WK 2 Audit Responsibilities and Objectives

AUDIT RESPONSIBILITIES AND
OBJECTIVES
EPPA 3013 AUDITING

SEMESTER 2
SESSION 2019/2020
ARZIM NAIM CA(M). CPA(M). FCCA. CPIF. ACPA. Ph.D (INCEIF)

OBJECTIVES
CONTENTS
1. Audit responsibilities & objectives - an overview
2. Objectives of conducting an audit of financial
statements
3. Management’s responsibilities
4. Auditor’s responsibilities
OBJECTIVES
CONTENTS… cont’d
5. Relationships among Management’s Assertions, Audit
Objectives, Audit Procedures & Audit Evidence
6. Financial statement cycles – Cycle approach in audit
segmentation
7. Errors, fraud and illegal acts
8. Non-compliance with laws and regulations acts
1. AUDIT RESPONSIBILITIES & OBJECTIVES:
AN OVERVIEW
 Companies Act 1965 Section 169 stipulates that every company

incorporated under the Act shall have its profit and loss account and
balance sheet audited before presentation at the AGM annually.
AN OVERVIEW
AN OVERVIEW
Companies Act 2016
 Requirement of an Auditor
– Every company is required to have at least one auditor
Section 2: Defines who is approved company auditor. Requires that an

audit must be performed by an approved company auditor as defined in
Section 263 and his qualification has not been revoked.
Section 263: Auditors must be an approved company auditor by the

MOF
Section 263(4): Auditors must not an officer of the company.

AN OVERVIEW
 Section 263: Qualification for appointment as company auditor

is similar to CA 1965 except indebtedness not exceeding
RM25,000
AN OVERVIEW
 Prohibits from acting or accepting an appointment as an

auditor on certain conditions;
1. Indebted to the company (not exceeding RM25,000)
2. Officer of the company
3. Partner, employer, officer of the company
4. Partner, employee of an employee of an officer of the company
5. Shareholder of a corporation whose employee is an officer of the
company
6. Responsible for keeping member’s register or the register of
debenture-holders of the company
AN OVERVIEW
 Recognition of audit firms registered as LLP:

– The appointment of a firm in the name of LLP will take
effect as appointment of partners and employees who are
approved company auditor at the time the appointment or
later as auditors of a company.
 The auditor of a company has statutory rights and duties under

the companies Act 2016. An auditor is a ‘watch dog’ not a
‘bloodhound’; similarly to the duties of auditors in verification and
detection. Whenever there is suspicious matter, he must go
deep. His business is to establish and state true financial position
of the Company as the time of audit, and his duties is confined.
AN OVERVIEW
 Sections 266; appointment, powers and responsibilities of auditors.

Specifies the powers and duties of an auditor.
 Section 266(4) indicates the right of auditors, whereby it describes

that a company’s auditor has the right to access, at all reasonable
times, the accounting and other records of the company, and is
entitled to require from any auditor of a related company and any
officer of the company such information and explanations as he/she
desires for the audit’s purposes.
 Section 266(7) states that an auditor has the right to attend general
meetings and be heard on any part of the business of the meeting to
which concerns the auditor in his/her capacity as an auditor.
AN OVERVIEW
What is accounting ?
 Is the recording, classifying and summarizing of economic events for
the purpose of providing financial information for decision making.
What is auditing ?
 Is the accumulation and evaluation of evidence about information to
determine and report on the degree of correspondence between
information and established criteria i.e. approved standards in
Statutory Audit.
Why is audit necessary ?
 To reduce information risk upon which decision is made.
 Enhances credibility.
AN OVERVIEW
Why is audit necessary ? (cont’d)

 Auditors perform an audit so as to add credibility to management's
inherent assertions included in the financial statements. If the audit
is to have any value, the auditor's opinion as to the reliability of the
assertions must be communicated to the users of the financial
statements.
 Financial statement 'users' include such groups as shareholders,

suppliers, customers, lenders, borrowers, potential investors, and
regulatory authorities.
AN OVERVIEW

 The auditor 'communicates' the results of the audit through the audit
report, a document, often just one page in length, that is attached to
audited financial statements and that sets out the scope of the audit
(i.e. the work the auditor has performed) together with the auditor's
opinion on the reliability of the assertions inherent in the financial
statements.
AN OVERVIEW

