Week 1:

Current Issues in Auditing,

Audit Responsibilities and
Objectives
Current Issues in Auditing
 Nature of Auditing
• Auditing is:
– The accumulation and evaluation of evidence about
information.
– Performed by a competent, independent person

• The definition of auditing includes the following key

words and phrases:
– Information and established criteria
– Accumulating and evaluating evidence
– Competent, independent person
– Reporting
 DIFFERENCE BETWEEN AUDIT AND ASSURANCE

AUDIT ASSURANCE

Involves the evaluation of the accounting information Is a way to analyse and assess the procedures, operations
1 available in financial statements and processes

The basic aim is to present fair and accurate It ensures that the presented accounting information is
financial information that follows accounting accurate, ie there is no misrepresentations or irregularities
2 principles and standards in such a report to all stakeholders

The audit is performed under international auditing The practitioner may restrict to a specific area due to the
3 standards and hence has extended rights assurance terms, therefore has fewer rights

4 All stakeholders of a company are engaged Assurance may restrict to one type of stakeholder

Resources and time necessary for conducting an Resources and time required for assurance are relatively
5 audit are relatively higher lower

Audit points out any dishonest activity or misuse of Assurance is done after the audit and provides essential
6 the funds in financial statements information for better decision making.
 Distinguish Between Auditing and
Accounting

• Accounting is the recording, classifying, and summarizing

of economic events for the purpose of providing financial
information for decision making
• Auditors focus on determining whether recorded
information is accurate and properly reflects the economic
events that occurred during the accounting period
Economic Demand for Auditing

• Auditing can have a significant effect on information

risk
• Information risk is the possibility that the information
upon which the business decision was made was
inaccurate.
• A likely cause of the information risk is the possibility of
inaccurate financial statements.
 Causes of Information Risk
• Reasons that increase the likelihood of decision
makers receiving unreliable information:
– Remoteness of information
– Biases and motives of the provider
– Voluminous data
– Complex exchange transactions

• There are three main ways to reduce information risk:

– User verifies information
– User shares information risk with management
– Audited financial statements are provided
Relationships Among Auditors,
Client, and External Users
 Nonassurance Services
• Nonassurance services are services rendered by accounting
firms that generally fall outside the scope of assurance services
such as:
– Accounting and bookkeeping services
– Tax services
– Management consulting services
Attestation Services
• Attestation service is a type of assurance service in which
the accounting firm issues a report about a subject matter
or assertion that is made by another party, including:

– Audit of historical financial statements

– Audit of internal control over financial reporting
– Review of historical financial statements
– Other attestation services that may be applied to a broad
range of subject matter
 Types of Audits

Professional Accountants perform three

primary types of audits:
– Operational audit
– Compliance audit
– Financial statement audit
Types of Audits
The table below summarises the purpose and nature of
each type of audit:
Examples of the Three Types of Audit
(1 of 2)

Type of Audit Example Information Established Available

Criteria Evidence

Operational Evaluate whether Number of Company Error reports,

audit the computerized payroll records standards for payroll records,
payroll processed in a efficiency and and payroll
processing for a month, costs effectiveness in processing costs
Chinese of the payroll
subsidiary is department, department
operating and number of
efficiently and errors made
effectively
Examples of the Three Types of Audit
(2 of 2)

Type of Audit Example Information Established Available

Criteria Evidence

Compliance Determine Company Loan agreement Financial

audit whether bank records provisions statements and
requirements for calculations by
loan the auditor
continuation
have been met

Financial Annual audit of Apple’s financial Generally Documents,

statement Apple’s financial statements accepted records, and
audit statements accounting outside sources
principles of evidence
Audit Responsibilities and
Objectives
Objective of Conducting an Audit of
Financial Statements

• The purpose of an audit is to:

– Provide financial statement users with an opinion by
the auditor on
▪ Whether the financial statements are presented
fairly, in all material respects, in accordance with
the applicable financial accounting framework,
which enhances the degree of confidence that
intended users can place in the financial
statements
Management’s Responsibilities

• Management’s responsibility includes:

– Adopting sound accounting policies
– Maintaining adequate internal control
– Making fair representations in the financial statements
– Certifying the quarterly and annual financial
statements
Auditor’s Responsibilities (1 of 2)
• The overall objectives of the auditor are to:
– Obtain reasonable assurance about
whether the financial statements as a
whole are free from material misstatement,
whether due to fraud or error, thereby
enabling the auditor to
▪ Express an opinion on whether the
financial statements are presented fairly,
in all material respects, in accordance
with an applicable financial reporting
framework
Auditor’s Responsibilities (2 of 2)

– Report on the financial statements, and

communicate as required by auditing
standards, in accordance with the auditor’s
findings (consider laws and regulations
relevant to the client)
Professional Skepticism (1 of 2)

