impairment indicators.

ASSET 5. Audit Evidence:

• Asset Register: Reviewing the entity's
NON-•CURRENT ASSET asset register for details of Non-
current assets.
1. Audit Assertion: • Physical Inspection Reports:
• Existence: Ensuring that non-current Documentation from physical verifications
assets exist and are owned by the entity. of non-current assets.
• Valuation: Checking that Non-current • Valuation Reports: Reports from
assets are correctly valued in accordance independent valuers for certain non-current
with accounting standards. assets like property or machinery.
• Rights and Obligations: Verifying that the
entity has legal ownership rights over the 6. Audit Test:
non-current assets. • Reperformance: Independently
calculating depreciation expense to verify
2. Accounting Treatment: accuracy.
• Recognition: Non-•current assets are • Confirmation: Confirming Non-•current
recognized on the balance sheet when they asset balances with external parties or lessors.
meet the criteria for recognition. • Analytical Procedures: Comparing Non-
• Depreciation/Amortization: Properly •current asset balances and related expenses
depreciating or amortizing non-current over time for consistency and reasonableness.
assets over their useful lives.
• Impairment: Assessing Non-•current CURRENT ASSET
assets for impairment and recognizing
impairment losses if necessary. 1. Audit Assertion:
• Existence: Ensuring that current assets
3. Accounting System and Control: physically exist and are owned by the entity.
• Asset Register: Maintaining an accurate • Completeness: Verifying that all current
register of non-current assets, including assets that should be recorded are included in
details like cost, useful life, and depreciation the financial statements.
method. • Rights and Obligations: Confirming that
• Asset Disposal Procedures: Controls over the entity has legal ownership rights over the
the disposal of non-current assets, including current assets.
authorization and recording of disposals.
• Physical Asset Verification: Periodic 2. Accounting Treatment:
physical verification of non-current assets to • Recognition: Current assets are typically
ensure they exist and are in usable condition. recognized at their acquisition cost or fair
value.
4. Audit Procedure: • Valuation: Properly valuing current assets
• Physical Verification: Conducting such as inventory at the lower of cost or net
physical inspections of non-current assets to realizable value.
verify their existence and condition. • Classification: Ensuring current assets
• Review of Depreciation Policies: are classified correctly as per accounting
Assessing the reasonableness and standards (e.g., cash, accounts receivable,
inventory).

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• Classification: Checking that expenses

3. Accounting System and Control: are properly categorized and classified in the
• Cash Controls: Implementing controls financial statements.
over cash receipts, disbursements, and
reconciliations. 2. Accounting Treatment:
• Inventory Management: Procedures for • Recognition: Expenses are typically
tracking and valuing inventory, including recognized when they are incurred, matching
periodic physical counts. with the revenues they help generate.
• Accounts Receivable Procedures: • Measurement: Expenses are recorded at
Controls over credit sales, collections, and their cost or fair value at the time of
aging analysis of accounts receivable. transaction.
• Amortization/Depreciation: Proper
4. Audit Procedure: treatment of long-term assets to allocate their
• Confirmation: Sending confirmations to costs over their useful lives.
banks for cash balances and to customers for
accounts receivable. 3. Accounting System and Control:
• Inventory Observation: Physically • Expense Authorization: Processes should
observing inventory counts and procedures. ensure that expenses are approved by
• Bank Reconciliation Review: Examining authorized personnel before being incurred.
bank reconciliations for unusual items or • Budgetary Controls: Monitoring
reconciling items. expenses against budgeted amounts to
prevent overspending.
5. Audit Evidence: • Segregation of Duties: Separating duties
• Bank Statements: Providing evidence of related to incurring, recording, and
cash balances and transactions. approving expenses to prevent fraud.
• Inventory Count Sheets: Documentation
from physical inventory counts. 4. Audit Procedure:
• Aging Schedules: Reports showing the • Expense Account Analysis: Examining
aging of accounts receivable balances. underlying documentation like invoices,
purchase orders, and contracts to verify
6. Audit Test: individual transactions.
• Cut-off Testing: Ensuring transactions are • Review of Expense Policies: Assessing
recorded in the correct accounting period. compliance with company policies and
• Analytical Procedures: Comparing accounting standards for expense
current asset balances to prior periods or recognition.
industry benchmarks. • Analysing Specific Expense Accounts:
• Reconciliation Testing: Testing the Focusing on high-risk areas like repairs and
reconciliation of current asset accounts to maintenance or legal expenses for potential
supporting documentation issues.
5. Audit Evidence:
EXPENSES • Invoices: Supporting documentation for
1. Audit Assertion: expenses incurred.
• Completeness: Ensuring that all expenses • Contracts: Agreements outlining the
that should be recorded are included in the terms and conditions of expenses.
financial statements. • Receiving Reports: Confirming the
• Accuracy: Verifying that the expenses are receipt of goods or services related to
correctly calculated and recorded at the expenses.
appropriate amounts.

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6. Audit Test:
• Analytical Procedures: Comparing 3. Accounting System and Control
current expenses with historical data or
industry benchmarks. • Documentation: Ensure proper
• Substantive Testing: Testing specific documentation is maintained for all non-
expense accounts for accuracy, completeness, •current liabilities, including contracts,
and validity. agreements, and amortization schedules.
• Observation: Observing the client's • Authorization: Establish a robust
processes for incurring and recording authorization process for incurring non-
expenses to assess internal controls. •current liabilities to prevent unauthorized
obligations.
LIABILITY • Reconciliation: Regular reconciliation of
liability accounts to ensure the recorded
NON-•CURRENT LIABILITY amounts match the supporting documents
and schedules.
1. Audit Assertion • Monitoring: Continuous monitoring and
review of non-•current liabilities to ensure
• Existence: Ensure Non-•current liabilities they are correctly recorded and classified.
recorded in the financial statements exist at
the balance sheet date. 4. Audit Procedure
• Completeness: Verify that all non-•current
liabilities that should have been recorded are • Inquiry and Confirmation: Inquire from
included. management and confirm directly with
• Valuation and Allocation: Check that non- creditors or other third parties to verify the
•current liabilities are recorded at existence and terms of non-•current
appropriate amounts and any necessary liabilities.
adjustments are made. • Recalculation: Recalculate interest expense
• Rights and Obligations: Confirm that the and amortization of premiums or discounts
entity has a legal obligation to pay the to ensure accuracy.
recorded liabilities. • Inspection: Inspect underlying
documentation such as loan agreements,
2. Accounting Treatment lease contracts, and bond indentures.
• Analytical Procedures: Perform analytical
• Initial Recognition: Non-•current liabilities procedures to identify any unusual trends or
are initially recognized at fair value, which discrepancies in non-•current liabilities.
typically is the cash received or the value of
goods/services received. 5. Audit Evidence
• Subsequent Measurement: These liabilities
are measured at amortized cost using the • External Confirmations: Obtain
effective interest method or at fair value if confirmations from lenders or creditors
they are financial liabilities held for trading. regarding the terms and balances of non-
• Interest Expense Recognition: The interest •current liabilities.
expense related to non-•current liabilities • Contracts and Agreements: Examine
should be recognized in the income contracts, loan agreements, and lease
statement over the period of the liability. documents to verify terms and obligations.
• Disclosure Requirements: Adequate • Amortization Schedules: Review and verify
disclosures should be made in the notes to amortization schedules for loans and bonds
the financial statements, including the nature, payable.
amount, and maturity dates of non-•current
liabilities.

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• Board Minutes: Check board meeting settlement of which is expected to result in

minutes for approvals related to non-•current an outflow of resources.
liabilities to ensure proper authorization. • Subsequent Measurement: These liabilities
are usually measured at the amount expected
6. Audit Test to be paid to settle the obligation.
• Accrued Liabilities: Recognize expenses
• Substantive Testing: Perform detailed incurred but not yet paid by the end of the
testing of significant non-•current liabilities accounting period, ensuring they are
to verify accuracy and completeness. matched with the related revenue.
• Analytical Review: Compare current year • Disclosure Requirements: Adequate
liability balances with prior year balances disclosures should be made in the notes to
and investigate any significant variances. the financial statements, including the nature,
• Cut-off Testing: Ensure that non-•current amount, and maturity dates of current
liabilities are recorded in the correct liabilities.
accounting period by reviewing transactions
around the year-end. 3. Accounting System and Control
• Disclosure Checklist: Use a disclosure
checklist to verify that all required • Documentation: Maintain proper
disclosures related to non-•current liabilities documentation for all current liabilities,
are properly made in the financial statements. including invoices, receipts, and contracts.
• Authorization: Implement a strong
These points provide a comprehensive authorization process for incurring liabilities
overview of auditing non-•current liabilities, to prevent unauthorized obligations.
including assertions, accounting treatment, • Reconciliation: Regularly reconcile
systems and controls, procedures, evidence, liability accounts to ensure recorded
and tests, ensuring a thorough audit process. amounts match supporting documents.
• Monitoring: Continuously monitor and
CURRENT LIABILITY review current liabilities to ensure they are
accurately recorded and classified.
1. Audit Assertion
4. Audit Procedure
• Existence: Confirm that current liabilities
recorded in the financial statements exist at • Inquiry and Confirmation: Inquire with
the balance sheet date. management and confirm with suppliers or
• Completeness: Ensure that all current other third parties to verify the existence and
liabilities that should be recorded are terms of current liabilities.
included in the financial statements. • Recalculation: Recalculate interest, taxes,
• Valuation and Allocation: Verify that and other accrued liabilities to ensure
current liabilities are recorded at their accuracy.
appropriate amounts and any necessary • Inspection: Inspect underlying
adjustments are made. documentation such as supplier invoices,
• Rights and Obligations: Confirm that the contracts, and payment schedules.
entity has an obligation to pay the recorded • Analytical Procedures: Perform analytical
liabilities. procedures to identify any unusual trends or
discrepancies in current liabilities.
2. Accounting Treatment
5. Audit Evidence
• Initial Recognition: Current liabilities are
recognized when the entity has a present • External Confirmations: Obtain
obligation arising from past events, the confirmations from suppliers or creditors

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regarding the terms and balances of current • Issuance of Equity: Recording the
liabilities. issuance of new shares or equity instruments
• Invoices and Receipts: Examine invoices, accurately.
receipts, and other supporting documents to • Dividends: Properly accounting for
verify the amounts and terms of current dividends declared and paid to shareholders.
liabilities. • Treasury Stock: Treatment of
• Bank Statements: Review bank statements repurchased shares as treasury stock on the
to verify payments made towards current balance sheet.
liabilities.
• Board Minutes: Check board meeting 3. Accounting System and Control:
minutes for approvals related to current • Equity Transactions Authorization:
liabilities to ensure proper authorization. Ensuring proper authorization for equity
transactions.
6. Audit Test • Dividend Declaration Process: Controls
over the declaration and payment of
• Substantive Testing: Perform detailed dividends to shareholders.
testing of significant current liabilities to • Share Capital Maintenance: Processes to
verify their accuracy and completeness. maintain accurate records of share capital
• Analytical Review: Compare current year and equity transactions.
liability balances with prior year balances
and investigate any significant variances. 4. Audit Procedure:
• Cut-off Testing: Ensure that current • Review of Equity Transactions:
liabilities are recorded in the correct Examining board minutes, share registers,
accounting period by reviewing transactions and other documents related to equity
around the year-end. transactions.
• Disclosure Checklist: Use a disclosure • Testing Dividend Payments: Confirming
checklist to verify that all required dividend payments with bank records and
disclosures related to current liabilities are board resolutions.
properly made in the financial statements. • Analysing Changes in Equity: Reviewing
changes in equity accounts to ensure
These points provide a comprehensive accuracy and completeness.
overview of auditing current liabilities,
including assertions, accounting treatment, 5. Audit Evidence:
systems and controls, procedures, evidence, • Board Resolutions: Documenting
and tests, ensuring a thorough audit process. decisions related to equity transactions.
• Share Registers: Records of shareholders
EQUITY and their holdings.
• Dividend Vouchers: Evidence of dividend
1. Audit Assertion: payments made to shareholders.
• Existence: Ensuring that equity
transactions occurred and are valid. 6. Audit Test:
• Completeness: Verifying that all equity • Confirmation: Confirming equity
transactions are properly recorded and balances with external parties or registrars.
disclosed. • Substantive Testing: Testing equity
• Valuation: Checking that equity is transactions for accuracy and completeness.
accurately valued and presented in the • Reconciliation: Reconciling equity
financial statements. account balances with supporting
documentation and records.
2. Accounting Treatment:
REVENUE

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• Bank Statements: Confirming cash

1. Audit Assertion: receipts from sales transactions.
• Existence/Occurrence: Ensuring that
recorded revenue transactions took place and 6. Audit Test:
are valid. • Vouching: Tracing revenue transactions
• Completeness: Verifying that all revenue from source documents to the financial
transactions that should be recorded are statements.
included in the financial statements. • Analytical Procedures: Comparing
• Accuracy: Checking that the amount of revenue trends over time or against industry
revenue recorded is accurate and correctly benchmarks.
calculated. • Observation: Observing the client's
processes for recording and reporting
2. Accounting Treatment: revenue transactions.
• Recognition: Revenue is typically
recognized when it is earned, regardless of
when cash is received.
• Measurement: Revenue is measured at
the fair value of the consideration received or
receivable.
• Disclosure: Proper disclosure of revenue
in the financial statements is essential for
transparency.

3. Accounting System and Control:

• Sales Recording: Processes should
accurately record sales transactions,
including proper documentation and
authorization.
• Internal Controls: Controls should be in
place to prevent and detect errors or fraud in
revenue recognition.
• Segregation of Duties: Separation of
duties between recording sales, authorizing
transactions, and reconciling accounts.

4. Audit Procedure:
• Sales Cutoff Testing: Ensuring sales are
recorded in the correct accounting period.
• Review of Revenue Recognition Policies:
Assessing compliance with accounting
standards and company policies.
• Testing Internal Controls: Evaluating the
effectiveness of controls over revenue
transactions.

5. Audit Evidence:
• Sales Invoices: Documenting the sale of
goods or services to customers.
• Shipping Documents: Providing evidence
of goods delivered to customers.

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CHAPTER 2: • Settlement of a lawsuit for an amount

different from what was accrued.
COMPLETING THE • Sale of inventory below carrying value
AUDIT PROCESS indicating net realizable value issues.

• Type 2 (Non-•Adjusting Events): Events

Reviewing Subsequent Events After the requiring disclosure but no adjustment to
Statement of Financial Position Date financial statements.
• Examples:
1. Define: • Uninsured casualty losses occurring after
Subsequent events refer to events or the financial statement date.
transactions that occur between the date of • Significant lawsuits initiated for
the financial statements (statement of incidents after the financial statement date.
financial position) and the date when those • Major decisions like mergers or issuing
statements are authorized for issue. These new securities.
events require special audit attention.
5. Simple Example to Understand:
2. Main Points: • Adjusting Event Example:
• Types of Subsequent Events: • A customer owing a significant amount
• Type 1 (Adjusting Events): Provide file for bankruptcy after the statement of
evidence of conditions that existed at the financial position date but had financial
date of the financial statements. issues before that date. The company needs
• Type 2 (Non-•Adjusting Events): Provide to adjust its receivables to reflect this loss.
evidence of conditions that arose after the • Non--Adjusting Event Example:
date of the financial statements. • A factory fire occurs after the statement of
financial position date. The financial
• Audit Activities for Subsequent Events: statements will not be adjusted, but the event
• Review events after the statement of should be disclosed in the notes for
financial position date but before issuing the transparency.
audit report.
• Investigate subsequent discovery of facts Audit Procedures for Identifying
existing at the auditor’s report date. Subsequent Events:
• Consider omitted audit procedures • Read minutes from board meetings and
discovered after the audit report is issued. other authoritative groups post year-end.
• Inquire with legal advisors about any
3. Importance: outstanding legal matters.
• Ensures financial statements reflect all • Review interim financial statements for
relevant information. significant changes.
• Helps maintain the accuracy and reliability • Discuss with management about any
of financial statements. momentous events or transactions.
• Protects stakeholders by providing a clear
financial picture of the company. Actions for Subsequent Discovery of Facts:
• Verify Reliability: Ensure the added
4. Types of Subsequent Events: information is dependable.
• Type 1 (Adjusting Events): Events • Assess Impact: Determine if the event
requiring adjustments to the financial occurred before the audit report date and if it
statements. would have affected the report.
• Examples: • Inform Users: If necessary, advise the client
• Bankruptcy of a major customer to disclose new facts, revise the financial
indicating pre-existing financial issues. statements, and audit report.

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• If Client Refuses Cooperation: • Example: Lawsuits where an

• Notify the client and regulatory agency unfavourable outcome is likely, and the
that the audit report should not be associated amount can be estimated.
with the financial statements. • Disclosed Only Contingencies: Possible
• Inform known users that the audit report but not certain.
should no longer be relied upon. • Example: Potential fiscal impact of an
ongoing litigation where the outcome is
Reviewing Contingencies uncertain.
• Common Practice Disclosures: Remote but
1. Define: disclosed due to industry norms.
• Contingent Liability: A potential liability • Example: Guarantees of debts of others
that may occur depending on the outcome of where the chance of the guarantee being
a future event which is beyond the control of called is minimal.
the business.
5. Simple Example to Understand:
2. Main Points: • Probable and Estimable:
• Accounting Treatment: • A company is sued for damages, and their
• Probable and Estimable Contingencies: legal team believes they will lose the case
Should be accrued and disclosed in the and estimates the loss at $1 million. This
financial statements. should be accrued and disclosed.
• Reasonably Possible Contingencies: • Reasonably Possible:
Should be disclosed in the notes to the • The company is facing a lawsuit with a 50%
financial statements. chance of losing, but the amount cannot be
• Remote Contingencies: Disclosed due to estimated. This should be disclosed in the
widespread practice. notes.
• Remote:
• Examples of Contingencies: • The company provided a guarantee on a
• Threat of asset expropriation in a foreign small loan that is highly unlikely to default.
country. This is disclosed due to widespread practice.
• Litigation, claims, and assessments.
• Guarantees of debts of others. Management and Auditor Responsibilities:
• Obligations under standby letters of credit. • Management: Identify, evaluate, and
• Agreements to repurchase sold account for all contingencies.
receivables. • Auditors: Ensure all material contingencies
• Purchase and sale commitments. are identified, accounted for, and disclosed
properly in the financial statements.
3. Importance:
• Ensures financial statements present a true Sources of Evidence for Auditors:
and fair view of the company's financial • Primary Sources:
position. • Management
• Provides stakeholders with a complete • Client’s legal counsel
understanding of potential liabilities and • Additional Sources:
risks. • Corporate minutes
• Helps in making informed business • Contracts
decisions by assessing future uncertainties. • Correspondence from government
agencies
4. Types: • Bank confirmations
• Accrued and Disclosed Contingencies:
Probable and can be estimated. 18.2.1 Letter of Audit Enquiry

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1. Define: 5. Simple Example to Understand:

• Letter of Audit Enquiry: A formal request • Complete Response:
sent by auditors to the client's legal counsel • The auditor sends a letter to the company's
to obtain corroborative evidence about lawyer about an ongoing lawsuit. The lawyer
litigation, claims, and assessments. responds with details of the case, expected
outcomes, and estimated fiscal impact.
2. Main Points: • Partial Response:
• Contents of the Letter: • The lawyer responds with basic details but
• Identification of the company, subsidiaries, does not provide an estimate of potential
and audit date. losses due to confidentiality concerns.
• A list of contingencies described and • No Response:
evaluated by management. • The lawyer declines to respond, leaving
• Request for the attorney to provide the auditor without necessary information to
comments on: assess the contingency fully.
• Completeness of management's list and
evaluations. Key Considerations:
• Details of each contingency, including: • Attorney's Response: Essential for
• Description, progress, and intended evaluating the completeness and accuracy of
actions. the client’s reported contingencies.
• Likelihood of unfavourable outcomes • Scope Limitation: If an attorney refuses to
and potential loss estimates. provide necessary information, it may
• Any limitations on the attorney's prevent the auditor from issuing an
response. unqualified opinion.
• Auditor’s Judgement: Despite the
• Purpose: attorney’s input, auditors must use their
• To ensure completeness of potential judgement and gather as much evidence as
liabilities. possible to support their opinion.
• To obtain information about contingencies.
The letter of audit enquiry helps in
3. Importance: establishing the completeness and factuality
• Provides critical evidence for assessing the of potential liabilities but also highlights the
accuracy and completeness of contingent limitations due to attorney client privilege
liabilities. and the need for auditor independence in
• Helps auditors form an opinion on the judgement.
financial statements' fairness.
• Ensures potential legal risks are properly 18.3 ▶ Going Concern
disclosed and evaluated.
1. Define:
4. Types:
• Going Concern: The assumption that a
• Complete Response:
company will continue its operations for the
• When the attorney provides detailed
near future, typically for at least one year
information on all requested aspects.
from the statement of financial position date.
• Partial Response:
• When the attorney provides limited
2. Main Points:
information, due to privilege or other
• ISA 570 Requirements:
constraints.
• Obtain sufficient and appropriate audit
• No Response:
evidence about the appropriateness of
• When the attorney refuses to provide
management's use of the going concern
information, indicating a scope limitation.
assumption.