 Accordingly, the objective may be expanded to gather and
evaluate audit evidence of sufficient quantity and appropriate
quality in order to form, and communicate to the users of the
financial statements, an opinion on the reliability of the
assertions of management inherent in those financial
statements for the purpose of adding credibility to those
assertions.
AN OVERVIEW
Auditor ?
 An auditor is a qualified accountant, who is an expert in determining the proper
audit procedures, the number and types of items to be tested, and evaluate the
results thereof.
Auditing standards?
 Auditing standards guide the auditors work and serve as measures of the
quality of the auditor’s performance. The difference between ‘auditing standards’
and ‘auditing procedures’ ;
 standards are a means of ensuring quality of audit performance,
 procedures are specifically methods or techniques used in the conduct of
the audit to gather evidence.
AN OVERVIEW
Auditing standards? … cont’d
 Auditing standards help to ensure that financial statements audits

are conducted in a thorough and systematic ways that procedures
reliable conclusions.
 Auditing standards in general do not address every specific audit

procedures for an account or class of transactions but rather
represent an overall framework for the audit process.
AN OVERVIEW
 International Federation of Accountants (IFAC) plays a very

significant role in the development of auditing standards in Malaysia.
Established in 1977 with its mission is for the development and
enhancement of accountancy profession able to provide services of
consistently high quality in the public interest.
AN OVERVIEW
 International Auditing and Assurance Standards Board (IAASB) is

one of the standing committees of IFAC with its function is to
develop and issue standards and statements of auditing, assurance
and related services, and quality control standards.
 Currently, IAASB is responsible for developing & issuing of

International Standards on Auditing (ISA).
AN OVERVIEW
 The ISAs are intended for international acceptance and they relate
primarily to the audit of general purpose historical financial
statements.
 ISAs are generally similar to Malaysian Approved Standard of

Auditing (MASA).
 ISAs do not override local regulations.

AN OVERVIEW
 An audit in accordance with ISAs is designed to provide reasonable

assurance that the financial statements taken as a whole are free
from material misstatement.
 In applying ISAs, the auditor must interpret the basic principles in the
context of the explanatory material provided.
 Reasonable assurance is less than certainty or absolute assurance

but more than a low level of assurance.
AN OVERVIEW
 It is important to consider how approved accounting standards and

approved standards on auditing are related in the audit function.
 Management & their accountants record business transactions in

accordance with approved accounting standards.
AN OVERVIEW
Approved standards on auditing, on the other hand, guide the auditor

how to gather evidence to test management’s assertions to determine if
they are in accordance with approved accounting standards.
Ifauditor has gathered sufficient evidence to provide reasonable

assurance that the financial statements present true and fair view in
accordance with approved accounting standards, an unqualified report
can be issued.
2. OBJECTIVES OF CONDUCTING AN AUDIT OF FINANCIAL
STATEMENTS
Audit objective
 The overall objective of the audit of the financial statements

of an entity is to gather and evaluate audit evidence of
sufficient quantity and appropriate quality in order to form,
and communicate to the users of the financial statements,
an audit opinion on the reliability of the assertions of
management inherent in those financial statements for the
purpose of adding credibility to those assertions.
STATEMENTS
Explanation of the meaning of this definition
 Principal objective: The principal objective of a financial

statement audit has evolved over time until, around 1940, it
was accepted as being to provide an opinion on the reliability
of a matter that is the responsibility of another party. In a
financial statement audit, the financial statements of the
entity is the 'matter' that is the responsibility of the other
party, and the 'other party' is the management of the entity.
STATEMENTS
How the objective is achieved ?
 The principal objective noted above may be expanded by

including a reference as to how the objective is achieved.
Auditors achieve their objective by gathering and evaluating
audit evidence. The evidence needs to be of such quantity
and quality that the auditor is able to form an opinion on the
financial statements. Thus, it may be stated that the objective
of the audit of the financial statements of an entity is to
gather and evaluate audit evidence of sufficient quantity and
appropriate quality in order to form an opinion on the financial
statements prepared by management.
 'quality' refers to the relevance and reliability of the evidence
 'entity' includes entities such as partnerships, trusts, government departments,
quasi government organizations as well as corporate entities.
STATEMENTS
How the objective is achieved ? … cont’d
 The objectives of the audit of financial statements are the

same, irrespective of the entity to which the financial
statements relate.
STATEMENTS
ISA 200 - Objective & General Principles Governing an Audit

of Financial Statements
“The objective of an audit of financial statements is to
enable the auditor to express an opinion whether the
financial statements are prepared, in all material respects,
in accordance with an identified financial reporting
framework.”
STATEMENTS
 Companies Act, 1965; Auditors of the company are

required to state in the auditor’s report whether the
financial statements of the company;
“give true and fair view”
 BOTH ISA 200 and section in Companies Act 1965

emphasizes issuing an opinion on financial statements
“Primary Focus”: Opinion on Financial