• Audit must be planned and performed with an

attitude of professional skepticism
• Professional skepticism consists of two
primary components:
– A questioning mind
– A critical assessment of the audit evidence
Professional Skepticism (2 of 2)

• Elements of professional skepticism include:

– Questioning mindset
– Suspension of judgment
– Search for knowledge
– Interpersonal understanding
– Autonomy
– Self-esteem
Financial Statement Cycles
• Audits are performed by dividing the financial
statements into smaller segments or components
• The division makes the audit more manageable
and aids in the assignment of tasks to different
members of the audit team
• A common way to divide an audit is to keep
closely related types (or classes) of transactions
and account balances in the same segment
Transaction Flow from Journals to
Financial Statements
Relationships Among Cycles

• Transaction cycles are an important way to

organize audits (revenue,expenditure,production,
human resource and financing)
• Auditors treat each cycle separately during the
audit
• Although auditors need to consider the
interrelationships between cycles, they typically
treat cycles independently to the extent practical
to manage complex audits effectively
Steps to Develop Audit Objectives- Transaction/Balance
Sheet
Setting Audit Objectives

• Audit objectives include:

– Transaction-related audit objectives (Interim)
– Balance-related audit objectives (Year end)
Management Assertions

• Management assertions are implied or

expressed representations by management
about:
– Classes of transactions and the related
accounts and disclosures in the financial
statements and
– They are directly related to the financial
reporting framework used by the company, in
accordance with accounting standards
Transaction-Related Audit Objectives (1 of 2)
• Occurrence
– Recorded or disclosed transactions exist
• Completeness
– Existing transactions are recorded and
disclosures are included
• Accuracy
– Recorded transactions are stated at the
correct amounts and disclosures are
appropriately measured and described
Transaction-Related Audit Objectives (2 of 2)

• Posting and Summarization

– Recorded transactions are properly included in the
master files and are correctly summarized
• Classification
– Transactions Included in the client’s journals are
properly classified

• Timing
– Transactions are recorded on the correct dates
• Presentation
– Transactions are appropriately aggregated or
disaggregated and described, and disclosures are
relevant and understandable
Management Assertions and Transaction-Related Audit
Objectives Applied to Sales Transactions
Balance-Related Audit Objectives
(1 of 3)

• Existence
– Amounts included exist
• Completeness
– Existing amounts and related disclosures are included
• Accuracy
– Amounts included are stated at the correct amounts,
and disclosures are appropriately measured and
described
Balance-Related Audit Objectives
(2 of 3)

• Cutoff
– Transactions near the balance sheet date are
recorded in the proper period
• Detail tie-in
– Details in the account balance agree with related
master file amounts, foot to the total in the account
balance, and agree with the total in the general ledger
• Realizable value
– Assets are included at the amounts estimated to be
realized
Balance-Related Audit Objectives
(3 of 3)

• Classification
– Amounts included in the client’s listing are properly
classified
• Rights and obligations
– Assets are owned or controlled by the entity, and
liabilities are obligations of the entity
• Presentation
– Amounts are appropriately aggregated or
disaggregated and described, and disclosures are
relevant and understandable
Management Assertions and Balance-Related Audit
Objectives Applied to Inventory
Comparison between Transaction &
Balance Audit Objectives
Transaction related Balance related
Objective Audit Objective Audit Objective
Occurrence X
Existence X
Completeness X X
Accuracy X X
Posting &
X
Summarization
Classification X X
Timing X
Cut-off X
Detail tie-in X

Realizable value X
Rights and
X
obligations
Presentation X X
Four Phases of a Financial Statement Audit
 Audit Oversight Board Assertions
• Responsible for the registration of auditors of public
interest entities or schedule funds under Part IIIA of
the Securities Commission Malaysia Act 1993
(SCMA).
• The AOB describes five categories of
management assertions:
– Existence or occurrence
– Completeness
– Valuation or allocation
– Rights and obligations
– Presentation and disclosure
Sustainability
• Sustainability is meeting the needs of the current generation
without compromising the needs of future generations. Ensuring a
balance between economic growth, environmental care and social
well being (ESG)
• Sustainability is crucial as our future depends on it. Environmental
measures practices which saves both time and money.
• The most important KPI’s to track when considering sustainability:

➢Energy consumption
➢ Carbon footprint
➢Product recycling rate
➢Saving levels due to conservation and improvements efforts
➢Supplier environmental sustainability index
➢Water footprint
➢Waste reduction rate
➢Waste recycling rate
Sustainability Reporting

➢ GRI – Global Reporting Institute (Bursa Malaysia is in line with GRI

recommendations)
❖GRI is an independent, international, non-profit organization is head
quartered in Amsterdam, Netherlands
❖Global Reporting Initiative Standards (GRI Standards) – most
comprehensive and widely accepted of sustainability reporting
standards. It has a set of 10 reporting principles that should be
adhered to, with respect to report the content and report quality.