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Nota Audit 2 FbyHan

• Conclude whether there is material • Auditor's Role: The auditor reviews the
uncertainty about the entity's ability to plan and other evidence to decide if the going
continue as a going concern. concern assumption is reasonable.

• Indicators of Going Concern Problems: Key Procedures:

• Negative Trends: Declines in cash flow, • Discuss with Management: Understand
sales, or profits. their plans to address going concern issues.
• Internal Issues: Loss of key personnel, • Assess Management’s Plans: Evaluate the
outdated facilities, or products. feasibility and effectiveness of the plans to
• External Factors: New legislation, loss of overcome going concern problems.
significant customers or suppliers, uninsured • Evaluate Financial Statement Disclosure:
casualty loss. Ensure that the financial statements
• Other Factors: Loan defaults, inability to adequately disclose any going concern issues
pay dividends, attempted debt restructuring. and management’s plans.
• Market Changes: Significant shifts in the
competitive market affecting the client's Audit Report Implications:
product competitiveness. • Explanatory Paragraph: Added to an
unqualified report if there is doubt about
3. Importance: going concern but disclosure is adequate.
• Ensures that financial statements are • Qualified Opinion: Issued if there is
prepared using the correct assumptions. inadequate disclosure about going concern.
• Provides users of financial statements with • Disclaimer of Opinion: Issued if there is
information about potential risks to the significant uncertainty and insufficient
entity’s viability. evidence about going concern.
• Helps in making informed decisions based
on the entity’s prospects. By understanding and evaluating these
aspects, auditors can provide assurance
4. Types: about the entity’s ability to continue
• Unqualified Opinion with Explanatory operating and ensure that financial
Paragraph: When there is doubt about going statements are appropriately prepared and
concern, but adequate disclosure is made. disclosed.
• Qualified Opinion: When disclosure about
going concern is not adequate. 18.4 ▶ Reviewing Significant Accounting
• Disclaimer of Opinion: When there is
Estimates
significant uncertainty about going concern
and the auditor cannot obtain sufficient
1. Define:
evidence.
• Accounting Estimates: Values in financial
statements that cannot be measured precisely
5. Simple Example to Understand:
but must be estimated, such as fair value
• Scenario: A company has been losing
estimates and provisions for liabilities.
money for the past year and has significant
debts. The auditor needs to determine if the
2. Main Points:
company can continue operating for at least
• ISA 540 Requirements:
the next year.
• Auditors need to obtain sufficient
• Indicators: The company lost a major
appropriate evidence that accounting
customer and is struggling to pay its bills.
estimates are reasonable, and disclosures are
• Management's Plan: Management has a
adequate.
plan to cut costs and find new customers.
• Estimates have inherent uncertainty and
can be influenced by management bias.

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• Audit Procedures: 18.4.1 Evaluating Adequacy of

• Review management's methods for Disclosures
making estimates.
• Verify calculations and application of Key Points:
formulas. • High Uncertainty: If uncertainty remains
• Make independent estimates to compare high despite efforts to quantify, disclosures
with management’s estimates. must explain this clearly.
• Sufficient Disclosure: Users must be able
3. Importance: to understand the condition and make
• Ensures financial statements reflect informed decisions.
accurate and reasonable estimates.
• Prevents manipulation of financial results Disclosure Responsibilities:
through biased estimates. • Occurrence and Pertinence: Ensure
• Provides assurance to users about the disclosed events and transactions happened
reliability of financial information. and are relevant to the entity.
• Completeness: All necessary disclosures
4. Types: are included.
• Fair Value Estimates: Estimates of the price • Understandability: Disclosures should be
at which an asset could be sold, or a liability clear and comprehensible.
settled. • Accuracy: Disclosures must be precise and
• Provisions for Liabilities: Estimates of correct.
future costs or obligations, such as legal
liabilities or warranty claims. Audit Report:
• Explanatory Paragraph: Auditors may add
5. Simple Example to Understand: an explanatory paragraph to highlight
• Scenario: A company estimates that a important disclosures without modifying the
lawsuit will cost $1 million. The auditor audit report.
needs to check if this estimate is reasonable.
• Management's Estimate: Based on legal By following these guidelines, auditors
advice and past experiences. ensure that significant accounting estimates
• Auditor's Procedures: Review the legal are fair, reasonable, and properly disclosed,
advice, past lawsuit costs, and make an providing users with reliable and transparent
independent estimate. financial information.
• Comparison: If the auditor's estimate is
close to $1 million, the estimate is reasonable. 18.5 ▶ Engagement Quality Review
If it differs significantly, further
investigation is needed.
1. Define:
• Engagement Quality Control Review: A
Key Factors in Evaluating Estimates:
process to evaluate significant judgments
• Significance: How important the estimate
and conclusions made by the audit team
is to the financial statements.
before the auditor's report is finalized.
• Sensitivity: How changes in assumptions
affect the estimate.
2. Main Points:
• Historical Patterns: Consistency with past
• Objective Evaluation: Ensures that
data.
significant judgments and conclusions are
• Susceptibility to Misstatement: Risk of
appropriate.
error or bias.
• Applicability: Required for audits of listed
• Economic Trends: Current market
entities and other engagements as
conditions affecting the estimate.
determined by the firm.

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• Reviewer: An experienced and independent • Process: Identifies significant fluctuations

individual or team not involved in the audit. or relationships that are inconsistent with
other information.
3. Importance: • Adjustments: If new risks are identified,
• Ensures the quality and reliability of the audit procedures must be revised.
audit.
• Maintains independence and objectivity. 3. Importance:
• Helps improve audit procedures and staff • Helps corroborate conclusions from the
training based on review findings. audit.
• Ensures completeness and accuracy of
4. Types: financial statements.
• Internal Review: Conducted by another • Identifies areas needing further
partner or qualified person within the firm. investigation.
• External Review: Conducted by an external
expert or team with no involvement in the 4. Types:
engagement. • Trend Analysis: Comparing current period
data with prior periods.
5. Simple Example to Understand: • Ratio Analysis: Evaluating financial ratios
• Scenario: An audit team concludes that a to identify inconsistencies.
significant accounting estimate is reasonable.
• Review Process: Another partner reviews 5. Simple Example to Understand:
the team's judgment and the proposed • Scenario: Sales revenue has increased
auditor’s report. significantly.
• Outcome: The reviewer either agrees with • Analytical Procedure: Compare sales
the conclusions or suggests improvements. revenue growth to industry trends and other
internal data.
Key Procedures in Engagement Quality • Outcome: If inconsistent, investigate
Review: further to determine the cause.
• Discuss significant matters with the
engagement partner. Key Procedures in Final Analytical Review:
• Review financial statements and the • Perform near the end of the audit.
proposed auditor's report. • Compare financial statement data with
• Evaluate audit documentation related to expectations.
significant judgments. • Investigate significant deviations.
• Ensure the review is completed before the • Revise risk assessments if necessary.
auditor’s report date.
18.7 ▶ Evaluating Management
18.6 ▶ Final Analytical Review Representations

1. Define: 1. Define:
• Analytical Procedures: Evaluations of • Written Representations: Statements
financial information by analysing provided by management confirming their
relationships among financial and non- responsibilities and responses about the
•financial data. financial statements.

2. Main Points: 2. Main Points:

• Purpose: To form an overall conclusion • Purpose: Reminds management of their
about the financial statements' consistency responsibilities and confirms significant oral
with the auditor's understanding of the entity. responses.

12
Nota Audit 2 FbyHan

• Form: A letter from management to

auditors, dated at the end of the audit 2. Main Points:
fieldwork. • Responsibilities and Scope: Informing the
committee about the auditor’s
3. Importance: responsibilities and the planned scope and
• Provides necessary audit evidence. timing of the audit.
• Reduces misunderstandings between • Relevant Information: Gathering
management and auditors. information from the committee that is
• Ensures all relevant information is provided relevant to the audit.
and transactions are recorded. • Observations: Providing timely and
significant observations from the audit.
4. Types: • Two-way Communication: Ensuring
• Standard Representations: General effective communication between auditors
confirmations about responsibilities and and the governance body.
completeness of information.
• Specific Representations: Detailed 3. Importance:
confirmations about transactions or issues. • Enhances the quality and transparency of
the audit process.
5. Simple Example to Understand: • Helps in identifying and addressing issues
• Scenario: Management confirms they have promptly.
disclosed all legal issues. • Ensures that the audit committee is
• Written Representation: Management informed about the audit’s progress and
signs a letter confirming this. findings.
• Outcome: Auditors use this letter as part
of their evidence but also perform additional 4. Types:
procedures to verify the information. • Formal Meetings: Scheduled meetings with
the audit committee.
Key Procedures in Evaluating Management • Written Reports: Written communications
Representations: summarizing audit findings and other
• Request written representations about the relevant information.
completeness and accuracy of information.
• Corroborate information with other audit 5. Simple Example to Understand:
evidence. • Scenario: An auditor finds a significant
• Address any reliability concerns or refusal error in financial reporting.
to provide representations. • Communication: The auditor discusses
the issue and its implications with the audit
By following these guidelines, auditors committee.
ensure the quality, reliability, and • Outcome: The committee understands the
completeness of the financial statements and issue and can take appropriate actions.
the audit process.
Key Items to Discuss with the Audit
18.8 ▶ Communicating with the Audit Committee:
• Auditor’s responsibilities and standards.
Committee
• Management judgments and estimates.
• Audit adjustments and uncorrected
1. Define:
misstatements.
• Communication with the Audit Committee:
• Accounting policies and major
The process by which auditors interact with
disagreements with management.
those responsible for governance, typically
• Difficulties encountered during the audit.
the audit committee or board of directors,
about key aspects of the audit.
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Nota Audit 2 FbyHan

18.9 ▶ Communicating with Key Purposes of the Management Letter:

• Comment on accounting records and
Management through the Management
controls.
Letter
• Bring attention to potential areas of
material errors or misstatements.
1. Define:
• Communicate matters impacting future
• Management Letter: A document provided
audits.
by auditors to management that includes
• Highlight areas for increased efficiency or
observations on control deficiencies,
effectiveness.
operational matters, and suggestions for
improvements.
By effectively communicating with both the
audit committee and management, auditors
2. Main Points:
ensure transparency, address issues promptly,
• Control Deficiencies: Highlighting
and provide valuable insights for improving
weaknesses in internal controls that could
the organization's financial and operational
lead to errors.
health.
• Operational Efficiency: Suggesting ways to
improve efficiency and effectiveness.
• Future Audits: Communicating matters that
might impact future audits.
• Timely Delivery: Ensuring the letter is
provided promptly after the audit is
completed.

3. Importance:
• Helps management improve internal
controls and operations.
• Provides valuable insights beyond financial
reporting.
• Enhances the overall quality and reliability
of the organization’s processes.

4. Types:
• Control Deficiencies: Issues in the
accounting system or controls that need
improvement.
• Operational Improvements: Suggestions
for better efficiency and effectiveness in
operations.

5. Simple Example to Understand:

• Scenario: An auditor notices that the
inventory tracking system is outdated and
prone to errors.
• Management Letter: The auditor writes a
letter suggesting an updated system to
improve accuracy.
• Outcome: Management updates the
system, reducing errors and improving
efficiency.

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Nota Audit 2 FbyHan

CHAPTER 3: AUDITOR 1. Define: An unqualified audit report, also

known as a clean opinion, is issued when the
REPORT auditor confirms that the financial statements
are free from material misstatements and are
presented fairly.
QUALIFIED REPORT
2. Main Points:
1. Define: An adverse audit report is issued
• It signifies that the auditor has reviewed
when the auditor concludes that the financial
the financial statements and found them to be
statements are materially misstated and do
accurate and in compliance with accounting
not present a true and fair view.
standards.
• No significant issues or discrepancies
2. Main Points:
were identified during the audit process.
• It signifies that the auditor has identified
significant errors or discrepancies in the
3. Importance:
financial statements.
• Provides assurance to stakeholders that
• The auditor believes that the
the financial information is dependable and
misstatements are pervasive and impact the
trustworthy.
overall accuracy of the financial information.
• Enhances the credibility of the company's
financial statements.
3. Importance:
• Highlights serious concerns about the
4. Types:
reliability and integrity of the financial
• Unmodified Report: The auditor gives a
statements.
straightforward opinion that the financial
• Indicates to stakeholders that there are
statements are presented fairly.
substantial issues that need to be addressed
• Clean Opinion: The auditor has no
by the company.
reservations about the accuracy and
completeness of the financial statements.
4. Types:
• Adverse Opinion: The auditor explicitly
5. Simple Example to Understand:
states that the financial statements are not
Think of an unqualified audit report like
presented fairly.
receiving an "A" grade on your school
• Qualified Adverse Opinion: The auditor
project. It means that your work is well-done,
expresses reservations about multiple
accurate, and meets all the requirements.
aspects of the financial statements.
Similarly, in a business context, an
unqualified report indicates that the financial
5. Simple Example to Understand:
statements are accurate and can be relied
Imagine you are a judge in a competition,
upon by users.
and you must give a verdict on a contestant's
DISCLAIMER REPORT
performance. If you issue an adverse report,
it is like saying, "I have observed significant
1. Define: A disclaimer audit report is issued
mistakes throughout the performance, which
when the auditor is unable to express an
affect the overall outcome." Similarly, in an
opinion on the financial statements due to
audit context, an adverse report indicates that
significant limitations in the audit process.
there are serious errors in the financial
statements that impact their reliability and
2. Main Points:
accuracy.
• It indicates that the auditor could not
gather enough evidence to form an opinion
UNQUALIFIED REPORT
on the financial statements.

15
Nota Audit 2 FbyHan

• The auditor refrains from providing • Highlights serious concerns about the
assurance on the accuracy or completeness reliability and integrity of the financial
of the financial information. statements.
• Indicates to stakeholders that there are
3. Importance: substantial issues that need to be addressed
• Alerts users that there are substantial by the company.
uncertainties or restrictions that prevent the
auditor from giving a clear opinion. 4. Types:
• Encourages stakeholders to exercise • Adverse Opinion: The auditor explicitly
caution when relying on the financial states that the financial statements are not
statements. presented fairly.
• Qualified Adverse Opinion: The auditor
4. Types: expresses reservations about multiple
• Disclaimer of Opinion: The auditor aspects of the financial statements.
explicitly states that they are unable to form
an opinion on the financial statements. 5. Simple Example to Understand:
• Scope Limitation: When the auditor is Imagine you are a judge in a competition,
unable to obtain sufficient evidence to and you must give a verdict on a contestant's
support their opinion. performance. If you issue an adverse report,
it is like saying, "I have observed significant
5. Simple Example to Understand: mistakes throughout the performance, which
Imagine you are a detective investigating a affect the overall outcome." Similarly, in an
case, but crucial evidence is missing. In this audit context, an adverse report indicates that
scenario, you would issue a disclaimer report, there are serious errors in the financial
stating, "I cannot confirm the conclusion due statements that impact their reliability and
to missing evidence." Similarly, in an audit, accuracy.
a disclaimer report indicates that the auditor
could not verify the financial statements 1. OBJECTIVES AND FORMAT OF AN
completely due to limitations, so users AUDIT REPORT
should be cautious when interpreting the
information. OBJECTIVE

ADVERSE REPORT 1. Express Opinion: The primary objective of

an audit report is to enable the auditor to
1. Define: An adverse audit report is issued express an opinion on the financial
when the auditor concludes that the financial statements. This opinion provides assurance
statements are materially misstated and do to stakeholders regarding the accuracy and
not present a true and fair view. fairness of the financial information
presented.
2. Main Points:
• It signifies that the auditor has identified 2. Compliance: The audit report aims to
significant errors or discrepancies in the ensure that the financial statements comply
financial statements. with the relevant financial reporting
• The auditor believes that the framework, such as accounting standards
misstatements are pervasive and impact the and statutory requirements.
overall accuracy of the financial information.
3. Transparency: By issuing an audit report,
3. Importance: the auditor enhances the transparency of the
financial reporting process, allowing

16
Nota Audit 2 FbyHan

stakeholders to make informed decisions • Describes management's responsibility

based on reliable financial information. for the preparation and fair presentation of
the financial statements.
4. Communication: The audit report serves
as a means of communication between the 5. Auditor's Responsibility:
auditor and the users of the financial • Outlines the auditor's responsibility to
statements, conveying the results of the audit express an opinion on the financial
procedures and the auditor's opinion on the statements based on the audit.
financial statements.
6. Opinion Paragraph:
5. Disclosure of Key Audit Matters: Another • States the auditor's opinion on whether
objective is to communicate key audit the financial statements present a true and
matters (KAM) that were considered fair view in accordance with the applicable
significant during the audit process. This financial reporting framework.
helps users understand the areas of the
financial statements that required particular 7. Basis for Opinion:
attention from the auditor. • Provides information on the audit
procedures performed and the basis for the
6. Identification of Qualifications or auditor's opinion.
Disclaimers: In cases where qualifications or
disclaimers are necessary, the audit report 8. Other Reporting Responsibilities (if
aims to clearly identify and explain the applicable):
reasons for such modifications to the • Includes any additional reporting
auditor's opinion. requirements, such as reporting on internal
controls or other regulatory matters.
By fulfilling these objectives, the audit
report plays a crucial role in enhancing the 9. Auditor's Signature and Date:
credibility and reliability of the financial • The report is typically signed by the audit
statements, providing assurance to firm or the individual auditor, along with the
stakeholders, and promoting transparency in date of issuance.
financial reporting.
10. Auditor's Address:
FORMAT • The address of the audit firm is often
included at the end of the report for contact
1. Title: The report is usually titled purposes.
"Independent Auditor's Report" or "Auditor's
Report" to clearly identify its purpose. This format ensures that the audit report is
structured, informative, and compliant with
2. Addressee: The report is addressed to the auditing standards and regulations.
shareholders of the company or the •••
appropriate governing body.
2. THE NEED OF AN AUDIT REPORT
3. Introductory Paragraph:
• Identifies the financial statements audited. 1. DEFINE:
• States the responsibility of the auditor and An audit report is needed to provide an
management. objective evaluation of a company’s
financial health and adherence to accounting
4. Management's Responsibility: standards.