Statements
STATEMENTS
 ISA 200 also states that;

While the auditor is responsible for forming and expressing an opinion
on the financial statements, the responsibility for preparing and
presenting the financial statements is that of the management of the
entity. The audit of the financial statements does not relieve
management of its responsibilities.
 ISA 400 emphasis that;

Auditors accumulate evidence to allow them to reach conclusions about
whether the financial statements are fairly stated and the effectiveness
of Internal Control, and they issue the appropriate audit report.
STATEMENTS
 Although AUDITOR is not an insurer or guarantor of the

fairness of the presentations in the statements, the auditor
has considerable responsibility for notifying users whether
statements are properly stated.
 If AUDITOR believes that the Fin. Stats. are not fairly

presented or is unable to reach a conclusion because of
insufficient evidence or prevailing conditions, AUDITOR has
the responsibility of notifying users thru AUDITOR’S
REPORT.
3. MANAGEMENT’S RESPONSIBILITIES
ISA 700:
While the auditor is responsible for forming and
expressing an opinion on financial statements, the
responsibility for preparing & presenting the financial
statements is that of the mgmt of the entity. The audit
of the FS does not relieve mgmt of its responsibilities
Adopting accounting policies & maintaining

adequate internal control
Making true & fair representations in FS
 The responsibility for adopting sound accounting policies, maintaining adequate internal
control, and making fair representations in the financial statements rests with the
management rather than with the auditor. Because they operate the business daily, a
company’s management knows more about the company’s transactions and related assets,
liabilities and equity than the auditor does.
 In contrast, the auditor’s knowledge of these matters and internal control is limited to that
acquired during the audit.
 Mgmt’s responsibility for the fairness on the

representations (assertions) in the financial statements
carries with it the privilege of determining which
disclosures it considers necessary.
 Although mgmt has the responsibility for the preparation

of the financial statements and the accompanying
footnotes, it is acceptable for an auditor to draft the
financial statements for the client or to offer suggestions
for clarification.
 In the event that mgmt insists on the financial statement

disclosure that the auditor finds unacceptable, the
auditor can either issue an adverse or qualified opinion
or withdraw from the engagement.
4. AUDITOR’S RESPONSIBILITIES
 It is also noted in ISA 200 that;

An audit in accordance with ISAs is designed to
provide reasonable assurance that the financial
statements taken as whole are free from material
misstatements.
 This paragraph discusses the auditor’s responsibility

for detecting material misstatements in the financial
statements.
 When the auditor also reports on the effectiveness of

Internal Control over financial reporting, the auditor is
also responsible for identifying material weaknesses in
internal control.
 The Auditors are just watchdogs, not

bloodhounds!!!
 An audit in accordance with ISAs is designed to provide

reasonable assurance that the financial statements
taken as a whole are free from material
misstatement.
 What is REASONABLE ASSURANCE???
Reasonable assurance is not defined in the literature,

but it is presumably less than certainty or absolute
assurance and more than a low level of assurance.
 The concept of reasonable, but not absolute assurance

indicates that the auditor is not an insurer or guarantor
of the correctness of the financial statements.
REASONABLE ASSURANCE
Sample vs Auditor
Population Judgement
Estimation Of Persuasive Evidence

Accounting Policies vs Conclusive
Inherent Limitation Normally Difficult

Of Internal Control To Detect Fraud -
Conspiracy
Misinterpretation Of Audit
Evidence
PROFESSIONAL SCEPTICISM
ISA 200:
Requires The Auditor To Conduct The Audit
With An Attitude Of Professional Scepticism
Recognising That Circumstances May Exist That
Cause The Financial Statements To Be Materially
Misstated Whether Due To Fraud Or Error
Evaluate Audit Evidence Objectively (maintain a
critical & questioning mind in assessing the validity of
audit evidence)
Identify circumstances increase the risk of material
misstatement - the auditor would be more sensitive to
select the type of evidence
Professional Skepticism???
 Professional skepticism in auditing implies an attitude

that includes a questioning mind and a critical
assessment of audit evidence without being obsessively
suspicious or skeptical. Such an attitude results, for
example, in the auditor asking more questions then
usual, and more probing questions, critically analyzing
these answers and then studiously comparing this
analysis with other evidence gathered.
 Professional skepticism includes a questioning

mind and a critical assessment of audit
evidence. Should not assume that management
is dishonest, but the possibility of dishonesty
must be considered.
 Auditors adopt an attitude of professional skepticism when

they evaluate all audit evidence. When the auditor adopts
such an attitude, the auditor does not accept evidence
gathered at its face value: rather, the auditor evaluates the
evidence bearing in mind:
1. the evidence may be misleading,