➢ TCFD - Task Force on Climate Change Financial Disclosure

IFRS- Sustainability Disclosure Standard
International Sustainability Standards Board
(ISSB)
➢ IFRS S1 –General requirements for disclosure of sustainability
related financial information.
▪ Covers governance, strategy, risk management, financial position,
performance and cash flow, resilience and metrics

➢ IFRS S2 – Climate related disclosures.

▪ Climate related risks and opportunities that will affect entity’s business model, strategy
and cash flows, access to finance and cost of capital over time.

* Effective 1 January 2024

Sustainability Audit

• A sustainability audit is a process that evaluates the performance of

an organization in relation to its sustainable development goals
• An audit of a company’s practices consist of self evaluation of three
specific areas:

❖ Investment practices – invests in companies which are

committed to sustainability

❖ Audit evaluates whether the business has reduced its energy

consumption, implemented recycling programs on site or for its
customers and if it is currently recycling

❖ Whether the company is educating its customers about

sustainable practices and whether there are any new products
being made from recycled materials
Companies going Green
• Nike Inc – Came up with a way to weave efficiently. Reduced raw
materials and labour time to make a shoe. Savings in transportation,
raw materials and waste disposal.
• Clarion Hotels - Forgo daily sheet change and daily towel change can
take 25% off hotel annual energy costs.
• Exxon Mobil – Energizes its operations in Texas with solar and wind
energy.
• Google, Facebook & Amazon – Energy for its data centres using wind
and solar energy.
• Nestle – Ever thinner plastic bottles and using recycled bottle
• Coca-Cola Inc – using aluminium cans
Bursa Malaysia
❖ Bursa Malaysia (Kuala Lumpur Stock Exchange KLSE)

❖ Frontline regulator of the Malaysian capital market

❖ Responsibility of encouraging investor confidence by ensuring

efficient, cost-effective, fair and orderly market operations are
carried out.

❖ Enforce regulations and supervise listed companies (impose

fines), membership

❖ Treasury management (capital raising)

Bursa Malaysia

Bursa Malaysia comprise of 3 markets ie 3 levels for companies of

different size and industries

❖ MAIN market – at least 25% of its issued shares must be to the

public

❖ ACE market – industry companies, mainly technology

companies

❖ LEAP market – SMEs (10% of shares issued to the public)

 Bursa Malaysia
• 26th Sept 2022 - Bursa announced the enhanced sustainability
reporting requirements in the MAIN and the ACE Market Listings.
• MAIN market will be required to disclose in their sustainability
statements:
❖A common set of prescribed sustainability matters and indicators that are
deemed material for all listed issuers (“common sustainability matters”)
❖Climate change-related disclosures that are aligned with Task Force on
Climate related Financial Disclosures (“TCFD”) recommendations.
Narrative statement of material economic, environmental and social risks
and opportunities in the annual reports
❖At least three financial years’ data for each reported indicator,
corresponding targets (if any) as well as a summary of such data and
corresponding performance in a prescribed format (“ enhanced
quantitative information”)
❖A statement on whether the sustainability statement has been reviewed
internally by an internal auditor or independently assured (“statement of
assurance”)
Bursa Malaysia – Extract (26th Sept 2022)
MALAYSIAN TAX 2023
 COVID 19: Malaysia 2022
• The Russia–Ukraine conflict put a major obstacle in the way of Malaysia’s
recovery. The conflict affected the prices of fertiliser, grain and other
foods. Global oil prices saw some volatility, which affected transport costs.
• Intermediate products used in the construction and manufacturing
industries saw price spikes, cutting businesses’ profit margins.
• Malaysia’s Prime Minister Anwar Ibrahim has to improve the long-term
prospects of the economy and tackle corruption, reintroduce good
governance, education, healthcare and infrastructure .
• Malaysian economy gathered momentum in 2022 as its growth rate
surpassed expectations quarter after quarter.
COVID 19: Malaysia June 2023
 AI

• Large language models (LLM) like ChatGPT from microsoft and OpenAI
Playground from Open AI are now available
• However there have been instances where they are found to share false
data, made up citations and incorrect information
• Learn to use as an effective tool
• Think critically about content and articulate thoughts for improving clarity.
 BLOCKCHAIN
Blockchain was introduced as the core technology for Bitcoin in 2008

What is blockchain technology ?