2. MAIN POINTS:

17
Nota Audit 2 FbyHan

• Confirms accuracy of financial information. 3. DISCLAIMER OF RESPONSIBILITY

• Enhances reliability and credibility.
• Identifies potential issues and areas for 1. DEFINE:
improvement. A disclaimer of responsibility is a statement
• Provides assurance to stakeholders. in an audit report indicating that the auditor
cannot form an opinion on the financial
3. IMPORTANCE: statements due to a lack of sufficient
• Builds investor and public trust. evidence.
• Helps in obtaining financing and
investments. 2. MAIN POINTS:
• Ensures legal and regulatory compliance. • Indicates limitations in the audit scope.
• Facilitates better decision-making. • States the auditor’s inability to obtain
necessary information.
4. TYPES: • Highlights the uncertainty in the financial
• Conflict of Interest statements.
• Consequences • Protects the auditor from legal liability.
• Complexity
• Remoteness 3. IMPORTANCE:
• Communicates audit limitations to
5. SIMPLE EXAMPLE TO UNDERSTAND: stakeholders.
A company’s financial statements are • Maintains auditor’s integrity and
audited to confirm they accurately reflect its objectivity.
financial status, ensuring investors can trust • Highlights areas needing further
the information provided. investigation.
• Protects auditor from unfounded
Subtopics Under the Need of an Audit assumptions of assurance.
Report:
4. TYPES:
• Conflict of Interest: • Scope Limitation
Ensures that financial information is • Management Imposed Restrictions
unbiased and free from management’s • Unavailability of Evidence
influence. • Lack of Cooperation from Management

• Consequences: 5. SIMPLE EXAMPLE TO UNDERSTAND:

Helps prevent and detect fraud, errors, and If a company does not provide the necessary
misstatements, avoiding financial scandals. documents for an audit, the auditor may issue
a disclaimer stating they could not gather
• Complexity: enough information to form an opinion.
Provides clarity on complex financial
transactions and ensures they are reported •••
correctly.
4. COMMUNICATING KEY AUDIT
• Remoteness: MATTERS IN THE INDEPENDENT
Assures remote stakeholders who cannot AUDITOR REPORT
personally verify the company’s financial
health. 1. DEFINE:
Key audit matters (KAM) are those matters
••• that, in the auditor’s professional judgment,
were of most significance in the audit of the
financial statements.

18
Nota Audit 2 FbyHan

2. MAIN POINTS:
• Highlight significant issues encountered
during the audit.
• Provide insights into areas of higher risk.
• Explain how these matters were addressed.
• Enhance the transparency of the audit
process.

3. IMPORTANCE:
• Informs stakeholders about critical audit
issues.
• Improves understanding of the financial
statements.
• Increases audit report transparency.
• Assists in stakeholder decision-making.

4. TYPES:
• Significant risks
• Complex accounting estimates
• Unusual transactions
• Significant judgments

5. SIMPLE EXAMPLE TO UNDERSTAND:

An auditor identifies a significant risk related
to revenue recognition and explains how
they addressed it in the audit report,
providing stakeholders with more detailed
information about potential issues.

19
Nota Audit 2 FbyHan

CHAPTER 4: THE Potential Risks in the Use of IT for

Internal Controls
IMPACT OF
INFORMATION IT ON Despite the benefits, IT also introduces
several potential risks:
THE AUDIT PROCESS
1. Data Processing Errors: Reliance on
systems or programs that inaccurately
Audit Objective and Scope of Work in a
process data or process inaccurate data.
Computerized Environment
2. Unauthorized Access: Unauthorized
access to data can result in the destruction or
In an IT environment, the information
improper modification of data, including the
system includes computer hardware,
recording of unauthorized or non-• existent
software, automated controls and procedures,
transactions.
and data in electronic format. The use of IT
3. Unauthorized Data Changes:
affects how transactions are recorded,
Unauthorized changes to data in expert files.
processed, and reported. The controls in IT
4. Unauthorized System Changes:
systems consist of a combination of manual
Unauthorized changes to systems or
and automated controls, depending on the
programs.
entity's use of IT.
5. Failure to Update Systems: Failure to
make necessary changes to systems or
Potential Benefits of IT on Internal
programs.
Controls
6. Inappropriate Manual Intervention:
Inappropriate manual intervention in IT
The integration of IT in internal controls
processes.
offers several potential benefits:
7. Data Loss: Potential loss of data.
1. Consistency and Performance: IT systems
ISA 315 and Auditor's Knowledge of the
consistently apply predefined business rules
Business
and perform complex calculations,
enhancing the processing of large volumes of
ISA 315 • Identifying and Assessing the
transactions or data.
Risks of Material Misstatement through
2. Timeliness and Accuracy: IT enhances the
Understanding the Entity and Its
timeliness, availability, and accuracy of
Environment, requires auditors to gain
information.
sufficient knowledge of the business to
3. Additional Analysis: IT facilitates further
identify and understand events, transactions,
analysis of information.
and practices that may significantly affect
4. Performance Monitoring: IT enhances the
the financial statements or audit report. This
ability to monitor the performance of the
knowledge is essential in assessing the
entity's activities, policies, and procedures.
significance of IT to the entity's business
5. Risk Reduction: IT reduces the risk of
activities and its impact on audit risk. The
controls being circumvented.
auditor must consider changes in the entity's
6. Segregation of Duties: IT enhances the
business environment due to IT and IT
ability to achieve effective segregation of
business risks that may affect the financial
duties by implementing security controls in
statements.
applications, databases, and operating
systems.
To obtain or update this knowledge, auditors
should consider:

20
Nota Audit 2 FbyHan

1. Business Activities and Industry: 7. System and Infrastructure Failures:

Understanding the entity's business activities Failures or crashes of systems and
and industry context. infrastructure can halt operations.
2. IT Strategy: Evaluating the entity's IT 8. Functioning Capabilities of Hardware and
strategy. Software: Protecting hardware, software,
3. Extent of IT Activities: Assessing the and related data from physical damage is
extent of the entity's IT activities. critical.
4. Outsourcing Arrangements: Reviewing 9. Systematic vs. Random Errors: While
the entity's IT outsourcing arrangements. technology• based procedures reduce the risk
of random human error; they increase the
Necessary Skills and Competence risk of systematic error (consistent errors
until corrected).
Auditors need specific skills and an elevated 10. Visibility of Audit Trail: IT use often
level of competence to audit within the IT reduces or eliminates source documents and
environment of business entities. If auditors records, making it harder to trace accounting
lack the necessary skills, they should seek information.
the opinion and expertise of third parties to 11. Reduced Human Involvement:
assist in planning, monitoring, and reviewing Employees dealing with initial transaction
the audit work. This ensures that the audit is processing may not see results, making it
thorough and considers all relevant IT• harder to identify misstatements.
related risks and controls. 12. Perception of IT Output as Correct:
Employees may regard IT• generated output
Assessing Risks of IT as inherently correct, potentially overlooking
errors.
1. Loss of Transaction Integrity: Without an 13. Lack of Traditional Authorization:
adequate audit trail (in paper or electronic Advanced IT systems can automatically
form), misstatements may not be easily initiate transactions, bypassing traditional
detected. authorization processes.
2. E• commerce Security Risks: These 14. Need for IT Expertise: Increasing use of
include virus attacks and the potential for IT systems requires qualified IT specialists.
fraud by customers, employees, and others 15. Reduced Separation of Duties:
through unauthorized access. Without proper Computers centralize tasks traditionally
online restrictions, unauthorized changes to segregated, increasing the risk of asset theft
software programs and expert files may by IT personnel with access to software and
occur. expert files.
3. Improper Accounting Policies: The
complexity of transactions surrounding IT Auditor's Role in Assessing IT Risks
can lead to improper accounting policies.
4. Non-• compliance with Regulations: This 1. Understanding the IT Environment: Gain
is particularly relevant for e• commerce a thorough understanding of the entity's IT
transactions conducted across international infrastructure, controls, and processes.
boundaries. 2. Identifying IT Risks: Recognize potential
5. Electronic Contract Validity: Ensuring that IT risks that could impact financial reporting.
contracts evidenced only by electronic 3. Evaluating Controls: Assess the
means are binding can be challenging. effectiveness of IT controls in mitigating
6. Over• reliance on E• commerce: Placing identified risks.
significant business systems or transactions 4. Testing IT Systems: Perform tests on IT
on the Internet increases vulnerability. systems to ensure they process data
accurately and securely.

21
Nota Audit 2 FbyHan

5. Reviewing IT Policies: Evaluate the • Use of Control Risk Matrix:

entity's IT policies and procedures for • Identifies manual and automated
managing and mitigating risks. application controls and related deficiencies
6. Monitoring Changes: Stay alert to changes for each audit objective.
in the IT environment that could affect the
entity's risk profile. Effect of IT Controls on Substantive
Testing
21.3.1 Effect of General Controls on
Control Risk • Reduction of Testing:
• Identification of specific application
• System• Wide Applications: controls allows for a reduction in substantive
• Ineffective general controls can lead to testing.
material misstatements across all system • Automated application controls enable
applications. auditors to reduce sample sizes in both
• Effective general controls allow auditors financial statement audits and internal
to rely more on application controls, control audits.
potentially reducing substantive testing.
• Relying on Prior Testing Results:
• Software Changes: • Auditors may rely on prior year testing
• Effective general controls simplify the results of automated controls if general
identification of software changes. controls were effective and unchanged.
• Weak general controls necessitate
thorough testing of application controls 21.4 Auditing Around and Through the
throughout the audit period. Computer

Understanding Client General Controls Auditing Around the Computer

• Information Gathering Methods: • Suitability:

• Interviews with IT personnel and key • Suitable for smaller organizations with
users. standard software packages or single
• Examination of system documentation. PC/small network setups.
• Review of detailed questionnaires
completed by IT staff. • Steps Involved:
• Examination of data input controls.
• Importance of Multiple Approaches: • Examination of expert file data.
• Each method offers different perspectives • Examination of output.
and information, enhancing the auditor's • External verification of output.
understanding.
Auditing Through the Computer
Relating IT Controls to Transaction•
Related Audit Objectives • Suitability:
• Used in complex computerized systems
• Direct Linkage: where information is generated internally.
• General controls impact multiple audit
cycles but are not linked to specific • Approach:
transaction• related audit objectives. • Understanding and interrogating the
• Ineffective general controls reduce management information system (MIS).
reliance on application controls across all • Addressing potential challenges such as
cycles. limited understanding by IT staff and

22
Nota Audit 2 FbyHan

management's avoidance of involvement in • Integrated Test Facilities:

day• to• day operations. • Creation of dummy ledgers for test data.

Techniques (CAATs) • Parallel Simulation:

• Modelling client's system for comparison.
• Types of CAATs:
• Generalized audit software. • Embedded Audit Software:
• Custom audit software. • Purpose• written program within client's
• Test data. system.
• Parallel simulation.
• Integrated test facility. Considerations in Using CAATs
• Concurrent auditing techniques.
Advantages
Audit Software
• Independent access to computer data.
• Purpose: • Testing reliability of client software.
• Interrogation of client's system. • Increased accuracy and efficiency of audit
• Examination of large volumes of data. tests.
• Presentation of results for further
investigation. Disadvantages

• Specific Procedures: • Costly and time• consuming setup.

• Extracting samples according to specified • Difficulty in obtaining client cooperation.
criteria. • Potential incompatibility with client's
• Calculating ratios and indicators. system.
• Checking arithmetical accuracy. • Requirement for specialized IT skills.
• Preparing reports. • Risk of data corruption or loss.
• Stratifying data.
• Producing letters. Auditing Software Examples
• Tracing transactions through the system.
• IDEA (Interactive Data Extraction and
Evaluate Data Analysis):
• Extracts and reformats data for audit
• Objective: testing.
• Testing operation of application controls.
• Includes data with errors and without • ACL (Audit Command Language):
errors. • Cleanses and normalizes data.
• Identifies trends and exceptions.
• Types of Errors: • Matches records and fields.
• Non-• existent codes. • Locates errors and potential fraud.
• Transactions above limits. • Analyses financial transactions.
• Invoices with errors. • Automates analyses.
• Incorrect batch control totals.
E• commerce and Its Impact on Auditing
• Testing Methods:
• Live test data. • Challenges Faced by Auditors:
• Dead test data. • Security.
• Availability.
Other CAATs • Authentication.
• Integrity.

23
Nota Audit 2 FbyHan

• Confidentiality. • IT auditors must comprehend cloud

• Privacy. technology, especially SaaS and IaaS.
• Establish approach for identifying key
• Factors for Successful E• commerce Audits: risks and develop effective audit strategies.
• Knowledge of security vulnerabilities.
• Expertise in system and network change Relevant Areas Involved in Auditing
management. Cloud Computing
• Inclusion of security specialists.
• Training in auditing financials in Data Protection
integrated systems environment. • Assess security methods including
• Experience in website review/audit. physical security, logical security, data
transmission, storage authorization, and
Management Controls for E• commerce intrusion detection.

• Strategic Controls: Technology Risks

• Participation in audits by e• commerce • Evaluate server virtualization, patch
steering and project committees. management, super users, and segregation of
duties.
• Development Controls:
• Proper selection of secure e• commerce Identity and Access Management
platform. • Assess efficiency and accuracy of access
• Regulated changes in e• commerce controls, approval layers, access rights
system. removal, and periodic access review
processes.
• Operational Controls:
• Regular security reviews. Regulatory Compliance
• E• commerce disaster recovery planning. • Evaluate compliance with privacy laws,
• Access control policies for customers. breach notification laws, and regulatory
requirements of different countries.
Role of Audit in the Era of Cloud
Computing Operations
• Assess policies and procedures related to
• Introduction to Cloud Computing: incident management, problem management,
• Emergence of cloud computing due to change management, and availability.
cost efficiency and data security concerns.
• Cloud service providers (CSPs) manage Conclusion
physical resources and sensitive data for • Auditing cloud computing involves
companies. comprehensive evaluation of data protection,
technology risks, identity management,
• Importance of Auditing in Cloud regulatory compliance, and operational
Computing: procedures to ensure data security and
• Ensure privacy and security of sensitive regulatory compliance.
data.
• Restrict access to computing and physical
resources.
• Check data integrity and prevent
unauthorized access, change, or loss.

• Auditor's Understanding:

24
Nota Audit 2 FbyHan

CHAPTER 5: • Professional Conduct and Practice:

Specific obligations for how members and
CORPORATE CODE OF their firms should conduct their practice.
ETHICS FOR AUDITOR 5. SIMPLE EXAMPLE TO UNDERSTAND:
16.1 > Fundamental Principles of Ethics
• Imagine an accountant working in
(5.1) and Professional Conduct in
Malaysia. They follow rules set by MIA to
Accordance with MIA By• Laws
ensure their work is honest and up to
international standards. These rules help
1. DEFINE:
them know what is right and wrong in their
• The MIA (Malaysian Institute of
job, making sure they do not cut corners or
Accountants) sets ethical and professional
engage in unethical behaviour. The rules are
standards for accountants in Malaysia. These
like a guidebook, with Part I teaching them
standards are detailed in the by• Laws (On
about ethics and Part II telling them how to
Professional Ethics, Conduct and Practice).
act professionally.
2. MAIN POINTS:
This simpler explanation breaks down the
• Establishment: MIA was established
fundamental principles and professional
under the Accountants Act 1967.
conduct according to MIA By• Laws,
• Role: Ensures external auditing is done
making it easier to understand.
by qualified accountants following approved
standards.
BOX 16.1 Overview of the MIA By• Laws
• By• Laws: Issued by MIA to guide
(On Professional Ethics, Conduct and
accountants on ethics and conduct.
Practice)
• Revisions: The By• Laws were updated
on 1 January 2011 and amended as of 28 July
PART A: GENERAL APPLICATION OF
2016, based on the Code of Ethics from the
THE CODE
International Ethics Standards Board of
1. 100 Fundamental Principles and
Accountants (IESBA).
Conceptual Framework
• Structure: The By• Laws consist of two
• 110 Integrity: Be honest and
parts:
straightforward.
• Part I: Professional Ethics, based on
• 120 Objectivity: Avoid bias, conflicts of
IESBA's Code of Ethics.
interest, and undue influence.
• Part II: Professional Conduct and
• 130 Professional Competence and Due
Practice, detailing obligations for MIA
Care: Maintain professional knowledge and
members and their firms.
skill.
• 140 Confidentiality: Respect the
3. IMPORTANCE:
confidentiality of information.
• Ethical Guidance: Provides a clear
• 150 Professional Behaviour: Comply
ethical framework for accountants.
with laws and avoid discrediting the
• Professional Standards: Ensures lofty
profession.
standards of professional conduct.
• Consistency: Aligns Malaysian
PART B: PROFESSIONAL
accounting practices with international
ACCOUNTANTS IN PUBLIC
standards.
PRACTICE
2. 200 Introduction
4. TYPES:
• Overview of responsibilities specific to
• Professional Ethics: Guidelines on
public practice.
ethical behaviour for all MIA members.
3. 210 Professional Appointment

25
Nota Audit 2 FbyHan

• Guidelines on accepting and continuing 14. 320 Preparation and Reporting of

client relationships. Information
• Prepare and report information
4. 220 Conflicts of Interest accurately and truthfully.
• Manage conflicts between professional
duties and personal interests. 15. 330 Acting with Sufficient Expertise
• Perform duties with the necessary
5. 230 Second Opinion expertise and knowledge.
• Provide opinions without conflicting
with existing client engagements. 16. 340 Financial Interests, Compensation
and Incentives Linked to Financial
6. 240 Fees and Other Types of Reporting and Decision Making
Remuneration • Avoid commercial interests that could
• Ensure fees are fair and not based on affect objectivity and integrity.
unethical practices.
17. 350 Inducements
7. 250 Marketing Public Practice • Do not accept inducements that could
Professional Services compromise professional judgment.
• Market services honestly without
misleading information. 16.1 Fundamental Principles of Ethics
and Professional Conduct in Accordance
8. 260 Gifts and Hospitality with MIA By• Laws
• Avoid accepting gifts that could
influence decisions. 1. DEFINE:
The MIA (Malaysian Institute of
9. 270 Custody of Clients' Assets Accountants) By• Laws set ethical standards
• Safeguard clients' assets and avoid for professional accountants in Malaysia to
misuse. ensure they conduct their duties with
integrity, objectivity, competence,
10. 280 Objectivity • All Services confidentiality, and professionalism.
• Maintain objectivity in all services
provided. 2. MAIN POINTS:
• Integrity: Be honest and straightforward in
11. 290 Independence • Audit and Review all professional activities.
Engagement • Objectivity: Avoid biases, conflicts of
• Ensure independence in audit and interest, and undue influence.
review engagements to maintain trust and • Professional Competence and Due Care:
integrity. Maintain and update professional skills and
knowledge.
PART C: PROFESSIONAL • Confidentiality: Respect and protect
ACCOUNTANTS IN BUSINESS confidential information.
12. 300 Introduction • Professional Behaviour: Comply with laws
• Overview of responsibilities specific to and avoid any actions that discredit the
business settings. profession.