2. the evidence may be incomplete, or
3. the person providing the evidence may be either
incompetent or motivated to provide evidence that is
misleading or incomplete.
4. the possibility of fraud.
 The lower the acceptable level of audit risk [AR*] or the

greater the risk of material misstatement [RMM], the
greater the application of an attitude of professional
skepticism.
5. RELATIONSHIPS AMONG MGMT’S ASSERTIONS, AUDIT
OBJECTIVES, AUDIT PROCEDURES AND AUDIT EVIDENCE
Financial Statements Audit Report 1. Existence
2. Rights & obligations
Mgmt’s assertions are 3. Occurrence
contained in FS
4. Completeness
5. Valuation or allocation
Auditor develops Audit
Objectives based on 6. Measurement
mgmt’s assertions; 7. Presentation & disclosure
1. General Audit
Objectives
1. Validity
2. Specific Audit
Objectives 2. Completeness
3. Cutoff
4. Ownership
Audit procedures are
conducted to test the audit 5. Accuracy
objectives 6. Valuation
7. Recording
Audit evidence is developed/ accumulated to
support mgmt’s assertions – Evidence on the 8. Classification
fairness of the Financial Statements 9. Presentation & Disclosure
Financial statements are simply a collection of assertions:
 The independent auditor’s work consists of searching for and

evaluating evidence concerning assertions.
 Remember AUDIT OBJECTIVE?
“The overall objective of the audit of the financial statements of an entity is

to gather and evaluate audit evidence of sufficient quantity and
appropriate quality in order to form, and communicate to the users of the
financial statements, an audit opinion on the reliability of
the assertions of management inherent in those financial statements for
the purpose of adding credibility to those assertions”
Financial statements are simply a collection of assertions:
 Financial statements are considered 'reliable' if they are, in all

material respects, complete, valid and accurate. That is, financial
statements are reliable when they contain no material
misstatements, which is, in effect, what management asserts when
they prepare the financial statements.
 2 TYPES OF ASSERTIONS;
1. General assertions  financial statements as a whole prepared in
accordance with accepted accounting standards.
2. Specific assertions  concerned with individual accounting

balances (and may include number of sub-assertions).
Specific assertions: Examples
"Inventory, at cost, $100,000" in a set of financial statements is in fact an

assertion by management that, inter alia, inventory actually exists, that it is
owned by the entity at balance date, that it cost $100,000 and that there is
no other inventory.
“Accounts receivable, $500,000” exist, implies amounts due are

collectible and all items included in this total come from ordinary sales to
customers.
ISA 500: As per the International Standards on Auditing (specifically
ISA500), there are 7 management assertions. The following are my
brief explanations.
1. Existence
Assets and liabilities exist.
2. Rights and Obligations

Assets are rights, and liabilities are obligations to the company.
3. Occurrence
A transaction occurred or took place.
4. Completeness
All transactions that should be recorded have been recorded.
5. Valuation
Assets and liabilities are recorded at the proper amount or value.
6. Measurement
Transactions are recorded at the proper amount and in the proper
financial period.
7. Presentation and Disclosure

Transactions and account balances are properly presented and
adequate disclosures have been made in the financial statements.
MANAGEMENT ASSERTION (REPRESENTATION)
ISA 500 Audit Evidence Classify Assertions - 7 Broad Catergories:
The assets & liabilities exists at a given date
Existence The assets are rights of the entity & the liabilities are its
obligations
Rights &
Obligations A transaction @ events has taken place
The accounts & transactions that should be included are
Occurrence
included; FS are complete
Completeness Assets & liabilities are recorded at appropriate carrying
Valuation value
Measurement A transaction is recorded at the proper amount & revenue