• Blockchain is a digital ledger which captures transactions since its
creation
• Multiple transactions are combined as a “block” and is added to the
ledger
• All participants uses the shared database as “nodes” connected to the
blockchain.
• Participating nodes can add new, time-stamped transactions
• Participants cannot delete or alter entries once the entries have been
validated and accepted by the network. Any modifications would not sync
with the network and will be excluded.
 BLOCKCHAIN (cont’d)
Characteristics of Blockchain
• Near real-time settlement
• Distributed ledger- peer-to-peer distributed network allows a public history
of transactions, hence secure proof that the transaction has occurred.
Database
• Irreversibility
• Censorship resistant – economic rules built into blockchain model
provides monetary incentives for independent participants to continue
validating new blocks. Therefore a blockchain grows without an “owner”
and is expensive to censor.
• Saves cost and transaction time
 BLOCKCHAIN (cont’d)
Impact on audit & assurance
An audit involves an assessment that the records are supported by
evidence that is relevant, reliable objective, accurate and verifiable.
Acceptance of a transaction on blockchain will satisfy audit evidence of
occurrence, however the records may be:
• Unauthorised, fraudulent or illegal
• Executed between related parties
• Linked to a side agreement which is “off-chain”
• Incorrectly classified in the financial statements
• Estimated values rather than historical cost

Auditors will also need to consider and test management’s estimates

although the transactions are recorded in a blockchain.
 BLOCKCHAIN (cont’d)
Impact on audit & assurance (cont’d)

Evolution of audits could include:

• Auditors will have real-time data access via read-only nodes on
blockchains
• Information obtained for the audit would be in a consistent and recurring
format, hence audits would be more efficient
• Auditors could use more automation, analytics and machine-learning
capabilities about unusual transactions on a real-time basis
• Supporting documents such as purchase invoices, agreements etc could
be encrypted and securely stored on blockchain
• Audit could cover whole population testing rather than samples
 BLOCKCHAIN (cont’d)
Impact on audit & assurance (cont’d)

• Focus the audit on testing controls rather than transactions

• Set up a continuous audit process
• Develop new advisory services

Auditors’ role with regards professional judgements with regards to

accounting estimates, evaluation and test of internal controls over data
integrity and sources of relevant information will continue to be required.
Sarbanes-Oxley Act of 2002
• The Sarbanes-Oxley Act (“Act”) of 2002 is a US federal law
that established sweeping auditing and financial regulations for public
companies. Lawmakers created the legislation to help protect
shareholders, employees and the public from accounting errors and
fraudulent financial practices.
• The Act was passed due to the accounting scandals at Enron,
WorldCom, Global Crossing, Tyco and Arthur Andersen, that resulted in
billions of dollars in corporate and investor losses. These huge losses
negatively impacted the financial markets and general investor trust.
• Impact – more costly audits
• Audit companies that conduct audit cannot provide other services
• Still valid today in 2023
• Compliance required
– financial data security
- prevent malicious tampering of financial data
- track data breach attempts and remediation efforts
- keep event logs readily available for auditors
- demonstrate compliance in 90-day cycles
 Transmile
Group Berhad-
Case Study
▪ The Company was an express freight and freighter charter company
established in November 1993.
▪ It had courier transportation services between Peninsular Malaysia and
East Malaysia and provide services to international companies such as
DHL Worldwide Express, United Parcel Service, Air Macau and CEN
Worldwide among others.
▪ Transmile was listed on Bursa Malaysia on 27 June 1997 and its’ largest
shareholders were the Kuok Group and Pos Malaysia
▪ Due to its strong financial performance, Transmile’s share price reached
a high of RM14.40 and a market cap of RM3.89bil on Jan 3, 2007
▪ A special independent audit revealed that the company had
overstated revenue for financial years 2004 to 2006 by RM622mil.
This related to invoices issued to over 20 companies.
▪ The independent auditors uncovered irregularities in Transmile’s
trade receivables, cash receipts, and property, plant and
equipment (no 3rd party conf of A/R)
▪ The adjustments following the special audit on Transmile
dramatically slashed the carrier’s shareholders’ fund as at
December 2006, from the unaudited figure of RM1.39bil
(announced in February 2007) to RM619mil as per the audited
balance sheet.
▪ In 2005, the company had losses of RM369.6m instead of
RM84.4m, as reported. In 2006, the company suffered losses of
RM126.3m instead of a reported profit of RM157.5m
▪ The company was delisted on 3 Mar 2011 following a failure to
submit a plan to regularise its business.
▪ The auditors of Transmile since 2000 was Deloitte
▪ CEO of Deloitte Asia Pacific said "We believe that Transmile
has a good business model and a good company. It is
unfortunate that we had to be caught in the situation that there
were all these accounting fraud,"
 Lessons learnt from Transmile case study

▪ Long time client - Familiarity threat

▪ Inadequate Professional skepticism – impact of politically
connected board members and investors
▪ No proper business risk analysis – poor understanding of
factors
▪ No proper analytical review – would have revealed anomalies
▪ Weak assessment of internal controls
▪ Inadequate substantive tests of balances
▪ Issues of corporate governance and business ethics were
raised
▪ Considerable concerns about the role of the external auditor