13. 310 Potential Conflicts 3. IMPORTANCE:

• Manage conflicts that may arise in These principles ensure that accountants
business roles. perform their roles ethically and
professionally, which:
• Builds public trust in financial reporting.

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Nota Audit 2 FbyHan

• Ensures the reliability and accuracy of

financial information. 5. SIMPLE EXAMPLE TO
• Protects the interests of stakeholders, UNDERSTAND:
including the public, investors, and
employees. • Integrity:
• Example: An accountant finds a mistake
4. TYPES: in the financial statements that could harm
the company's reputation. Integrity requires
(a) Integrity: them to report the mistake accurately,
• Main Point: Be straightforward and regardless of the consequences.
honest.
• Importance: Ensures truthful and • Objectivity:
accurate audits. • Example: An accountant auditing a
• Example: Reporting financial company where their friend works ensures
discrepancies honestly even if it affects the their personal relationship does not influence
client negatively. their professional judgment.

(b) Objectivity: • Professional Competence and Due Care:

• Main Point: Stay unbiased and impartial. • Example: An accountant takes courses on
• Importance: Ensures fair and the latest tax laws to ensure they provide the
independent financial reporting. best advice to their clients.
• Example: Avoiding conflicts of interest,
such as not auditing a company you own • Confidentiality:
shares in. • Example: An accountant does not share
sensitive client financial information with
(c) Professional Competence and Due Care: anyone outside the organization without
• Main Point: Maintain professional proper authorization.
knowledge and skill.
• Importance: Ensures high• quality and • Professional Behaviour:
reliable professional services. • Example: An accountant avoids any
• Example: Regularly attending behaviour, such as false advertising or
professional development courses to stay involvement in fraudulent activities, which
updated with new accounting standards. could tarnish the reputation of their
profession.
(d) Confidentiality:
• Main Point: Protect client information. 16.4 Situations That Can Influence
• Importance: Maintains trust and Independence in Appearance and in Fact
complies with legal requirements.
• Example: Not sharing client financial 1. DEFINE:
data with third parties without permission. Independence in auditing means that
auditors must be free from biases and
(e) Professional Behaviour: conflicts of interest. This ensures that their
• Main Point: Act in a manner that judgments and actions are based solely on
maintains the profession's reputation. the evidence and not influenced by personal
• Importance: Ensures respect for the or external pressures.
profession and adherence to laws and
regulations. 2. MAIN POINTS:
• Example: Avoiding any unlawful • Independence of Mind: Auditors must
activities or negligent actions that could make unbiased decisions.
discredit the accounting profession.

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Nota Audit 2 FbyHan

• Independence in Appearance: Auditors 5. SIMPLE EXAMPLE TO

must avoid situations that might make others UNDERSTAND:
think their decisions are biased.
• Threats to Independence: Self• interest, • Independence of Mind:
self-• review, advocacy, familiarity, and • Example: An auditor ensures their
intimidation. judgment is not swayed by personal gains or
relationships.
3. IMPORTANCE:
Independence is crucial because it: • Independence in Appearance:
• Ensures the credibility and reliability of • Example: Even if an auditor is unbiased,
audit reports. they avoid situations like auditing a friend’s
• Builds trust among stakeholders, including company to prevent any appearance of bias.
investors, clients, and the public.
• Maintains the integrity and • Self• interest Threat:
professionalism of the auditing profession. • Example: An auditor holds investments in
a client company, which could bias their
4. TYPES: audit.

(a) Self• interest Threat: • Self• review Threat:

• Main Point: Financial or other interests • Example: An auditor might not critique
might influence the auditor’s judgment. their previous work accurately if they are
• Example: An auditor owns shares in the evaluating it again.
company they are auditing.
• Advocacy Threat:
(b) Self• review Threat: • Example: An auditor’s objectivity might
• Main Point: The auditor might not be compromised if they are actively
rigorously evaluate their previous work. supporting their client’s position in legal or
• Example: An auditor reviewing financial regulatory matters.
statements they helped prepare.
• Familiarity Threat:
(c) Advocacy Threat: • Example: After collaborating with a client
• Main Point: The auditor promotes a for many years, an auditor might become too
client's position too strongly. trusting and overlook potential issues.
• Example: An auditor lobbying on behalf
of a client for favourable regulatory • Intimidation Threat:
treatment. • Example: An auditor might feel pressured
to give a favourable report due to threats
(d) Familiarity Threat: from the client, such as losing their job or
• Main Point: Long or close relationships contract.
with clients could lead to bias.
• Example: An auditor who has been By maintaining both independence in mind
auditing the same client for many years. and appearance, auditors can provide
trustworthy and unbiased reports, essential
(e) Intimidation Threat: for stakeholder confidence and the integrity
• Main Point: Auditors might be of financial reporting.
influenced by pressures or threats.
• Example: A client threatens to replace the
auditor if the audit report is unfavourable.

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Nota Audit 2 FbyHan

16.5 Advertising and Other Methods to • Example: Publishing informative articles,

Attract Customers blogs, or videos to highlight expertise and
attract clients.
1. DEFINE:
Advertising for professional accountants 5. SIMPLE EXAMPLE TO
involves promoting their services to attract UNDERSTAND:
clients. This can include various marketing
strategies like online ads, networking, or • Need for Marketing:
public speaking engagements. • Example: An accountant who only relies
on referrals may find it difficult to attract
2. MAIN POINTS: new clients compared to one who actively
• Need for Marketing: In today’s promotes their services online.
competitive environment, accountants need
to actively market their services to attract • Ethical Marketing:
and retain clients. • Example: An accountant should avoid
• Ethical Marketing: Accountants must claiming to be the "best" in the field without
ensure their marketing efforts do not substantial evidence, as this could mislead
compromise professional ethics. potential clients and harm the profession’s
• Client Education: Educating clients on reputation.
ethical practices can help prevent requests
for unethical actions. • Client Education:
• Selective Client Acceptance: Being • Example: Explaining to a client why
selective about clients can help maintain certain audit procedures are necessary helps
professional integrity and avoid troublesome the client understand the importance of
engagements. ethical practices and builds trust.

3. IMPORTANCE: • Selective Client Acceptance:

Marketing is essential for accountants to: • Example: An audit firm might decline a
• Stay Competitive: Maintain and grow their client who insists on manipulating financial
client base. statements, as this could lead to unethical
• Build Trust: Transparent and ethical compromises.
marketing helps build trust with potential
clients. • Traditional Marketing:
• Maintain Professional Reputation: Ethical • Example: Attending a local business
marketing protects the reputation of the networking event to meet potential clients.
profession and prevents misleading the
public. • Digital Marketing:
• Example: Running a Facebook ad
4. TYPES: campaign targeting small business owners in
(a) Traditional Marketing: need of accounting services.
• Example: Networking at professional
events, distributing business cards, and • Content Marketing:
word• of• mouth referrals. • Example: Writing a blog post about
common tax mistakes to attract readers who
(b) Digital Marketing: might later seek professional advice.
• Example: Using social media platforms,
websites, and online ads to reach potential By adhering to ethical standards while
clients. marketing, professional accountants can
attract clients effectively without
(c) Content Marketing:

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Nota Audit 2 FbyHan

compromising their integrity or the (b) Ethical Requirements:

profession’s reputation. • Example: Implementing a code of ethics
and regular ethics training.
Elements of a Quality Control System
(c) Acceptance and Continuance:
To ensure high• quality performance in their • Example: Evaluating a potential client's
services, firms need to implement a robust integrity and resources before accepting an
quality control system. This system should engagement.
include policies and procedures addressing
six key elements: (d) Human Resources:
• Example: Providing ongoing
1. DEFINE: professional development and training for
Quality Control System: A set of policies and staff.
procedures to ensure that a firm's work meets
professional standards, regulatory (e) Engagement Performance:
requirements, and is performed with • Example: Using standardized checklists
integrity and competence. and documentation for consistency in audits.

2. MAIN POINTS: (f) Monitoring:

• Leadership Responsibilities: Promoting a • Example: Conducting periodic reviews
culture of quality within the firm. of completed engagements to ensure quality
• Ethical Requirements: Ensuring all standards are met.
personnel adhere to ethical standards.
• Acceptance and Continuance: Evaluating 5. SIMPLE EXAMPLE TO
client relationships and engagements for UNDERSTAND:
suitability.
• Human Resources: Hiring and developing • Leadership Responsibilities:
competent and ethical personnel. • Example: A firm's CEO emphasizes the
• Engagement Performance: Ensuring work importance of quality by regularly
is performed according to standards and discussing quality goals in team meetings
regulations. and ensuring everyone understands their role
• Monitoring: Regularly reviewing and in maintaining standards.
improving the quality control system.
• Ethical Requirements:
3. IMPORTANCE: • Example: The firm has a strict policy that
• Quality Assurance: Ensures the firm's work all employees must follow ethical guidelines,
is dependable and meets professional such as confidentiality and integrity, with
standards. regular training sessions to reinforce these
• Trust and Reputation: Builds trust with values.
clients and regulators, enhancing the firm's
reputation. • Acceptance and Continuance:
• Compliance: Helps the firm adhere to legal • Example: Before taking on a new client,
and regulatory requirements, reducing risk. the firm checks the client's history to ensure
they are reputable and that the firm has the
4. TYPES: necessary skills and resources to serve them
(a) Leadership Responsibilities: effectively.
• Example: CEO promoting quality culture
through regular meetings and training • Human Resources:
sessions. • Example: The firm invests in professional
development programs to ensure all

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Nota Audit 2 FbyHan

employees are up• to• date with the latest decisions and overseeing employees.
industry standards and practices. Performing such duties impairs
independence because it involves making
• Engagement Performance: decisions that should be the client's
• Example: During audits, the firm uses a responsibility.
standardized set of procedures and
documentation to ensure consistency and Examples of Management Responsibilities:
adherence to regulatory standards. • Setting policies and strategic direction.
• Authorizing transactions.
• Monitoring: • Deciding which recommendations to
• Example: The firm conducts regular implement.
internal audits of its processes and outcomes • Taking responsibility for financial
to identify areas for improvement and ensure statement preparation and internal controls.
compliance with quality standards.
(b) Administrative Services
By implementing these elements, firms can Administrative Services: Involve assisting
maintain lofty standards of quality, uphold clients with routine tasks that require
ethical practices, and continuously improve minimal professional judgment, typically
their services, thereby fostering trust and clerical in nature. These do not impair
reliability in their professional engagements. independence but must be evaluated for
threats.
Services That Can Impair Independence
Examples of Administrative Services:
Public accounting firms often provide a • Word processing.
range of non-• assurance services to their • Preparing and submitting statutory forms.
audit clients. While these services leverage • Monitoring and advising on filing dates.
the firms' expertise, they can sometimes
create threats to the independence of the firm (c) Preparing Accounting Records and
or members of the assurance team. Key Financial Statements
threats include: Accounting and Bookkeeping Services:
Involve preparing financial records and
1. Self- Review Threat: Occurs when statements. For non-• public interest entities,
auditors review their own previous work. these services may be acceptable if the self-•
2. Self- Interest Threat: Happens when review threat is managed. For public interest
auditors have a financial interest in the entities, these services are prohibited due to
client's performance. significant independence threats.
3. Advocacy Threat: Arises when auditors
promote or represent their clients, leading to Examples of Acceptable Services for Non-•
potential bias. Public Interest Entities:
• Payroll services based on client data.
In certain situations, these threats cannot be • Recording client• approved transactions.
mitigated to an acceptable level, and non-• • Preparing financial statements from trial
assurance services should not be provided to balances.
audit clients. The following are specific
services that can impair independence: (d) Valuation Services
Valuation Services: Involve making
(a) Management Responsibilities assumptions and applying methodologies to
Management Responsibilities: Involve compute values for assets, liabilities, or
controlling, leading, and directing an entity's businesses. These services can create a self-•
activities, which include making strategic

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Nota Audit 2 FbyHan

review threat, especially if they significantly Safeguards to Protect Independence

affect the financial statements.
Auditor independence is crucial for objective
Factors Affecting Threats from Valuation and impartial judgment. Management should
Services: consider all relationships and services that
• Material impact on financial statements. could impair independence. Specific
• Client involvement in methodology. circumstances likely to create threats and the
• Subjectivity and reliability of data. corresponding safeguards include:
• Dependence on future events.
1. Financial Interest: A direct or material
(e) Tax Services financial interest in a client creates a self-•
Tax Services: Include preparing tax returns interest threat. Safeguards include divesting
and advising on tax treatments. These the interest or removing the individual from
services do not impair independence if they the assurance team.
are based on historical information and
management takes responsibility for 2. Loans and Guarantees: Loans or
significant judgments. guarantees from a client create self-• interest
threats. Acceptable loans are those from
(f) Internal Audit Services client banks under normal terms and
Internal Audit Services: Provide independent immaterial amounts.
assurance on risk management, control, and
governance. These services can impair 3. Business Relationships: Close business
independence if the firm uses the internal relationships with clients create self-•
audit work in the external audit, especially if interest or intimidation threats. Safeguards
they assume management responsibilities. include terminating the relationship or
removing individuals from the assurance
(g) IT Systems Services team.
IT Systems Services: Include designing and
implementing hardware or software systems. 4. Family and Personal Relationships:
These can impair independence if they affect Relationships between assurance team
financial reporting. Certain off• the• shelf members and client officers create various
software implementations may be acceptable threats. Immediate family members in
if customization is minimal. significant roles require removing the team
member to mitigate threats.
(h) Legal Services
Legal Services: Require legal training and By understanding and managing these
may include contract support and litigation threats and applying appropriate safeguards,
advice. These can create self-• review and accounting firms can maintain their
advocacy threats, which need to be managed independence and the integrity of their audit
through safeguards like using separate services.
professionals.

(i) Recruiting Services

Recruiting Services: Can create self-•
interest, familiarity, or intimidation threats.
Acceptable services include reviewing
applicant qualifications and advising on
suitability. However, threats must be
evaluated and managed.

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CHAPTER 6: LIABILITY shareholders, from financial losses due to

audit failures or misconduct.
OF AUDITORS AND
CORPERATE 4. Types:
• Negligence: Failure to exercise reasonable
GOVERNANCE care and skill in performing audit procedures.
• Breach of Contract: Failure to fulfil
contractual obligations outlined in the
Auditors' Liability engagement agreement.
• Fraudulent Misrepresentation: Intentional
1. Define: misrepresentation or concealment of
Auditors' liability refers to the legal material facts in audit reports.
responsibility that auditors have for their • Civil Liability: Lawsuits filed by
professional conduct and the accuracy of stakeholders seeking damages for financial
their audit opinions. It encompasses the duty losses attributed to audit failures.
to perform audits with due care and diligence, • Criminal Liability: Prosecution by
and the potential consequences if they fail to regulatory authorities for fraudulent conduct
do so. or violations of securities laws.

2. Main Points: 5. Simple Example to

• Duty of Care: Auditors are expected to Understand:
exercise reasonable care, skill, and diligence Imagine an auditor is engaged to audit a
in conducting audits. company's financial statements. During the
• Professional Standards: Auditors must audit, the auditor fails to detect material
adhere to auditing standards and guidelines misstatements due to negligence in sampling
established by regulatory bodies. procedures. As a result, investors rely on the
• Scope of Liability: Auditors may be held inaccurate financial statements and suffer
liable for negligence, breach of contract, or financial losses when the company later
fraud in their audit engagements. declares bankruptcy. In this scenario, the
• Legal Consequences: Liability may result auditor may be held liable for negligence and
in lawsuits, financial penalties, loss of breach of duty, facing legal consequences
reputation, and professional sanctions. such as lawsuits and financial penalties.
• Defences: Auditors can defend against
liability claims by demonstrating adherence
to auditing standards, proper documentation,
Types of Litigation in Public
and absence of negligence or fraud. Accounting Firms
Liability affecting public accounting firms
3. Importance: arises from two main sources: common law
• Investor Confidence: Auditors' liability
and statutory law. Understanding these
ensures the integrity of financial reporting,
sources is crucial for assessing auditors' legal
thereby maintaining investor trust in capital
responsibilities and liabilities.
markets.
• Accountability: Holding auditors
1. Common Law Liability:
accountable for their actions promotes
• Definition: Common law liability
transparency and ethical conduct within the
encompasses legal concepts established
auditing profession.
through court decisions, particularly
• Legal Protection: Protects stakeholders,
concerning negligence, gross negligence, or
including investors, creditors, and
fraud.

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Nota Audit 2 FbyHan

• Negligence: Failure to exercise reasonable actions initiated by clients and third parties
care or skill in performing auditing duties, who rely on audited financial statements.
leading to financial harm to a third party. Common causes of legal actions against
• Gross Negligence: Extreme negligence or auditors include breach of contract,
reckless disregard for professional duties, negligence, gross negligence, and fraud.
resulting in significant harm.
• Fraud: Intentional misrepresentation or 1. Breach of Contract:
deceit by the auditor, leading to monetary • Definition: Occurs when an auditor fails to
loss or damage. fulfil contractual obligations with the client.
• Examples: Violating client confidentiality,
2. Statutory Law Liability: late submission of audit reports, failure to
• Definition: Statutory law liability arises detect material errors or fraud, unjustified
from federal securities laws or state statutes, withdrawal from audit engagement.
imposing legal obligations and liabilities on • Legal Remedies: Specific performance of
auditors. contract, injunction to prevent certain acts,
• Federal Securities Laws: Laws governing recovery of financial losses.
the issuance and trading of securities, such as • Auditor's Défense: Demonstrating due
the Securities Act of 1933 and the Securities professional care, client contributory
Exchange Act of 1934. negligence, lack of causation between breach
• State Statutes: Laws enacted at the state and client's losses.
level, including regulations related to
corporate governance and financial reporting. 2. Negligence:
• Companies Act 2016: A significant statute • Definition: Failure to exercise reasonable
in Malaysia governing corporate entities, care in performing auditing duties, leading to
including provisions related to audit financial harm to the client or third parties.
requirements and liabilities. • Conditions for Liability: Duty of care,
breach of duty, causal relationship, actual
Importance: loss, fairness in imposing liability.
• Understanding the types of litigation is • Duty of Care: Obligation to adhere to
essential for auditors to comprehend their professional standards, ethical behaviour,
legal obligations and potential liabilities. terms of engagement, and employing
• Adherence to professional standards and competent staff.
due diligence in audit procedures can help • Proof of Negligence: Demonstrating loss
mitigate common law and statutory law due to reliance on misleading financial
liabilities. statements, auditor's knowledge or should•
have• known of misleading statements.
Example:
If an auditor fails to detect fraudulent activity Importance:
during an audit, leading to financial losses • Understanding common law liability is
for investors, they may face legal action crucial for auditors to recognize their legal
under common law principles of negligence. obligations and potential consequences of
Similarly, if an auditor violates specific their actions.
provisions of the Companies Act 2016 • Adherence to professional standards and
related to audit requirements, they may incur due diligence in audit procedures can help
statutory law liability. mitigate the risk of legal liability.