@ expenses is allocated to the proper accounting period
Presentation &
Amounts shown in the FS are properly presented &
Disclosure
disclosed
Specific assertions: Examples
"Inventory, at cost, $100,000" in a set of financial statements is in fact an assertion by
management that, inter alia, inventory actually exists, that it is owned by the entity at
balance date, that it cost $100,000 and that there is no other inventory.
“Accounts receivable, $500,000” exist, implies amounts due are collectible and all items
included in this total come from ordinary sales to customers.
 All these records and financial report assertions, by themselves, are not considered
sufficient (must be supported by corroborating information)
 By disaggregating the assertions into more specific audit objectives, the auditor is
better able to design audit procedures for obtaining sufficient competent audit evidence
to test management assertions.
 Operationally, this is accomplished by developing audit objectives that relate to

management’s assertions.
MANAGEMENT ASSERTIONS AUDIT OBJECTIVES
1. Existence 1. Validity
2. Rights & obligations 2. Completeness
3. Occurrence 3. Cutoff
4. Completeness 4. Ownership
5. Valuation or allocation 5. Accuracy
6. Measurement 6. Valuation
7. Presentation & disclosure 7. Recording

8. Classification
9. Presentation & Disclosure
Based on the above assertions, 9 broad categories of audit objectives are
developed:
1.Validity
Recorded transactions are valid (transacted). Assets are not overstated
(exists).
2.Completeness
All transactions are recorded, without intentional omission. Liabilities are not
overstated (omitted).
3.Cut-off
Transactions are recorded in the proper accounting period.
4.Ownership
To address rights and obligations.

5. Accuracy
To address valuation.
6. Valuation
Account balances are properly valued without material overstatement
and undervalued.
7. Recording
Transactions are properly recorded at the appropriate amount without
material overstatement and undervalued.
8. Classification
To address presentation and disclosure.
9. Presentation and disclosure

Account balances and disclosure are properly presented in the
financial statements, with adequate disclosures
The Completeness Assertion can be divided unto 2 audit objectives;
Completeness & Cutoff.
Auditobjectives for Completeness is tested to determine if all accounts

payable were included in the account.
Auditobjective for Cutoff tests whether all accounts payable were

recorded in the proper accounting period.
One audit procedure that would provide evidence about completeness

objective would be a search for unrecorded liabilities; examine vendor bills
recorded in the period after year-end to determine if those liabilities relate
to current period.
5. RELATIONSHIPS AMONG MGMT’S
ASSERTIONS, AUDIT OBJECTIVES, AUDIT
PROCEDURES AND AUDIT EVIDENCE
Each objective relates to each assertion in the following manner:
Assertions by management Audit objectives
(1) Existence An asset exists (1) Validity, (4) Ownership
(2) Rights & obligations That the asset is owned by (1) Validity, (2) Completeness
the firm
(3) Occurrence Purchase of asset really took (1) Validity, (3) Cutoff
place
(4) Completeness There are no unrecorded (2) Completeness, (3) Cutoff
assets
(5) Valuation An asset is recorded at an (6) Valuation, (5) Accuracy
appropriate carrying value
(6) Measurement Depreciation charge is (7) Recording, (5) Accuracy
correctly recorded
(7) Presentation & Disclosure Asset is classified, disclosed (8) Classification,
and described in accordance (9) Presentation & Disclosure
with acceptable accounting
policies
6. FINANCIAL STATEMENTS AUDITING
(i) Segmenting the Financial Statements into Divisions
 Audits are performed by dividing the financial statements into

smaller segments/ component eg. Most auditors treat FA and
Payables as different segments but each segment is audited
separately but not on a completely independent basis (Audit of FA
may reveal an unrecorded Payable).
 The division makes audit more manageable.
 After the audit of each segment is completed, including

interrelationships with other segments, the results are combined.
 A conclusion can then be reached about the financial statements

taken as a whole.
6. FINANCIAL STATEMENTS AUDITING
(ii) CYCLE APPROACH
 Another way is to divide audit is by related types (or classes)

of transactions and account balances. This is called the
CYCLE APPROACH for example;
 Sales, sales returns, cash receipts and charge-offs of

uncollectible accounts are the 4 classes of transactions that
cause RECEIVABLE to INCREASE AND DECREASE. Therefore,
they are all part of SALES AND COLLECTION CYCLE.
 Payroll transactions and accrued payroll are a part of the
PAYROLL AND PERSONNEL CYCLE.
6. FINANCIAL STATEMENTS CYCLES – CYCLE
APPROACH IN AUDIT SEGMENTATION
 The CYCLE APPROACH combines transactions recorded in

different journals with the General Ledger balances result
from those transactions.
 The logic of using CYCLE APPROACH can be seen by

thinking about the way transactions are recorded in journals
and summarised in the General Ledger and Financial
Statements.
Transaction Flow from Journals to Financial Statements
TRANSACTIONS JOURNALS LEDGERS, TRIAL BALANCE
& FINANCIAL
STATEMENTS
Sales Sales journal
General Ledger &
Cash Receipts Cash receipts
subsiadiary records
journal
Acquisition of Acquisitions
goods & services journal General ledger
trial balance
Cash
Cash
disbursements
disbursements
journal
Payroll services & Financial
disbursements Payroll journal
Statements
Allocation &
General journal
adjustments
7. ERROR, FRAUD AND ILLEGAL ACTS
FRAUD AND ERROR
 The distinguishing factor between fraud and error is

whether the underlying action that results in the
misstatement of the financial statements is intentional
or unintentional.
FRAUD & ERROR
ISA 240 – Fraud & Error
Fraud: Error:
Intentional act by one or more Unintentional misstatements in
individuals among management, those charged financial statements
with governance, employees or third parties,
involving the use of deception, to obtain an unjust
or illegal advantage.
2 Category:
Fraudulent Financial
Reporting
Misappropriation of
Asset
ERROR
 Error refers to unintentional misstatements in financial

statements including;
 A mistake in gathering and processing data.
 An incorrect accounting estimate arising from
oversight or misinterpretation of facts.
 A mistake in the applications of accounting principles
relating to measurement, recognition, classification
etc.
FRAUD
 Fraud refers to an intentional act by one or more individuals

among management, those charged with governance,
employees or third parties, involving the use of deception, to
obtain an unjust or illegal advantage.
 UNJUST ADVANTAGE eg. You are one of audit committee for

PLC & you just knew the Co.’ s businesses is to be expanded,
say, going oversea. You bought their shares before the Co. go
for press conference to announce their plan to go
oversea….you are in the UNJUST ADVANTAGE position!!!
CHARACTERISTICS OF FRAUD
 Intentional misstatements resulting from;
 Fraudulent financial reporting, and

 Misappropriation of assets.
 Fraudulent financial reporting involves;
 Manipulation, falsification (including forgery) or

alteration of accounting records or supporting
documentation,
 Misrepresentation in or intentional omission of
events, transactions or information,
 Intentional misapplication of accounting principles
 Fraudulent financial reporting CAN BE COMMITTED

BY TECHNIQUES AS
 Recording fictitious journal entries,

 Inappropriately adjusting assumptions and changing
judgments used,
 Omitting, advancing or delaying recognition of
events and transactions
 Fraudulent financial reporting CAN BE COMMITTED

BY TECHNIQUES AS
 Concealing or not disclosing facts that could affect

amounts recorded,
 Engaging in complex transactions that are structured
to misrepresent,
 Altering records and terms related to significant and
unusual transactions
 Misappropriation of assets involve the theft of an entity’s

assets and is often perpetrated by employees.
 Misappropriation of assets CAN BE COMMITTED BY

TECHNIQUE AS;
 Embezzling receipts
 Stealing physical or intellectual assets
 Causing to pay for goods and services not received
 Using an entity’s assets for personal use
 It is the responsibility of mgmt, with the oversight of

those charged with governance, to establish a control
environment and maintain policies and procedures, to
place strong emphasis on FRAUD PREVENTION
AND FRAUD DETERENCE
 Owing to the inherent limitation of an audit,
1. Use of testing
2. Inherent limitations of internal control
3. Audit evidence is persuasive and not conclusive
4. Use of judgment.
There is an unavoidable risk that some material

misstatements will not be detected, even though
the audit is properly planned and performed in
accordance with ISAs.
 An auditor is not and cannot be held responsible for the

prevention of fraud and error.
 However, annual audit may act as a deterrent for such

occurrence.
 Auditor => professional skepticism throughout the audit,

recognizing the possibility that a material misstatement due
to fraud could exist, notwithstanding the auditor’s past
experience with the entity about the honesty and integrity of
management and those charged with governance.
Risk assessment procedures
 Make enquiries of mgmt, of those charged with

governance (knowledge of any actual, suspected or
alleged fraud).
 Considers whether one or more fraud risk factors are

present.
 Considers any other information.