Liability under Common Law Example:

If an auditor fails to detect fraudulent activity
Auditors are subject to civil liability under during an audit, resulting in financial losses
common law, which encompasses legal for investors, they may face legal action for

34
Nota Audit 2 FbyHan

breach of contract or negligence. The • Ruling: Auditors not liable as they were
plaintiff must demonstrate reliance on unaware of specific lenders relying on
misleading financial statements and the reports.
auditor's failure to exercise due care, leading • Legal Principle: Lack of auditor's
to the plaintiff's losses. Courts have held knowledge of third• party reliance absolves
auditors liable when their actions or liability.
omissions result in financial harm to clients • Lesson: Auditors must be aware of third•
or third parties who rely on audited party reliance to establish duty of care.
statements. • Outcome: Third parties must prove
auditors' awareness of reliance for
Summary of Cases: negligence claims.

17.2 Candler v Crane, Christmas & Co. 17.2.3 Other Cases:

(1951) • Haig v Bamford (1976): Duty of care owed
• Issue: Negligence in preparing company to specific third parties based on auditor's
accounts led to investor loss. knowledge.
• Ruling: Accountants not liable as they had • Scott Group v McFarlane (1978): Duty of
no contract with the investor. care owed to foreseeable parties relying on
• Legal Principle: Lack of contractual audited statements.
relationship absolves accountants from duty • R Lowe Lippmann Figdor and Frank v
of care to third parties. AGC (Advances) Ltd. (1992): No duty of
• Lesson: Without a direct contract, third care if audit reports not supplied directly to
parties cannot claim negligence against third parties.
auditors. • Esanda Finance v Peat Marwick
• Outcome: Investors must rely on Hungerford’s (1997): Limited liability of
contractual agreements or seek alternative auditors if reports not intended for specific
legal recourse. third• party reliance.
• AWA Limited v Deloitte Haskin & Sells
17.3 Caparo Industries PLC. v Dickman (1992): Auditors liable for negligence if
& Others (1990) failure to report significant weaknesses in
• Issue: Alleged negligent audit led to internal controls leads to losses.
investor losses in takeover bid.
• Ruling: Auditors not liable as duty of care 17.3 • Statutory Liability
not owed to potential investors.
• Legal Principle: Duty of care must be 1. DEFINE:
knowingly assumed towards specific third Statutory liability refers to legal
parties. obligations imposed on auditors by written
• Lesson: Auditors not automatically liable laws enacted by the legislative branch or
to potential investors without direct regulatory agencies, apart from liabilities
relationship. under common law.
• Outcome: Investors must demonstrate
auditors' awareness of reliance on audit 2. MAIN POINTS:
information. • Auditors can face legal action under
statutory law from various parties like clients,
17.4 Ultra mares v Touche, et al. (1931) shareholders, investors, and government
• Issue: Alleged negligence in audit led to bodies for failure to perform professional
lender's loss due to misleading financial services adequately.
statements. • In the US, auditor liability is established
by laws like the Securities Act of 1933, the
Securities Exchange Act of 1934, and the

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Nota Audit 2 FbyHan

Sarbanes• Oxley Act of 2002, allowing securities laws, leading to criminal

disciplinary actions by the SEC for unethical proceedings, fines, and imprisonment.
behaviour.
• In Malaysia, auditors may be sued for 2. MAIN POINTS:
violating the Companies Act 2016 and other • Auditors can be criminally charged for
statutes like the Securities Commission Act various offenses like failure to report non-•
1993 and the Banking and Financial compliance or insider trading under
Institution Act 1989, which aim to protect corporate or securities laws.
shareholders and depositors. • In Malaysia, criminal actions against
auditors are rare, but if found guilty, auditors
3. IMPORTANCE: may face substantial fines and imprisonment.
• Statutory laws ensure auditors fulfil legal
reporting responsibilities and maintain 3. IMPORTANCE:
professional standards, safeguarding the • Criminal liability ensures auditors adhere
interests of stakeholders. to legal standards and ethical conduct,
• They provide a framework for legal maintaining integrity in financial reporting
actions against auditors in case of non-• and protecting stakeholders' interests.
compliance or violation of specific statutory • It acts as a deterrent against fraudulent or
duties. unethical behaviour by auditors, promoting
transparency and trust in financial markets.
4. TYPES:
• Liability under US laws: Auditors can 4. TYPES:
face sanctions like revocation of registration, • Failure to report non-• compliance:
civil penalties, and mandatory education for Auditors can be charged for not reporting
violations. violations of the Companies Act 2016,
• Liability under Malaysian laws: Auditors leading to penalties and imprisonment.
may be held accountable for misstatements • Insider trading: Auditors engaging in
in prospectuses under the Companies Act illegal trading based on non-• public
2016, with specific provisions for liability information can face criminal charges,
and defences. resulting in severe consequences.

5. SIMPLE EXAMPLE TO 5. SIMPLE EXAMPLE TO UNDERSTAND:

UNDERSTAND: • In the case of WorldCom and Arthur
• Suppose an auditor signs off on a Andersen LLP, Arthur Andersen, the external
prospectus for a company's initial public auditor, failed to detect WorldCom's massive
offering (IPO) without conducting thorough accounting fraud, leading to overstated
due diligence. If investors suffer losses due earnings of billions of dollars. The SEC
to misleading information in the prospectus, charged both WorldCom and Arthur
they can sue the auditor under statutory law Andersen with accounting fraud. Arthur
for compensation. The auditor can defend Andersen faced criminal liability for its
themselves by proving they withdrew failure to uncover the fraud, leading to severe
consent or were competent in their penalties and loss of reputation.
statements.
17.3.2 • Criminal Liability to Third Party
17.3.2 • Criminal Liability to Third Party
1. DEFINE:
1. DEFINE: Criminal liability refers to the legal
Criminal liability refers to the legal responsibility auditors may face for
responsibility auditors may face for committing offenses under corporate or
committing offenses under corporate or

36
Nota Audit 2 FbyHan

securities laws, leading to criminal potential financial losses resulting from legal
proceedings, fines, and imprisonment. actions against them.

2. MAIN POINTS: 2. MAIN POINTS:

• Auditors can be criminally charged for • Auditors and accounting firms employ
various offenses like failure to report non-• various strategies to minimize their liability,
compliance or insider trading under such as rotating audit engagement partners,
corporate or securities laws. restricting non-• audit services for public
• In Malaysia, criminal actions against company audit clients, and implementing
auditors are rare, but if found guilty, auditors firm policies emphasizing auditor
may face substantial fines and imprisonment. independence.
• Other measures include internal control
3. IMPORTANCE: programs mandated by laws like the
• Criminal liability ensures auditors adhere Sarbanes• Oxley Act, which require quality
to legal standards and ethical conduct, reviews of registered public accounting
maintaining integrity in financial reporting firms, and internal reviews such as
and protecting stakeholders' interests. concurring partner reviews and inter• office
• It acts as a deterrent against fraudulent or reviews.
unethical behaviour by auditors, promoting
transparency and trust in financial markets. 3. IMPORTANCE:
• Limitations of liability are crucial for
4. TYPES: protecting auditors and accounting firms
• Failure to report non-• compliance: from financial harm resulting from legal
Auditors can be charged for not reporting actions, ensuring their long• term
violations of the Companies Act 2016, sustainability.
leading to penalties and imprisonment. • These measures also contribute to
• Insider trading: Auditors engaging in maintaining trust and confidence in the audit
illegal trading based on non-• public profession by demonstrating a commitment
information can face criminal charges, to lofty standards of professionalism and
resulting in severe consequences. integrity.

5. SIMPLE EXAMPLE TO UNDERSTAND: 4. TYPES:

• In the case of WorldCom and Arthur • Periodic rotation of audit engagement
Andersen LLP, Arthur Andersen, the external partner.
auditor, failed to detect WorldCom's massive • Prohibition of certain non-• audit
accounting fraud, leading to overstated services for public company audit clients.
earnings of billions of dollars. The SEC • Restriction of other non-• audit services
charged both WorldCom and Arthur for audit clients.
Andersen with accounting fraud. Arthur • Firm policies emphasizing auditor
Andersen faced criminal liability for its independence and requiring signed
failure to uncover the fraud, leading to severe statements of independence.
penalties and loss of reputation. • Internal control programs like quality
reviews mandated by laws such as the
17.4 • Limitations of Liability Sarbanes• Oxley Act.

1. DEFINE: 5. SIMPLE EXAMPLE TO UNDERSTAND:

Limitations of liability refer to measures • Imagine an accounting firm
taken by auditors and accounting firms to implementing policies that require audit
reduce their exposure to legal risks and partners to rotate every few years. This
ensures fresh perspectives and reduces the

37
Nota Audit 2 FbyHan

risk of complacency or familiarity with 5. SIMPLE EXAMPLE TO UNDERSTAND:

clients, which can lead to oversight or • Imagine a group of auditors forming an
negligence. By adhering to such practices, LLP to provide audit services. Each member
the firm aims to minimize its liability invests a certain amount of money into the
exposure and maintain the quality of its audit LLP. If the LLP faces legal claims or
services. financial losses beyond its assets, the
personal assets of individual members are
17.4.1 • Limited Liability Partnerships protected, limiting their liability to the
(LLP) amount of their investment. This setup
encourages auditors to pursue business
1. DEFINE: opportunities and innovation while
Limited Liability Partnerships (LLP) are safeguarding their personal wealth.
corporate business entities that combine the
benefits of limited liability with the
organizational flexibility of traditional 17.4.2 • Limited Liability Agreements
partnerships.
1. DEFINE:
2. MAIN POINTS: Limited Liability Agreements are contracts
• LLPs offer limited liability to their allowed in certain districts, such as the UK
members, meaning their personal assets are under the Companies Act 2006, which
protected from business liabilities beyond enable companies to limit the liability of
their investment in the LLP. their auditors, subject to shareholder
• The LLP itself is liable to the full extent approval.
of its assets, like a company, while the
liability of individual members is limited. 2. MAIN POINTS:
• LLPs must file annual financial • These agreements must be fair and
statements with disclosures, like ordinary reasonable in the circumstances, with the
limited companies, ensuring transparency possibility of a court overriding them if
and accountability. deemed necessary.
• They are typically valid for the current
3. IMPORTANCE: year only and require approval by a
• LLPs provide protection to their resolution of the entity's shareholders.
members' personal assets, encouraging • Fairness and reasonableness are
entrepreneurship and risk• taking without determined by numerous factors including
exposing individuals to excessive financial the auditor's legal and regulatory
risks. responsibilities, contractual obligations, and
• They offer a middle ground between professional standards.
traditional partnerships and corporations,
allowing professionals like auditors to 3. IMPORTANCE:
operate with limited liability while retaining • Limited liability agreements provide a
partnership• like organizational structures. means for companies to manage their risk
exposure by setting reasonable limits on
4. TYPES: auditor liability.
• Limited liability to individual members. • They offer auditors and companies a
• Full liability of the LLP as a separate mechanism to negotiate liability terms,
legal entity. promoting transparency and clarity in their
• Requirement to file annual financial professional relationships.
statements with disclosures.
4. TYPES:

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Nota Audit 2 FbyHan

• Fair and reasonable agreements 3. IMPORTANCE:

determined by legal and regulatory • Promotes confidence in audited financial
responsibilities, contractual obligations, and statements and protects the interests of
professional standards. investors.
• Approval required from the entity's • Regulates the auditing profession
shareholders. through continuous supervision, ensuring
• Validity typically limited to the current adherence to standards and ethical conduct.
year. • Complements good corporate
governance practices in Malaysia.
5. SIMPLE EXAMPLE TO UNDERSTAND:
• Suppose a company engages an auditing 4. TYPES:
firm to review its financial statements. • Implementation of audit oversight
Before commencing the audit, the company policies and programs.
proposes a limited liability agreement to cap • Registration and supervision of auditors,
the auditor's liability for any errors or particularly those auditing PIEs.
omissions detected during the audit process. • Directing the establishment or adoption
This agreement, subject to approval by the of auditing and ethical standards.
company's shareholders, ensures that the • Conducting inspections, inquiries, and
auditor's potential financial exposure is monitoring compliance.
defined and manageable, reducing • Collaborating with relevant authorities
uncertainty and promoting a fair business and oversight bodies.
relationship.
5. SIMPLE EXAMPLE TO UNDERSTAND:
17.5 • Role of the Audit Oversight Board • Think of the AOB as a watchdog
(AOB) ensuring that auditors follow the rules and
maintain lofty standards in their profession.
1. DEFINE: Like a referee in a game, it monitors the
The Audit Oversight Board (AOB) is an actions of auditors, steps in when rules are
entity established under the Securities broken, and works to maintain the integrity
Commission Act 1993 (SCA) in Malaysia to and fairness of the auditing process.
promote effective audit oversight and ensure
confidence in audited financial statements. 22.1 • Malaysian Code on Corporate
Governance (MCCG)
2. MAIN POINTS:
• Responsible for implementing policies 1. DEFINE:
and programs to ensure an effective audit The Malaysian Code on Corporate
oversight system in Malaysia. Governance (MCCG) is a framework
• Registers auditors of Public Interest established in 2000 to promote effective
Entities (PIEs) and directs the Malaysian corporate governance practices in Malaysia,
Institute of Accountants (MIA) to establish influencing listed companies and
or adopt auditing and ethical standards. encouraging adoption by non-• listed entities
• Conducts inspections and monitoring to enhance accountability, transparency, and
programs to assess compliance with auditing sustainability.
and ethical standards.
• Conducts inquiries and imposes 2. MAIN POINTS:
sanctions against auditors failing to comply • Reflects global principles and best
with standards. practices, surpassing minimum statutory
• Cooperates with relevant authorities and requirements.
oversight bodies locally and internationally. • Revised in 2007, 2012, and 2017 to align
with evolving global standards.

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Nota Audit 2 FbyHan

• Applies to listed companies but 22.1.1 • Internal and External Monitoring

encourages adoption by non-• listed entities. Mechanisms
• Requires meaningful explanation in
annual reports regarding governance 1. DEFINE:
practices and alternative approaches. Internal and external monitoring
• Enforces three key principles: mechanisms are structures put in place
strengthening board independence, within a company to oversee its operations,
enhancing board diversity, and transparency ensure compliance with regulations, and
in directors' remuneration. safeguard shareholder interests. They
involve the board of directors, audit
3. IMPORTANCE: committee, and internal and external auditors.
• Raises standards of corporate
governance, promoting investor confidence. 2. MAIN POINTS:
• Enhances accountability, transparency, • Board of Directors: The highest authority
and sustainability of businesses. responsible for overseeing corporate affairs
• Provides guidelines for effective and ensuring effective governance.
governance beyond legal requirements. Functions include promoting good corporate
• Ensures alignment with global standards culture, reviewing management proposals,
to maintain competitiveness. setting strategic plans, supervising
management performance, and establishing
4. TYPES: risk management frameworks.
• Strengthening independence of the board, • Audit Committee: A subcommittee of the
including tenure limits for independent board responsible for overseeing financial
directors. reporting, internal controls, and risk
• Promoting board diversity, particularly management processes. It ensures the
increasing women representation. integrity of financial statements and
• Enhancing transparency in directors' compliance with laws and regulations.
remuneration, requiring detailed disclosure. • Internal and External Auditors: Internal
• Strengthening independence of audit auditors evaluate internal controls and risk
committees. management processes, while external
• Establishing risk management auditors provide an independent assessment
committees and improving shareholder of financial statements and attest to their
participation at general meetings. accuracy.

5. SIMPLE EXAMPLE TO UNDERSTAND: 3. IMPORTANCE:

• Think of the MCCG as a playbook for • Enhances transparency and
companies to ensure they are playing by the accountability in corporate governance.
rules of good governance. Like a set of • Helps identify and mitigate risks to the
guidelines in a game, it outlines how company's operations and reputation.
companies should structure their boards, • Ensures compliance with legal and
manage risks, disclose information, and regulatory requirements.
engage with shareholders. Following these • Protects shareholder interests by
guidelines helps companies build trust with providing oversight and assurance.
investors, protect shareholder interests, and
operate ethically and sustainably. 4. TYPES:
• Internal Monitoring: Conducted by the
board of directors and internal auditors to
ensure effective governance, risk
management, and compliance.