Fraud Risk Factors:
 Events or conditions that indicates an incentive or

pressure to commit fraud or provide an opportunity to
commit fraud.
Fraud risk factors are classified based on 3 conditions;

1. An incentive or pressure to commit fraud.
2. Perceived opportunity.
3. An ability to rationalize the fraudulent action.
To respond to the risk of management override of controls, the
auditor should;
 Test the appropriateness of journal entries recorded and other

adjustments made.
 Review accounting estimates for biases eg. Change of depreciation

policy from SL to RB.
 Obtain understanding of business rationale of significant transactions

outside the normal course of business.
AUDITOR RESPONSIBILITY FOR ASSESSING THE RISK OF
FRAUD & ERROR
During audit planning, auditors need to measure the
risk of material misstatements involving fraud!!!
i. Pressure @ incentive ii. Perceived opportunity

to commit the fraud to commit the fraud
Identify of Events which Increase the Risk of Fraud & Error:

Questions with respect to the integrity or competence of
management
Unusual Pressures within or on an entity
Unusual transactions
Problem in obtaining sufficient appropriate audit evidence
Some factors unique to a computer info systems environment
which relate to the conditions & events described above
To respond to the risk of management override of controls, the
auditor should;
 Test the appropriateness of journal entries recorded and other

adjustments made.
 Review accounting estimates for biases eg. Change of depreciation

policy from SL to RB.
 Obtain understanding of business rationale of significant transactions

outside the normal course of business.
RISK FACTORS
 Susceptibility
1. Large amount of cash on hand
2. Easily convertibles assets, such as bearer bonds, diamonds
3. Fixed asset characteristics eg. Small size, marketability or lack of
ownership identification
 Controls
1. Lack of appropriate mgmt oversight
2. In adequate record keeping
3. Lack of timely and appropriate documentation for transactions
FRAUD AND ERROR
 When the auditor confirms that, or is unable

to conclude whether, the financial
statements are materially misstated as a
result of fraud, the auditor should consider
the implications for the audit – Guidance
from ISA 700
MANAGEMENT REPRESENTATIONS
 The auditor should obtain written representations from mgmt
that;
 Acknowledges its responsibility for the design and implementation of

Internal Control to prevent and detect fraud,
 It has disclosed to the auditor the results of its assessment of the risk that
the Financial Statements may be materially misstated as a result of fraud,
 It has disclosed to the auditor its knowledge of actual, suspected or

alleged fraud.
MANAGEMENT LETTER
 Communication with management and those charged
with governance;
 Auditors studied and tested,
 To establish a basis for relying,
 Selective basis,
 Inherent limitations of audit.

WITHDRAWAL FROM ENGAGEMENT

 The auditor may conclude that withdrawal from the
engagement is necessary;
 Implication of involvement of high authority eg. Managing Director

within the entity, reliability of mgmt’s representation, effect on
continuing association.
Steps to be taken
If suspect; Suspect and fraud really
happened;
•Consider the materiality effect on
financial statements •contact audit supervisor and
seek advice on how to proceed
•Auditors to consider extra audit
(first orally then follow by
procedures to ensure fraud really
written reports)
happened
•make note on every
•Consider changes in financial
fraud(formal evidence for legal
statements and the effect towards
proceeding). Should record:
audit report
detail of time & place, how long
• Auditors to suggest to the documents were in his custody,
management on extra procedures/ whether other people had
internal control to the non- access to them, whether any
compliance witnesses during his
Report/communicate fraud & examination.
error
Only for material fraud
All fraud (material @ immaterial)
8. NON-COMPLIANCE WITH LAWS &
REGULATIONS ACT
ISA 280 – define;

Violations of laws or government regulations other than
fraud. Non-compliance is “acts of omissions or commission
by the entity being audited, intentional or non-intentional,
which are contrary to the prevailing laws and regulations”.
 However, non-compliances does not include personal misconduct

unrelated to the business activities of the entity by the entity’s mgmt
or employees.
 2 examples of non-compliance are a violation of Income Tax Act

1967 and a violation of the provision of the Companies Act 1965
REGULATIONS ACT
 There are 2 types of non-compliance acts;

a) Direct-effect non-compliance acts, and
b) Indirect-effect non-compliance acts.
Direct-effect non-compliance acts

 Certain violations of laws and regulations that bring direct financial effects on
specific account balances in the financial statements eg. Violation of income tax
laws => effect income tax expense and income tax payables
 Auditor’s responsibilities is same as for errors and fraud. On each audit, auditor
will evaluate whether or not there is evidence available to indicate material
violations of income tax laws.
REGULATIONS ACT
Indirect-effect non-compliance acts