40
Nota Audit 2 FbyHan

• External Monitoring: Conducted by communicates insights, and concerns to

external auditors and regulatory bodies to auditors, and facilitates coordination
provide independent assessments of between internal and external auditors.
financial reporting and compliance.
5. SIMPLE EXAMPLE TO UNDERSTAND: 3. IMPORTANCE:
• Think of internal and external monitoring • Enhances transparency and
mechanisms like referees and umpires in a accountability in financial reporting.
sports game. The board of directors acts as • Provides independent oversight to ensure
referees overseeing the game (company compliance with laws and regulations.
operations), ensuring players (management) • Helps safeguard shareholder interests by
follow the rules (policies and regulations). ensuring the accuracy and reliability of
Internal auditors are like coaches observing financial information.
players' performance (internal controls), • Facilitates effective communication
while external auditors are like impartial between management, auditors, and the
judges verifying the game's fairness board of directors.
(financial statements). Together, they ensure
the game (company) runs smoothly, fairly, 4. TYPES:
and in compliance with the rules, protecting • Internal Oversight: Monitoring
the interests of all involved (shareholders, conducted within the company by the audit
stakeholders). committee to ensure adherence to financial
reporting standards and internal controls.
Audit Committee • External Oversight: Oversight provided
by regulatory bodies and external auditors to
1. DEFINE: ensure compliance with legal and regulatory
The audit committee is a subcommittee of requirements and to provide independent
the board of directors established to oversee assessments of financial reporting.
the accounting and financial reporting
processes of a company, as well as the audits 5. SIMPLE EXAMPLE TO UNDERSTAND:
of its financial statements. It plays a crucial • Imagine the audit committee as the
role in ensuring transparency, integrity, and referees in a sports match. They closely
compliance within the organization. observe the game (company operations) to
ensure that players (management) follow the
2. MAIN POINTS: rules (financial reporting standards) and play
• Role and Responsibilities: The audit fairly. Just like referees communicate with
committee monitors financial reporting, officials and coaches, the audit committee
internal controls, risk management, and communicates with internal and external
governance processes. It reviews financial auditors to address any concerns or issues.
statements to ensure accuracy and fairness, Their goal is to ensure a fair and accurate
provides advice on financial matters, and outcome (financial statements) for the
communicates concerns to internal and benefit of all stakeholders (shareholders,
external auditors. investors, etc.).
• Composition: Typically comprises
independent directors who possess relevant Malaysian Institute of Corporate
skills and financial literacy. All members Governance (MICG)
should collectively possess a wide range of
necessary skills to effectively discharge their 1. DEFINE:
duties. MICG is an organization established to
• Oversight Function: Ensures that promote and encourage the development of
significant matters related to the company's corporate governance practices in Malaysia.
audit and financial statements are addressed,

41
Nota Audit 2 FbyHan

It provides education, training, and resources • Research Initiatives: Conducting studies

to its members and other interested parties. and publishing reports to advance
understanding and knowledge in the field of
2. MAIN POINTS: corporate governance.
• Establishment: Founded in 1998 based
on recommendations by the High-Level 5. SIMPLE EXAMPLE TO UNDERSTAND:
Finance Committee on Corporate • Think of MICG as a hub for learning and
Governance. sharing best practices in how companies
• Membership: Includes key organizations should be run. It is like a school for corporate
such as the Federation of Public Listed governance, where members can attend
Companies, Malaysian Institute of classes, participate in workshops, and access
Accountants, Malaysian Institute of resources to learn how to make their
Certified Public Accountants, Malaysian companies better managed and more
Institute of Chartered Secretaries and trustworthy. Just like how a school helps
Administrators, and Malaysian Institute of students improve their skills and knowledge,
Directors. MICG helps companies improve their
• Activities: Focuses on promoting best governance practices for the benefit of
practices in corporate governance through everyone involved.
education, training, research, and
collaboration with relevant authorities and Auditors' Responsibilities Relating to
regulatory agencies. Fraud
• Objectives: Aims to lead corporate
governance development in Malaysia, 1. DEFINE:
promote academic study and research, Auditors are responsible for detecting
establish partnerships with other governance intentional misstatements (fraud) or
organizations, and provide impartial unintentional errors in financial statements.
guidance to enhance corporate governance. Fraud involves deliberate actions to deceive
users of financial statements, while errors are
3. IMPORTANCE: unintentional mistakes.
• Facilitates the development and adoption
of effective corporate governance practices. 2. MAIN POINTS:
• Enhances transparency, accountability, • Primary Responsibility: While the
and trust in corporate entities. primary responsibility for fraud prevention
• Provides valuable resources and support and detection lies with management and
to corporate stakeholders, including those overseeing governance, auditors play a
members and regulatory agencies. crucial role in obtaining reasonable
• Contributes to the overall stability and assurance that financial statements are free
sustainability of the business environment in from material misstatements, whether
Malaysia. caused by fraud or error.
• Objectives: Auditors aim to identify and
4. TYPES: assess the risks of material misstatement due
• Promotional Activities: Organizing to fraud, obtain sufficient evidence regarding
workshops, seminars, and conferences to these risks, and respond appropriately to any
raise awareness and disseminate best fraud or suspected fraud detected during the
practices. audit.
• Educational Programs: Offering courses, • Types of Fraud: Fraudulent financial
certifications, and training sessions on reporting involves intentional misstatements
corporate governance principles and or omissions in financial statements to
implementation. deceive users. It can include overstatement
of assets and income or understatement of

42
Nota Audit 2 FbyHan

liabilities and expenses. Common techniques organization and is typically conducted for
include recording fictitious entries, personal gain.
manipulating assumptions, and concealing
facts. 2. MAIN POINTS:
• Auditors' Role: Auditors must maintain • Nature of Misappropriation: While the
professional scepticism, questioning amounts involved may not always be
assumptions and critically evaluating material to the financial statements, the loss
evidence. They should develop tailored audit of assets remains a significant concern for
procedures to address specific fraud risks management as it can impact operational
and complexities in transactions. efficiency and financial stability.
• Perpetrators: Misappropriation can occur
3. IMPORTANCE: at lower levels of the organizational
• Enhances the reliability and credibility of hierarchy, but it can also involve
financial statements by detecting and management who may have greater access
preventing fraudulent activities. and ability to conceal such activities.
• Protects stakeholders' interests and • Methods of Misappropriation: Examples
investments by ensuring transparency and include embezzling receipts, stealing
accountability in financial reporting. physical or intellectual property, causing the
• Contributes to maintaining trust and entity to pay for goods or services not
integrity in the financial markets and received, and using company assets for
business environment. personal purposes.
• Concealment: Perpetrators often create
4. TYPES: false records or documents to cover up the
• Fraudulent Financial Reporting: misappropriation and avoid detection.
Intentional misstatements or omissions in
financial statements to deceive users. 3. IMPORTANCE:
• Misappropriation of Assets: Theft or • Protects the entity's resources and
misuse of an entity's assets for personal gain. financial integrity by detecting and
preventing unauthorized use or theft of assets.
5. SIMPLE EXAMPLE TO UNDERSTAND: • Preserves the trust and confidence of
• Imagine a company's manager inflates stakeholders by ensuring that assets are
the company's revenue by recording sales utilized for legitimate business purposes.
that never occurred. This intentional • Safeguards against financial losses and
misstatement, if undetected, could mislead operational disruptions caused by asset
investors and creditors into believing the misappropriation.
company is more profitable than it is.
Auditors, through their scrutiny and 4. TYPES:
verification processes, aim to uncover such • Embezzlement: Misappropriating funds
fraudulent activities and ensure financial or receipts intended for the entity's
statements accurately reflect the company's operations.
true financial position. • Theft of Physical Assets: Stealing
inventory, equipment, or other tangible
Misappropriation of Assets property.
• Fraudulent Payments: Making payments
1. DEFINE: for fictitious goods or services or inflating
Misappropriation of assets involves the prices for personal gain.
unauthorized theft or misuse of an entity's • Misuse of Intellectual Property:
resources, which can include physical assets, Unauthorized disclosure or use of
intellectual property, or financial assets. It proprietary information or technology.
can occur at various levels within an

43
Nota Audit 2 FbyHan

5. SIMPLE EXAMPLE TO UNDERSTAND: 3. IMPORTANCE:

• An employee working in the accounts • Ensures the integrity and reliability of
receivable department siphons off customer financial statements by uncovering material
payments into their personal bank account misstatements resulting from fraud.
instead of depositing them into the • Protects stakeholders' interests by
company's account. To cover up the theft, providing accurate and transparent financial
they manipulate accounting records to make information.
it appear as though the payments were • Enhances trust and confidence in the
properly accounted for. This audit process and financial reporting.
misappropriation of funds, if undetected,
could lead to financial losses for the 4. TYPES:
company and damage its reputation. • Management Fraud: Intentional
Auditors play a vital role in uncovering such misstatements perpetrated by top
fraudulent activities through rigorous management to deceive stakeholders.
examination of financial records and • Employee Fraud: Misappropriation of
controls. assets or other fraudulent activities
conducted by lower• level employees.
Auditing Standards and Fraud Detection • External Fraud: Fraudulent activities
involving parties external to the organization,
1. DEFINE: such as vendors or customers.
Auditing standards, such as ISA 240,
outline the responsibility of auditors to detect 5. SIMPLE EXAMPLE TO UNDERSTAND:
and address material misstatements in an • An auditor conducting a financial
organization's financial statements, statement audit must remain vigilant for
including those resulting from fraud. While signs of potential fraud, such as unusual
management bears the responsibility to transactions, unexplained discrepancies, or
prevent and detect fraud, auditors have a conflicts of interest. For instance, if an
duty to identify and address fraudulent employee is consistently recording fictitious
activities during the audit process. sales to inflate revenue figures, it could
indicate fraudulent financial reporting. By
2. MAIN POINTS: adhering to auditing standards and
• Responsibility Distribution: conducting thorough procedures, auditors
Management is primarily responsible for can identify and address such fraudulent
fraud prevention and detection due to their activities, ensuring the accuracy and
stewardship role over the organization's reliability of financial statements.
resources. Auditors, however, must
diligently detect and address material Auditing Standards for Detecting Fraud
misstatements, whether they result from
intentional fraud or unintentional errors. 1. DEFINE:
• Complexity of Fraud Detection: Auditing standards outline the
Fraudulent activities are often intentional, responsibilities of auditors in identifying and
involve top management, include complex addressing material misstatements in an
transactions, may start small, and are driven organization's financial statements,
by incentives or perceived needs, making including those resulting from fraud. These
their detection challenging for auditors. standards guide auditors in assessing the risk
• Risk Assessment: Auditors must assess of fraud, conducting audit procedures, and
the risk of material misstatement due to fraud communicating findings to relevant
at both the financial statement level and the stakeholders.
assertion level for transactions, balances, and
disclosures, as mandated by ISA 315.

44
Nota Audit 2 FbyHan

2. MAIN POINTS:
• Auditor's Responsibility: Auditors are 4. TYPES:
tasked with detecting material misstatements • Fraudulent Financial Reporting:
in financial statements, whether they arise Intentional misstatements or omissions in
from intentional fraud or unintentional errors. financial statements to deceive users, often
• Characteristics of Fraud: Fraudulent involving manipulation of financial data.
activities are typically intentional, often • Misappropriation of Assets:
involve top management, can be complex, Unauthorized theft or misuse of an entity's
and may start small before escalating. They resources, including physical assets,
are motivated by incentives or perceived intellectual property, or financial assets.
needs.
• Assessing Fraud Risk: Auditors must 5. SIMPLE EXAMPLE TO UNDERSTAND:
assess the risk of fraud at both the financial • An auditor conducting an audit for a
statement level and the assertion level for company notices discrepancies in inventory
transactions, account balances, and records that suggest theft. After further
disclosures. investigation, they uncover evidence of
• Planning and Conducting the Audit: employees colluding to steal inventory for
Auditors must understand the business, personal use. The auditor communicates
evaluate changes in the economy, identify these findings to management and
potential fraud factors, and adjust audit recommends implementing stronger
procedures accordingly to address fraud inventory controls to prevent future
risks. misappropriation.
• Risk Factors for Fraudulent Financial
Reporting: Incentives/pressures, Whistle• blowing.
opportunities for manipulation, and
management's attitude towards financial 1. DEFINE:
reporting can increase the risk of fraudulent Whistle• blowing involves reporting
financial reporting. significant breaches of laws or regulations to
• Risk Factors for Misappropriation of the appropriate authorities. It is a vital
Assets: Financial pressures, weak internal mechanism for uncovering wrongdoing
controls, and management attitudes can within organizations and promoting
contribute to the misappropriation of assets. transparency and accountability.
• Communication and Documentation:
Auditors must communicate findings of 2. MAIN POINTS:
fraud or suspicion to appropriate levels of • Auditors' Role: Auditors, as members of
management and governance and document professional bodies, are obligated by ethical
their assessment of fraud risk and audit standards to report any breaches they
procedures. uncover during their work.
• Legal Protection: In Malaysia, the
3. IMPORTANCE: Securities Commission Act 1993, and the
• Ensures the reliability and integrity of Whistleblower Protection Act 2010
financial reporting by detecting and safeguard the confidentiality and rights of
addressing fraudulent activities. whistle• blowers.
• Protects stakeholders' interests by • Categories Protected: Certain individuals,
providing accurate and transparent financial including auditors, CEOs, and officers
information. responsible for financial statements, are
• Enhances trust in the organization's entitled to additional protection under the
governance and management practices. law.
• Scope of Disclosures: Whistle• blowers
can report various forms of misconduct, such

45
Nota Audit 2 FbyHan

as abuse of authority, violations of laws, and Competition refers to the rivalry among
ethical standards, without needing hard businesses striving to increase profits,
evidence. market share, and sales volume. It is a
• Confidentiality: The identity of whistle• fundamental aspect of market dynamics that
blowers and the information they provide are drives innovation, efficiency, and consumer
kept confidential to prevent retaliation or choice.
harm.
• Legal Safeguards: Whistle• blowers and 2. MAIN POINTS:
those associated with them are shielded from • Legislation: The Competition Act 2010
civil, criminal, or disciplinary actions for in Malaysia aims to promote economic
making disclosures of improper conduct. development by fostering and safeguarding
fair competition in commercial markets. It
3. IMPORTANCE: protects consumer interests and ensures the
• Enhances transparency and efficiency of enterprises.
accountability within organizations. • Regulatory Body: The Malaysia
• Helps prevent and address wrongdoing, Competition Commission (McC),
including financial fraud and unethical established in 2011, enforces the
practices. Competition Act. It oversees compliance,
• Protects whistle• blowers from investigates anti-• competitive practices,
retaliation and ensures their contributions to conducts market reviews, and imposes
uncovering misconduct are valued. penalties on violators.
• Objectives: McC’s role is to ensure free
4. TYPES: and fair competition, which benefits
• Securities Law Protection: Provided consumers, enhances enterprise efficiency,
under the Securities Commission Act 1993, and contributes to overall economic
offering legal safeguards to whistle• blowers development.
in the financial sector. • Authority: McC is empowered to enforce
• Whistleblower Protection Act 2010: competition laws, investigate complaints,
Covers both public and private sectors, conduct market studies, and impose fines on
encouraging disclosures of improper conduct companies violating competition regulations.
and providing comprehensive legal It can also collaborate with other agencies,
protection to whistle• blowers. request information from enterprises, and
perform related functions.
5. SIMPLE EXAMPLE TO UNDERSTAND:
• An auditor working for a company 3. IMPORTANCE:
discovers evidence of financial fraud during • Consumer Welfare: Promotes fair pricing,
an audit. They report this information to the quality, and choice, benefiting consumers by
appropriate authorities under whistle• preventing monopolistic practices and
blowing provisions, ensuring confidentiality ensuring a level playing field.
and legal protection. Subsequently, • Economic Efficiency: Encourages
investigations are conducted, and innovation, efficiency, and productivity
appropriate actions are taken to address the among businesses, driving economic growth
fraud, safeguarding the interests of and development.
stakeholders, and promoting integrity in • Market Integrity: Upholds the integrity
financial reporting. of markets by preventing unfair practices,
fostering trust, and promoting a healthy
Competition business environment.
4. TYPES:
1. DEFINE: • Competition Act 2010: Legislation
aimed at fostering fair competition,

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Nota Audit 2 FbyHan

protecting consumer interests, and resource conservation and operational

promoting economic development. efficiency.
• Malaysia Competition Commission • Risk Mitigation: It helps firms identify
(McC): Regulatory body responsible for and address environmental and social risks
enforcing competition laws, investigating that could impact their business financially,
complaints, and ensuring compliance with fostering better overall business performance.
the Competition Act. • Global Standards: The Global Reporting
Initiative (GRI) framework is widely
5. SIMPLE EXAMPLE TO UNDERSTAND: adopted worldwide, providing a unified
• Imagine a market where multiple standard for sustainability reporting.
smartphone companies compete to sell their • Malaysian Context: Bursa Malaysia
products. The Competition Act ensures that launched a new sustainability framework in
these companies cannot engage in unfair 2015, mandating sustainability reporting for
practices like price• fixing or monopolistic Malaysian• based public listed companies
behaviour. McC oversees this by (PLCs) with a market capitalization over
investigating complaints, conducting market RM2 billion from the fiscal year ending on
reviews, and penalizing companies found or after 31 December 2016.
violating competition laws. As a result,
consumers benefit from a wide range of 3. IMPORTANCE:
choices, fair prices, and innovative products, • Reputation: Enhances company
while businesses strive to improve their reputation by demonstrating commitment to
offerings to stay competitive in the market. sustainability.
• Stakeholder Trust: Builds trust among
Sustainability Reporting investors, employees, and other stakeholders
by providing transparent information about
1. DEFINE: sustainability practices.
Sustainability reporting involves • Financial Access: Improves access to
organizations providing information about capital by attracting socially responsible
their economic, environmental, social, and investors and lenders.
governance performance. It aims to highlight • Operational Efficiency: Promotes
how a company operates sustainably, efficiency and waste reduction, leading to
considering its impact on various cost savings and improved resource
stakeholders and the planet. management.

2. MAIN POINTS: 4. TYPES:

• Purpose: It serves as a comprehensive • Sustainability Reporting: Providing
report on a company's sustainability efforts, information on economic, environmental,
covering aspects like environmental impact, social, and governance performance.
social responsibility, and corporate • Global Reporting Initiative (GRI):
governance. Widely adopted framework for sustainability
• Benefits: Sustainability reporting reporting worldwide.
enhances a company's reputation, meets • Malaysian Sustainability Framework:
employee expectations, improves access to Mandated by Bursa Malaysia for Malaysian•
capital, and promotes efficiency and waste based PLCs with a market capitalization over
reduction. RM2 billion.
• Data Gathering: Companies need to
collect information on processes and impacts 5. SIMPLE EXAMPLE TO UNDERSTAND:
they may not have measured before, leading • Think of a company that produces
to greater transparency and insights for consumer goods. Through sustainability
reporting, it shares details about its efforts to

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Nota Audit 2 FbyHan

reduce carbon emissions, use eco• friendly

packaging, ensure fair labour practices, and
contribute positively to local communities.
This report not only highlights the company's
commitment to sustainability but also helps
investors, employees, and customers make
informed decisions about supporting the
company's products and initiatives.

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Nota Audit 2 FbyHan

CHAPTER 7: GROUP involvement in subsidiaries' audits, and

potential restrictions.
AUDIT AND USING THE
WORK OF OTHERS Importance
• Ensures auditors can perform their duties
effectively.
7.0 Administration and Planning for
• Prevents auditors from accepting
Group Audit
engagements where sufficient evidence
cannot be obtained.
Define
• Protects the auditor's reputation and
Group Audit:
compliance with standards.
• Audit involving a parent company and its
subsidiaries.
Types
• New Engagement: Deciding whether to
Main Point
accept a new group audit.
• Planning: Ensure effective audit through
• Continuing Engagement: Determining if
sufficient evidence, reasonable costs, and
an ongoing audit should continue or if
clear client communication.
withdrawal is necessary.
• Staffing: Address requirements and use of
experts.
•••
• Administration: Organize audit tasks for
efficient execution.
Accepting Appointment Details
Importance
• Ensures comprehensive understanding of
• Evaluate Ability to Obtain Evidence:
the entire group.
Principal auditors must ensure they can be
• Facilitates compliance with auditing
involved in subsidiaries' audits sufficiently.
standards.
• Restrictions by Group Management: If
• Enhances audit effectiveness and
sufficient evidence cannot be obtained,
efficiency.
auditors may need to decline or withdraw
from the engagement.
Types
• New Engagement: Do not accept if
• Component Auditors: Auditors for
sufficient evidence is not obtainable.
subsidiaries.
• Continuing Engagement: Withdraw if
• Specialists: Experts in specific fields.
possible or refuse an opinion if withdrawal is
• Internal Auditors: Internal teams assisting
not an option.
in the audit.
7.1.2 Principal Auditor's Involvement
7.1.1 Accepting Appointment
Define
Principal Auditor's Involvement:
Define
• The extent to which the principal auditor
Accepting Appointment:
participates in auditing subsidiaries.
• The process and considerations for an
auditor to accept an audit engagement.
Main Point
• Understanding Client and Subsidiaries:
Main Point
Essential for effective group audit.
• General Principles: Follows ISA 210 and
• Involvement Extent: Ensures principal
ISA 200 for agreeing to audit terms.
auditor's understanding and evidence
• Additional Considerations: Evaluates
sufficiency.
ability to gather sufficient evidence,

49
Nota Audit 2 FbyHan

Importance • Advise on independence requirements.

• Ensures comprehensive audit coverage. • Coordinate efforts and establish audit
• Facilitates accurate and reliable group arrangements.
financial statements. • Communicate accounting, auditing, and
• Enhances overall audit quality. reporting requirements.
• Document work and conclusions related
Types to other auditors.
• Direct Involvement: Principal auditor
participates directly in subsidiary audits. • Documentation Requirements:
• Indirect Involvement: Principal auditor • Components audited by other auditors.
relies on component auditors but stays • Significance to the overall financial
informed. statements.
• Names of other auditors.
7.2.2 Work of Other Auditors • Procedures and conclusions reached.

Define • Response to Other Auditors' Reports:

Work of Other Auditors: • If work is insufficient, perform additional
• The involvement and evaluation of procedures or issue a qualified
auditors other than the principal auditor in opinion/disclaimer.
the group audit. • Consider modifications if other auditors’
issue or plan to issue a modified report.
Main Point
• Impact on Audit: Assess how other 7.2.3 Related Party Transactions
auditors' work affects the overall audit.
• Professional Competence: Evaluate the Define
competence of other auditors. Related Party Transactions:
• Evidence Adequacy: Ensure sufficient and • Transactions between the reporting entity
appropriate audit evidence from other and a related party that may have control or
auditors' work. considerable influence over the entity.
• Significant Findings: Review significant
findings from other auditors. Main Point
• Related parties include entities or
Importance individuals with control, considerable
• Ensures the reliability and adequacy of influence, or common management with the
audit evidence. reporting entity.
• Facilitates coordination and • These transactions may have higher risks
communication between principal and other of material misstatement compared to
auditors. transactions with unrelated parties.
• Helps in maintaining audit quality and
meeting professional standards. Importance
• Ensures transparency and accuracy in
Types financial reporting.
• Professional Competence Evaluation: • Helps in identifying and mitigating risks of
• Membership in professional fraud and misstatement.
organizations. • Necessary for compliance with financial
• Affiliations with other firms. reporting frameworks.
• Inquiries with peers and bankers.
• Discussions with other auditors. Types
• Control or Influence:
• Principal Auditor Responsibilities:

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Nota Audit 2 FbyHan

• Direct or indirect control over the • Obtain sufficient audit evidence

reporting entity. regarding related party transactions.
• Significant influence over the reporting
entity. • Director's Responsibilities:
• Common control through ownership, • Disclose related party transactions.
family relationships, or key management. • Provide written assurances to auditors
about the completeness and accuracy of
• Audit Objectives: disclosures.
• Understand related party relationships
and transactions. • Audit Engagement Team:
• Identify fraud risk factors related to these • Discuss the nature and extent of related
transactions. party transactions.
• Ensure fair presentation or non-• • Maintain professional scepticism to
misleading disclosures in financial detect potential misstatements.
statements.
• Verify appropriate identification, By addressing these aspects, auditors ensure
accounting, and disclosure of related party that related party transactions are accurately
transactions. reflected in the financial statements,
maintaining the integrity and reliability of
• Auditor's Responsibilities: the audit.
• Obtain written representations from
directors about related party transactions. In the context of auditing related party
• Ensure all related parties and transactions relationships and transactions, auditors
are disclosed. should consider numerous factors and
• Maintain professional scepticism indicators:
regarding potential misstatements.
• Complex Organizational Structure:
Summary of Specific Issues Complex structures may indicate the
presence of related party relationships or
7.2 Specific Issues in Group Audit transactions that need to be identified and
• Principal Auditor: Focuses on supervision, disclosed.
performance, and compliance with standards.
• Work of Other Auditors: Evaluates and • Use of Special• Purpose Entities (SPEs):
incorporates the work of other auditors to SPEs are often used for off• balance sheet
ensure adequate audit evidence. transactions, which may involve related
• Related Party Transactions: Involves parties and require disclosure.
identifying, understanding, and auditing
transactions with related parties to ensure • Inadequate Information Systems: Weak
transparency and compliance. information systems may hinder the
identification and disclosure of related party
Key Points on Related Party Transactions relationships and transactions.

• ISA 550 • Related Parties: Defines and • Records and Documents: Reviewing
outlines audit requirements for related party records and documents can provide evidence
transactions. of related party relationships or transactions
• Audit Procedures: that management may not have disclosed.
• Recognize and assess fraud risks.
• Ensure transactions are fairly presented • Management and Governance Importance:
and disclosed. Understanding how management and
governance view the identification,

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Nota Audit 2 FbyHan

accounting, and disclosure of related party addressed in the group audit report. This
transactions is crucial, especially if related process helps maintain the integrity and
party requirements are established in the accuracy of the consolidated financial
financial reporting framework. statements.

In a group audit scenario, ISA 600 mandates TYPES:

that the group engagement team furnish each 1. Materiality Assessment: Determining if
component auditor with a list of related issues identified at the subsidiary level are
parties provided by group management. This material in the context of the consolidated
list, along with any additional related parties accounts.
known to the group engagement team, serves 2. Reporting Modifications: Deciding
as a reference for the component auditor's whether modifications to the audit report are
inquiries into the entity's related party necessary at both the subsidiary and group
relationships. levels based on the materiality of the
findings.
In situations where a subsidiary is incurring 3. Documentation: Thoroughly documenting
losses but is expected to continue operating all discussions and decisions made between
with the support of the parent company, principal auditors and other auditors
auditors may request a letter of support from regarding audit findings to maintain
the parent company. This letter typically transparency and accountability.
confirms two key assurances:

• Financial Support: The parent company DEFINE:

commits to financially supporting its Using the Work of Others
subsidiaries, ensuring that any debts incurred
by the subsidiary will be settled. MAIN POINT:
Using the work of others in audit
• Inter• Company Loans: The parent engagements involves leveraging resources,
company agrees not to seek repayment of expertise, and personnel from within or
inter• company loans or balances until all outside the auditing firm to enhance the
other creditors have been satisfied. efficiency and effectiveness of the audit
process.
These assurances provide auditors with
evidence of the parent company's IMPORTANCE:
commitment to backing up its subsidiaries It allows auditors to allocate resources
and sustaining their operations. effectively, especially in high• risk areas or
complex matters, ensuring that the audit is
DEFINE: conducted with the necessary technical
Audit Report for Subsidiaries proficiency and expertise. This approach
helps streamline the audit process and
MAIN POINT: optimize resource utilization.
The audit report for subsidiaries involves
considering significant findings discovered TYPES:
during the subsidiary audit and determining 1. Resource Allocation: Determining the
their impact on the overall group audit specific areas where additional resources or
conclusion. expertise are needed based on factors such as
engagement size, complexity, and level of
IMPORTANCE: risk.
It ensures that material issues identified at 2. Personnel Selection: Identifying
the subsidiary level are appropriately experienced team members or experts with

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the requisite technical training and • Actuaries: Evaluate liabilities related to

proficiency to address specific audit pension schemes, insurance contracts, or
requirements effectively. other financial obligations.
3. Timing Considerations: Planning the • Geologists, stockbrokers, lawyers, etc.:
timing of the work to be performed to ensure Provide expertise in various specialized
resources are allocated appropriately and areas as needed by the auditor.
audit objectives are met within the specified
timeline. IMPORTANCE OF EXPERTS:
• Assisting in obtaining an understanding of
DEFINE: the entity and its environment, including
Work of an Expert internal controls.
• Identifying and assessing risks of material
MAIN POINT: misstatements.
In auditing, the work of an expert refers to • Designing and performing further audit
leveraging the specialized knowledge and procedures.
skills of individuals or organizations outside • Evaluating the sufficiency and
the auditing firm to obtain sufficient and appropriateness of audit evidence obtained.
appropriate audit evidence in areas beyond
the auditor's expertise, such as valuation, CONSIDERATIONS IN SELECTING
legal matters, or technical assessments. EXPERTS:
• Competence and technical qualifications of
IMPORTANCE: the specialist.
Utilizing the expertise of specialists • Experience in the relevant field.
enhances the audit process by providing • Independence from the audited entity.
valuable insights, increasing the accuracy of
assessments, and ensuring compliance with PROCEDURES TO EVALUATE
auditing standards. Experts contribute to a EXPERT'S WORK:
thorough understanding of complex issues, • Inquiries of the expert.
helping auditors make informed decisions • Reviewing working papers and reports.
and reach reliable conclusions. • Corroborative procedures such as
observing the expert's work, examining
TYPES: published data, confirming relevant matters
1. Internal Expert: A partner or staff member with third parties, and performing detailed
within the auditor's firm or network firm analytical procedures.
possessing specialized knowledge relevant
to the audit engagement. RESPONSIBILITY AND CHALLENGES:
2. External Expert: An individual or • The auditor retains sole responsibility for
organization external to the auditor's firm the audit opinion, regardless of using the
with expertise in specific fields, such as work of an expert.
valuation, actuarial science, or legal matters. • Evaluating the adequacy of the expert's
work may pose challenges due to differences
EXAMPLES OF SPECIALISTS: in expertise and experience.
• Valuers: Assess the value of non-• current • Auditors must exercise professional
assets, complex financial instruments, works judgment and consider alternative courses of
of art, or antiques. action if unsatisfied with the expert's work.
• Quantity Surveyors: Determine the value
of work done on long• term contracts or DEFINE:
construction projects. Work of Internal Auditors

MAIN POINT:

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Nota Audit 2 FbyHan

The work of internal auditors refers to the EXAMPLES OF INTERNAL AUDIT

activities performed by an entity's internal FUNCTIONS USED BY EXTERNAL
audit function to evaluate and improve the AUDITORS:
effectiveness of the entity's governance, risk • Evaluating the effectiveness of controls.
management, and internal control processes. • Conducting substantive procedures
External auditors may consider utilizing the involving limited judgment.
work of internal auditors to inform their own • Observing inventory counts.
audit procedures. • Tracing transactions through relevant
information systems.
IMPORTANCE: • Testing compliance with regulatory
Utilizing the work of internal auditors can requirements.
enhance the efficiency and effectiveness of
external audit procedures, potentially EVALUATION BY EXTERNAL
reducing the extent of audit work required. AUDITORS:
However, external auditors must carefully • Making inquiries of internal audit
assess the competence, objectivity, and personnel.
quality of the internal audit function to • Observing internal audit procedures.
determine the extent to which they can rely • Reviewing internal audit work programs
on their work. and working papers to assess quality and
adequacy.
TYPES: • Considering the level of objectivity,
1. Assurance Activities: Internal audit competence, and quality control of the
functions perform assurance activities to internal audit function when deciding on
evaluate the reliability and effectiveness of reliance.
the entity's internal control systems.
2. Consulting Activities: Internal auditors DOCUMENTATION:
may also provide consulting services aimed If external auditors decide to use the work of
at improving the entity's governance, risk internal auditors, audit documentation
management, and internal control processes. should include an evaluation of the internal
audit function's objectivity, competency, and
CRITERIA FOR ASSESSMENT: quality control, details of the work utilized,
• Organizational Status: Internal auditors and audit procedures performed to assess the
should report to the highest level of adequacy of the internal audit work.
management and be free from operational
responsibilities to maintain independence.
• Scope of Function: The nature and extent
of activities performed by the internal audit
function, including management's response
to audit recommendations.
• Technical Competence: Internal auditors
should possess adequate training, skills, and
expertise to perform their responsibilities
effectively.
• Due Professional Care: Internal audit work
should be carefully planned, executed,
supervised, reviewed, and documented to
ensure quality.

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CHAPTER 8: information, aiding stakeholders in making

informed decisions.
ASSURANCE AND NON-• • Trust and Credibility: Provides confidence
ASSURANCE RELATED to users about the accuracy and reliability of
the information.
• Regulatory Compliance: Helps ensure that
INTRODUCTION
organizations comply with regulatory
requirements.
Define:
• Broad Applicability: Assurance services
Assurance services are independent
cover a wide range of areas beyond
professional services provided by accounting
traditional financial audits, including IT
firms to improve the quality of information
systems, product quality, and operational
or its context for decision• makers. These
processes.
services can involve assorted items, from
financial statements to computer system
Types:
integrity, product quality, or compliance with
1. Special Purpose Audit: Audits focused on
regulations.
specific areas or criteria.
2. Assurance Level for Related Services:
Main Points:
Assurance on processes related to financial
1. Assurance Services Definition:
and non-• financial information.
Independent professional services enhancing
3. Due Diligence Review: Assessment of a
the quality of information for decision•
company's financial health, often during
makers.
mergers and acquisitions.
2. Key Components of Assurance Services:
4. Forensic Audit: Investigation of financial
• Information or process being assured.
discrepancies, fraud, or compliance issues.
• Users who benefit from the assurance.
5. Review Engagement: Less extensive than
• Assurance service providers.
an audit, providing limited assurance on
3. Assurance Services in Malaysia:
financial statements.
• Offered by both regional/local CPA firms
and larger public accounting firms.
Simple Example to Understand:
• Larger firms do not provide consulting
• Scenario: A company wants to ensure its
services to their publicly traded audit clients.
financial data is accurate and dependable for
4. International Framework for Assurance
investors.
Engagements:
• Assurance Service Provided: An
• Issued by the IAASB in 2004.
accounting firm conducts a review
• Provides a reference for all assurance
engagement, examining the financial
engagements.
statements to provide limited assurance that
5. Levels of Engagements in Malaysia:
there are no material modifications needed.
• Examination of Prospective Financial
• Outcome: Investors gain confidence in the
Information (ISAE 3400)
financial statements, helping them make
• Engagements to Review Financial
informed investment decisions.
Statements (ISRE 2400)
• Engagements to Perform Agreed• upon
By understanding these key aspects of
Procedures (ISRS 4400)
assurance services, stakeholders can
• Engagements to Compile Financial
appreciate the value and importance of these
Information (ISRS 4410)
professional services in enhancing the
quality and reliability of information for
Importance:
better decision• making.
• Enhances Decision• Making: Assurance
services improve the reliability of

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Special Purpose Audit • Audits of Summarized Financial

Statements
1. Define:
A Special Purpose Audit is an audit 5. Simple Example to Understand:
conducted on financial statements or specific • Scenario: A company enters a contract that
elements of financial statements prepared requires an annual audit of its compliance
using a framework other than general• with specific financial covenants.
purpose accounting frameworks. These • Special Purpose Audit: An auditor is
audits are tailored to meet specific needs, engaged to verify the company's compliance
such as compliance with contractual with these financial covenants and reports
agreements or reporting on specific accounts the findings.
or items. • Outcome: The auditor issues a report
confirming whether the company has met the
2. Main Points: contractual requirements, providing
• Objective: Address special considerations assurance to the contracting parties.
relevant to the acceptance, planning,
performance, and reporting of the audit. Key Points in a Special Purpose Audit
• Client Agreement: Ensure clarity with the
client on the nature and scope of the audit Define:
and the report format. A Special Purpose Audit focuses on financial
• Understanding Purpose: Auditor must statements or specific elements prepared
understand the purpose and intended users of using a unique accounting framework
the financial information. tailored for specific needs or users.
• Reporting Requirements: Adjust the report
format to comply with auditing standards Main Points:
and the special purpose framework. 1. Objective: Address special considerations
• Agreement Interpretation: Disclose in planning, performing, and reporting the
significant interpretations of agreements in audit.
the financial information. 2. Client Agreement: Clearly define the
nature, scope, and format of the audit with
3. Importance: the client.
• Tailored Information: Provides 3. Understanding Purpose: Understand the
stakeholders with information tailored to purpose and intended users of the financial
specific needs and purposes. information.
• Compliance: Ensures compliance with 4. Reporting Requirements: Ensure the audit
contractual agreements or other specific report complies with the special purpose
requirements. framework and auditing standards.
• User Awareness: Alerts users that the 5. Agreement Interpretation: Disclose
financial statements are prepared under a significant interpretations in the financial
special purpose framework, which may not information.
be suitable for other uses.
Importance:
4. Types: • Provides stakeholders with information
• Audits of Financial Statements Prepared on tailored to specific needs.
an Other Comprehensive Basis of • Ensures compliance with contractual or
Accounting (OCBOA) specific requirements.
• Audits of Specified Elements, Accounts, or • Alerts users that the financial statements
Items may not be suitable for other purposes.
• Audits of Compliance with Contractual
Agreements Types:

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Nota Audit 2 FbyHan

1. Audits of Financial Statements on • Risk Reduction: Identifies and mitigates

OCBOA. risks to an acceptable level, ensuring the
2. Audits of Specified Elements, Accounts, reliability of the information.
or Items. • Compliance: Ensures that the information
3. Audits of Compliance with Contractual meets specific criteria and regulatory
Agreements. requirements.
4. Audits of Summarized Financial
Statements. 4. Types:
• Reasonable Assurance Engagement:
Simple Example to Understand: • Example: Full audit of financial
• A company must verify compliance with statements.
financial covenants annually. • Objective: To provide a positive opinion
• An auditor checks compliance and reports by reducing engagement risk to a low level.
findings.
• The auditor’s report confirms compliance, • Limited Assurance Engagement:
providing assurance to stakeholders. • Example: Review of financial statements.
• Objective: To provide a negative
assurance by performing fewer procedures
Assurance Level for Related Services than a full audit.

1. Define: 5. Simple Example to Understand:

The level of assurance indicates the degree • Reasonable Assurance Example:
of confidence provided to users about the • A company undergoes a full audit of its
reliability of the subject matter under review. annual financial statements. The auditor
There are two main levels of assurance: conducts extensive testing and verification
reasonable assurance and limited assurance. of the financial data and provides a positive
opinion that the financial statements are free
2. Main Points: from material misstatement.
• Reasonable Assurance:
• Provides an elevated level of confidence, • Limited Assurance Example:
but not absolute certainty. • A company requests a review of its
• Involves thorough procedures to reduce quarterly financial statements. The auditor
risk to a low level. performs limited procedures, such as inquiry
• Conclusion is expressed in a positive and analytical review, and provides a
form (e.g., "In our opinion, the financial negative assurance, stating that nothing has
statements present fairly, in all material come to their attention that indicates the
respects..."). financial statements are materially misstated.

• Limited Assurance: Key Points in Assurance Levels for Related

• Provides a moderate level of confidence. Services
• Involves less extensive procedures than
reasonable assurance. Define:
• Conclusion is expressed in a negative Assurance levels convey the degree of
form (e.g., "Nothing has come to our confidence in the reliability of the subject
attention that causes us to believe..."). matter. There are two levels: reasonable
assurance (high confidence) and limited
3. Importance: assurance (moderate confidence).
• User Confidence: Helps users of financial
information make informed decisions based Main Points:
on the level of assurance provided. 1. Reasonable Assurance:

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Nota Audit 2 FbyHan

• High but not absolute confidence. • Subjective Nature: The reports can vary
• Extensive procedures. based on the specifics of the engagement and
• Positive conclusion. professional conducting it.
2. Limited Assurance: • Professional Involvement: Can involve
• Moderate confidence. accountants, actuaries, surveyors, lawyers,
• Fewer procedures. and other experts.
• Negative conclusion.
3. Importance:
Importance: • Informed Decision• Making: Helps clients
• Provides user confidence in financial make informed decisions regarding
information. investments, mergers, or acquisitions.
• Reduces risk to acceptable levels. • Risk Management: Identifies potential
• Ensures compliance with criteria and risks and liabilities associated with the target
regulations. organization.
• Strategic Planning: Provides crucial
Types: information for planning and executing
1. Reasonable Assurance Engagement: business strategies.
• Full audit of financial statements.
• Positive opinion. 4. Types:
2. Limited Assurance Engagement: • Assurance Engagement: Provides a formal
• Review of financial statements. opinion on the findings of the due diligence
• Negative opinion. review.
• Non-• Assurance Engagement: Provides
Simple Example to Understand: findings and insights without a formal
• Reasonable Assurance: A full audit opinion, often used for internal decision•
provides high confidence that financial making.
statements are accurate.
• Limited Assurance: A review gives 5. Simple Example to Understand:
moderate confidence, indicating no key • Example: A company is considering
issues found with limited procedures. acquiring another business. They hire an
accounting firm to perform a due diligence
Due Diligence Review review. The accounting firm examines the
target company's financial statements, legal
1. Define: matters, and operational processes. The
A due diligence review is an investigation or report highlights potential risks, such as
audit of a potential investment or product to outstanding legal disputes and discrepancies
confirm all facts, such as reviewing financial in financial records. This information helps
records. It can be either an assurance or non- the acquiring company decide whether to
• assurance engagement and is commonly proceed with the acquisition and negotiate
used in mergers and acquisitions. terms accordingly.

2. Main Points: Key Points for Due Diligence Review

• Engagement Letter: Specifies the scope of
work, time, and expectations. Define:
• Inquiries and Investigations: Focuses on A due diligence review involves a thorough
various aspects of the target organization, investigation into various aspects of an
such as financial accounts, operations, and organization that a client is interested in
legal matters. acquiring or investing in. It can be assurance
or non-• assurance based.

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Nota Audit 2 FbyHan

Main Points: 1. Accepting the Assignment: Initiated with

1. Engagement Letter: Defines the scope and a letter of engagement.
time of the work. 2. Planning the Work: Strategizing the
2. Inquiries and Investigations: Covers approach.
financial, operational, and legal aspects. 3. Gathering Evidence: Collecting relevant
3. Subjective Nature: Reports can vary data and documents.
widely. 4. Reporting: Compiling findings into a
4. Professional Involvement: May involve report.
multiple types of professionals. 5. Court Proceedings: Presenting findings
in court if necessary.
Importance:
• Informed Decisions: Assists clients in 3. Importance:
making well• informed investment decisions. • Legal Evidence: Provides crucial evidence
• Risk Identification: Helps identify and for legal proceedings.
assess potential risks. • Fraud Detection: Identifies and documents
• Strategic Insights: Provides critical instances of fraud or misconduct.
information for business strategy and • Dispute Resolution: Helps resolve
planning. shareholder, partnership, and economic
disputes.
Types: • Expert Testimony: Assists courts by
1. Assurance Engagement: Formal opinion providing expert analysis and testimony.
provided.
2. Non-• Assurance Engagement: Informal 4. Types:
findings for internal use. • Fraud Investigation: Examining financial
records to uncover fraudulent activities.
Simple Example to Understand: • Criminal Investigation: Working with law
• Example: A company hires an accounting enforcement on financial crimes.
firm to review the financial health and legal • Dispute Resolution: Analysing financial
status of a business they plan to acquire. The data to resolve business disputes.
review identifies financial inconsistencies • Economic Loss Assessment: Evaluating
and potential legal issues, guiding the financial damages for litigation purposes.
company’s acquisition strategy.
5. Simple Example to Understand:
Forensic Audit • Example: A company suspects an
employee of embezzling funds. They hire a
1. Define: forensic auditor to investigate. The auditor
Forensic auditing, also known as forensic reviews financial records, identifies
accounting, involves examining financial suspicious transactions, and gathers
records to gather information that can be evidence. The findings are compiled into a
used as legal evidence in court cases. It report, which is used in court to prosecute the
combines investigative skills with employee.
accounting and business expertise.
Key Points for Forensic Audit
2. Main Points:
• Purpose: To develop information for legal Define:
evidence or court use. Forensic auditing is the examination of
• Situations: Used in cases of fraud, criminal financial records to gather information for
investigations, disputes, and economic losses. legal evidence, often used in court cases. It
• Stages: integrates investigative skills with
accounting and business knowledge.

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Nota Audit 2 FbyHan

Main Points:
1. Purpose: Legal evidence and expert court 2. Main Points:
testimony. • Limited Assurance: Provides a lower level
2. Situations: Fraud, criminal investigations, of assurance compared to an audit.
disputes, economic losses. • Professional Judgment: The extent of
3. Stages: evidence and procedures depends on the
• Accepting the assignment (letter of auditor's professional judgment.
engagement) • Engagement Letter: Establishes
• Planning the work understanding and terms of service between
• Gathering evidence the accountant and the client.
• Reporting • Negative Assurance: The accountant states
• Court proceedings whether anything came to their attention that
suggests the financial statements are not true
Importance: and fair.
• Legal Evidence: Supports court cases. • Independence: The accountant must
• Fraud Detection: Identifies fraud. remain independent of the client.
• Dispute Resolution: Helps resolve disputes.
• Expert Testimony: Provides expert court 3. Importance:
analysis. • Cost• Effective: Less expensive than a full
audit, suitable for small entities with no
Types: significant regulatory requirements.
1. Fraud Investigation: Identifies fraud. • Sufficient Assurance: Provides adequate
2. Criminal Investigation: Assists law assurance for stakeholders when a full audit
enforcement. is not necessary.
3. Dispute Resolution: Analyses data for • Flexibility: Tailored to the specific needs
disputes. of the client and the engagement.
4. Economic Loss Assessment: Evaluates
financial damages. 4. Types:
1. Standard Review Engagement: Reviews
Simple Example to Understand: annual financial statements and provides
• Example: A company hires a forensic limited assurance.
auditor to investigate suspected employee 2. Interim Financial Review: Reviews
embezzlement. The auditor uncovers interim financial information (e.g., quarterly
fraudulent transactions, compiles a report, reports) for public companies under ISRE
and presents the findings in court. 2410, typically performed by the entity’s
auditor.

Review Engagement 5. Simple Example to Understand:

• Example: A small business owned by a
1. Define: partnership wants to provide its investors
A review engagement is a type of service with some assurance about its financial
where an accountant provides limited statements without incurring the cost of a full
assurance on financial statements, indicating audit. They hire an accountant to perform a
whether anything has come to their attention review engagement. The accountant
that causes them to believe the statements are performs analytical procedures, makes
not prepared in accordance with approved inquiries of management, and reviews the
accounting standards. It is less thorough than financial statements. The accountant then
an audit and involves fewer procedures. issues a report stating that nothing came to
their attention that causes them to believe the

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Nota Audit 2 FbyHan

financial statements are not prepared in statements are in accordance with

accordance with accounting standards. accounting standards.

Key Points for Review Engagement

Non-• Assurance Related Services
Define:
A review engagement provides limited 1. Define:
assurance on financial statements, indicating Non-• assurance services are professional
if anything has come to the accountant’s services provided by accountants that do not
attention that would suggest the statements involve offering any form of assurance on
are not true and fair. It involves fewer the subject matter. Instead, these services
procedures than an audit. typically involve consultation, advice, or
other professional tasks where the
Main Points: accountant's expertise is applied but without
1. Limited Assurance: Lower level of the requirement to provide an opinion on the
assurance compared to an audit. reliability of information.
2. Professional Judgment: Extent of evidence
and procedures depend on the auditor’s 2. Main Points:
judgment. • No Assurance Provided: These services do
3. Engagement Letter: Establishes the terms not require the accountant to provide any
of service. form of assurance on the information or
4. Negative Assurance: The accountant states processes involved.
if anything suggests the financial statements • Diverse Services: Includes a variety of
are not true and fair. services like consultations, secretarial
5. Independence: The accountant must be services, agreed• upon procedures,
independent of the client. compilation, and taxation.
• Expertise Application: Utilizes the
Importance: accountant's skills and knowledge in various
• Cost• Effective: Less expensive than a full fields without the need to gather extensive
audit. evidence.
• Sufficient Assurance: Adequate assurance • Different Reporting Requirements: The
for stakeholders. reports produced for non-• assurance
• Flexibility: Tailored to the client's needs. engagements are different and do not contain
assurance• related language.
Types:
1. Standard Review Engagement: Reviews 3. Importance:
annual financial statements. • Cost• Effective Solutions: Non-• assurance
2. Interim Financial Review: Reviews services can be more affordable for clients
interim financial information for public who do not need high• level assurance.
companies. • Broad Application: These services cater to
a wide range of needs in various industries,
Simple Example to Understand: including banking, commerce, and education.
• Example: A partnership hires an • Flexibility: Offers clients the flexibility to
accountant for a review engagement to engage accountants for specific tasks
assure investors about their financial without the additional cost and complexity of
statements without the expense of a full audit. assurance engagements.
The accountant performs inquiries and
analytical procedures, then issues a report 4. Types:
providing limited assurance that the financial

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Nota Audit 2 FbyHan

1. Consultations: Providing expert advice on practical experience in various fields like

financial planning, business strategies, or audits, taxation, and corporate advisory.
operational improvements. • Regulatory Compliance: Helps clients
2. Secretarial Services: Managing company meet specific criteria under regulatory
secretarial duties, such as filing statutory frameworks such as the Malaysian Code on
returns and maintaining corporate records. Corporate Governance and Bursa Malaysia's
3. Agreed• Upon Procedures: Performing Listing Requirements.
specific procedures agreed upon by the client • Wide Scope: Can cover areas such as
and reporting factual findings without internal control and risk control reporting,
forming an opinion. merger and acquisition planning, and due
4. Compilation: Assisting in the preparation diligence for initial public offerings (IPOs).
of financial statements based on information • No Assurance Required: These services do
provided by the client, without offering any not require the accountant to provide
assurance on the statements. assurance; rather, they offer guidance and
5. Taxation: Offering tax planning, recommendations based on expertise.
compliance, and advisory services to
individuals and businesses. 3. Importance:
• Strategic Guidance: Provides clients with
5. Simple Example to Understand: critical insights and strategic advice to
• Example: A small business owner wants to navigate complex business and regulatory
prepare financial statements for internal use environments.
but does not need an audit. They hire an • Compliance: Assists clients in complying
accountant to perform a compilation with various regulatory requirements,
engagement. The accountant takes the ensuring they meet legal and listing
financial information provided by the standards.
business owner and compiles it into a set of • Informed Decision• Making: Helps
financial statements without verifying the businesses make informed decisions during
accuracy of the information. The accountant mergers, acquisitions, and IPOs by offering
then issues a report stating that they have not expert advice and due diligence support.
audited or reviewed the statements and, • Flexibility: Offers tailored solutions
therefore, do not express any assurance on without the need for the rigorous evidence•
them. This allows the business owner to have gathering required in assurance engagements.
organized financial statements at a lower
cost compared to an audit. 4. Types:
1. Internal Control and Risk Control
Consultations Reporting: Advising on the implementation
and reporting of internal controls and risk
1. Define: management practices.
Consultations are non-• audit services 2. Merger and Acquisition Planning:
provided by accountants who use their Providing strategic advice and planning
expertise to advise clients on a range of support for mergers and acquisitions.
issues, including internal controls, risk 3. Compliance Advisory: Assisting with
management, mergers and acquisitions, and compliance to the Malaysian Code on
regulatory compliance. These services do not Corporate Governance and Bursa Malaysia’s
involve assurance but rather focus on Listing Requirements.
providing professional advice and solutions. 4. Due Diligence for IPOs: Offering
independent advice and support in the due
2. Main Points: diligence process for companies planning to
• Expert Advice: Involves offering go public.
professional advice based on extensive

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5. Simple Example to Understand: legal penalties and ensuring smooth

• Example: A publicly listed company needs operation.
to enhance its internal controls to comply • Corporate Governance: Supports good
with the Malaysian Code on Corporate corporate governance practices by
Governance. The company hires an maintaining accurate records and facilitating
experienced accountant to review its current effective meetings.
internal control systems and provide • Professional Expertise: Provides expert
recommendations for improvements. The advice on business structures and legal
accountant examines the company's compliance, helping companies navigate
processes, identifies weaknesses, and regulatory requirements.
suggests practical enhancements to meet • Administrative Efficiency: Streamlines
regulatory standards. This consultation helps administrative processes, allowing
the company strengthen its internal controls companies to focus on core business
and ensures compliance with governance activities.
requirements, without the accountant
needing to provide an assurance report. 4. Types:
1. Advisory Services: Advising on business
and organizational structures.
Secretarial Services 2. Company Incorporation: Assisting in the
incorporation of new companies under the
1. Define: Companies Act 2016.
Secretarial services involve professional 3. Setting Up Partnerships: Establishing
assistance provided by company secretaries limited liability partnerships.
to ensure that companies comply with 4. Record Maintenance: Keeping statutory
statutory requirements under the Companies records and minute books.
Act 2016. This includes maintaining 5. Meeting Facilitation: Attending and
corporate records, filing statutory returns, preparing minutes for directors' and
and advising on legal compliance and shareholders' meetings.
business structures. 6. Compliance Services: Filing statutory
returns and other compliance• related
2. Main Points: services.
• Compliance Assistance: Helps companies 7. Registered Office: Providing company
comply with legal requirements under the secretaries and registered office facilities.
Companies Act 2016. 8. Liquidation: Assisting in the liquidation
• Mandatory Role: Every company in process of companies.
Malaysia must appoint at least one company 9. Business Conversion: Converting from a
secretary within 30 days of incorporation. sole proprietorship or partnership to a private
• Professional Requirement: Company limited company.
secretaries must be members of a recognized
professional body or licensed by the 5. Simple Example to Understand:
Companies Commission of Malaysia (CCM). • Example: A newly formed tech startup in
• Range of Services: Includes business Malaysia needs to comply with the
advisory, company incorporation, statutory Companies Act 2016. They hire a company
record maintenance, meeting facilitation, secretary from an accounting firm to manage
and filing statutory returns. their compliance needs. The company
secretary assists with incorporating the
3. Importance: startup, maintaining statutory records, and
• Legal Compliance: Ensures companies filing necessary returns with the Companies
adhere to statutory obligations, avoiding Commission of Malaysia. Additionally, the
company secretary attends board meetings

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and prepares the minutes. This ensures the • Financial Information: Procedures applied
startup meets all legal requirements without to financial statements or specific financial
the founders having to navigate complex data.
regulations themselves. • Non-• financial Information: Procedures
applied to non-• financial data, such as
operational metrics or compliance• related
Agreed• upon Procedures. information.

1. Define: 5. Simple Example to Understand:

An agreed• upon procedure engagement • Example: A company undergoing a
involves specific audit procedures agreed financial restructuring engages an
upon by the auditor and management or a accountant to perform agreed• upon
third• party user. It focuses on performing procedures on its financial records. The
predetermined procedures on financial or agreed procedures include verifying the
non-• financial information to provide accuracy of revenue calculations, confirming
factual findings without expressing the existence of certain assets, and analysing
assurance. expense patterns. The accountant conducts
these procedures and presents a report
2. Main Points: detailing the findings, including any
• Scope: Limited to specific procedures discrepancies or exceptions identified during
agreed upon by all parties involved. the review. This report helps stakeholders
• Nature: Not considered an audit or review; gain insights into specific financial aspects
no assurance is provided. of the company's operations without
• Report Emphasis: Focuses on procedures providing an overall assurance on the
performed and factual findings. financial statements.
• International Standard: Governed by the
International Standard on Related Services Compilation
(ISRS) 4400.
• Engagement Letter: Specifies the nature, 1. Define:
purpose, procedures, and limitations of the Compilation engagements involve
engagement. accountants preparing financial statements
or other financial information based on data
3. Importance: provided by the client. It does not involve an
• Tailored Engagement: Allows assessment of the reliability or completeness
customization of audit procedures based on of the information, and no assurance is
specific needs and objectives. provided on the compiled statements.
• Focused Approach: Targets specific areas
or items of interest, providing detailed 2. Main Points:
insights into identified issues. • Nature: Preparation of financial statements
• Flexibility: Offers flexibility in the choice based on client• provided data.
and extent of procedures to be performed, • Scope: Typically performed for small
depending on the requirements of entities lacking accounting personnel.
stakeholders. • Audience: Prepared statements are
• Transparency: Enhances transparency by primarily for internal use or presentation to
clearly outlining the procedures performed third parties.
and the findings obtained. • Responsibility: Management remains
responsible for the accuracy and
4. Types: completeness of the financial information.

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• Regulation: Governed by ISRS 4410 • the financial statements, disclosing any

Engagements to Compile Financial departures from accounting standards or lack
Statements. of independence if applicable. If the
• Procedures: Limited audit• type accountant identifies errors or incomplete
procedures may be performed, such as information, they request clarification from
analytical review and inquiries of the client or withdraw from the engagement
management. if necessary.

3. Importance:
• Financial Reporting: Provides small TAXATION
entities with organized financial statements 1. DEFINE:
for internal use and presentation to Taxation services involve providing advice
stakeholders. and assistance to individuals and businesses
• Compliance: Helps entities meet regarding their tax obligations and
regulatory requirements for financial compliance with tax laws.
reporting without the need for a full audit.
• Efficiency: Saves time and resources for 2. MAIN POINTS:
entities with limited accounting personnel by • Taxation services are regulated by laws
outsourcing the preparation of financial such as the Accountants Act 1967 and the
statements. Income Tax Act 1967.
• Transparency: Encourages transparency by • Professionals providing taxation services
disclosing any departures from reporting need to be registered as chartered
frameworks or lack of independence in the accountants and obtain a tax license from the
compilation report. Inland Revenue Board of Malaysia (IRB).
• Responsibilities of tax agents include
4. Types: advising on record• keeping, assisting with
• Compilation with Full Disclosures: tax returns, and representing clients during
Includes all required disclosures in audits, investigations, and appeals.
accordance with accounting standards.
• Compilation Omitting Substantially All 3. IMPORTANCE:
Disclosures: Excludes most disclosures but • Taxation services ensure that individuals
notes the omission in the report. and businesses comply with tax laws and
• Compilation Departing from Approved regulations.
Accounting Standards: Discloses any • Proper tax planning and compliance help
departures from accounting standards within clients minimize tax liabilities and avoid
the report. penalties.
• Compilation without Independence: If the • Tax advisors play a crucial role in
accountant lacks independence from the representing clients' interests and ensuring
client, it is disclosed in a separate paragraph fair treatment in dealings with tax authorities.
of the report.
4. TYPES:
5. Simple Example to Understand: • Tax advisory: Providing guidance on tax
• Example: A small business owner engages planning, compliance, and strategies to
an accountant to compile financial minimize tax liabilities.
statements for their company. The • Tax consultancy: Offering specialized
accountant gathers the financial data advice on complex tax matters, such as
provided by the client, organizes it into international taxation, mergers, and
proper financial statement format, and acquisitions.
presents the compiled statements to the
owner. The compilation report accompanies

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• Tax representation: Representing clients

during audits, investigations, appeals, and
negotiations with tax authorities.

5. SIMPLE EXAMPLE TO UNDERSTAND:

• Imagine a small business owner seeking
advice on how to optimize their tax
deductions to reduce their taxable income. A
tax advisor could help them identify eligible
expenses and deductions, ensuring they pay
the correct amount of tax while maximizing
their tax benefits. If the business faces a tax
audit, the tax agent would represent them,
ensuring their rights are protected and
helping them navigate the audit process to
achieve a fair outcome.

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