 Most non-compliance acts affect the financial statements
indirectly eg. Company violates environmental protection laws,
insider securities trading regulations, civil rights laws and
employee safety requirements.
 There is an effect on the financial statements only if there is a
fine or sanction.
 Potential material fines and sanctions indirectly affect financial
statements by creating the need to disclose a contingent
liability for the potential amount that might ultimately be paid.
REGULATIONS ACT
Indirect-effect non-compliance acts….Cont’d
 Auditor’s responsibility; ISA 250 clearly states that the

auditor provides no assurance or held responsible that
indirect-effect non compliance will be detected and
prevented. Auditors lack legal expertise, and the frequent
indirect relationship between non-compliance and the
financial statements makes it impractical for auditors to
assume responsibility for discovering non-compliance.
REGULATIONS ACT
ISA 250 – Consideration of Laws and Regulations in an Audit

of Financial Statements;
1. Auditor’s responsibilities for direct non-compliance is the

same as for errors and fraud.
2. Auditor provides no assurance or held responsible that
indirect-effect non-compliance will be detected and
prevented.
“NON-COMPLIANCE” DENGAN UNDANG-UNDANG &
PERATURAN
Under ISA 250 – acts of omission @ commission

by the entity being audited – intentional @
unintentional which are contrary to the prevailing
laws & regulations
Direct Effect on specific Indirect Effect on FS

account balances in FS
ISA 250 – Auditors to conduct ISA 250 – Auditors must not be

audit procedures to detect non- held responsible to deter non-
compliance’.
compliance’
Auditors must gather enough Imparctical for discovering nc

evidences material non-compliance – lack legal expertise &
frequent indirect relationship
REGULATIONS ACT
3 level of responsibility that the auditor has for finding

and reporting with regards to ‘non-compliance’
acts;
1. Evidence Accumulation When There Is No Reason to Believe

Indirect-Effect Non-Compliance Exist.
2. Evidence Accumulation and Other Actions When There Is
Reason to Believe Direct or Indirect-Effect Non-Compliance
MAY EXIST.
3. Actions When the Auditor Knows of a Non-Compliance.
REGULATIONS ACT
1. Evidence Accumulation When There Is No Reason to

Believe Indirect-Effect Non-Compliance Exist.
 Many audit procedures normally performed on audits to search for errors

and fraud may also uncover NON-COMPLIANCE eg. Reading of minutes of
BOD or inquiring of any litigations/ pending litigations.
 Auditor should inquire mgmt about policies they have established to prevent
illegal acts and whether mgmt knows of any laws or regulations that the
company has violated.
 Other than these procedures, auditor SHOULD NOT SEARCH for indirect-
effect non-compliance unless there is reason to believe they may exist.
REGULATIONS ACT
2. Evidence Accumulation and Other Actions When
There Is Reason to Believe Direct or Indirect-
Effect Non-Compliance MAY EXIST.
 Auditor may find indications of possible non-compliance in

variety of ways eg. Minutes may indicate that an investigation
by govt. agency is in process or large pymts made to govt.
officials/ consultants. Thus, several actions need to be taken;
I. Auditor should inquire of mgmt at a level above those likely to
be involved in the potential non-compliance.
II. Consult with client’s legal counsel/ other specialists that
knowledgeable about potential of non-compliance.
III. Auditor to accumulate additional evidence whether there
actually is a non-compliance.
REGULATIONS ACT
3. Actions When the Auditor Knows of a Non-Compliance.
 First action is to consider effects on Financial Statements including

adequacy of disclosures eg. Violation of civil rights laws could involve
significant fines but could also result in loss of customers or key
employees => Revenue & Expenses
 If auditor concludes that the disclosures for non-compliance is
INADEQUATE, auditor should MODIFY the audit report accordingly.
 ISA 250; if non-compliance has material effect on the accounts and
yet, not reflected in the accounts
 Auditor should express QUALIFIED or ADVERSE opinion
REGULATIONS ACT
3. Actions When the Auditor Knows of a Non-

Compliance….Cont’d
 Auditor to consider their r’ship with client. If mgmt knew but failed to inform
auditor, can they be trusted??
 Auditor should communicate with the Audit Committee & others and make
sure they knew about this => oral or written
 If client refuses to accept auditor’s modified report or fails to take remedial
action concerning the illegal act, auditor to withdraw from the engagement. If
client is PLC, auditor must report to SC.
 Such decisions are complex and normally involve consultation by the auditor
with the auditor’s legal counsel.
AUDITOR’S RESPONSIBILITY ON NON-COMPLIANCE WITH
LAW & REGULATIONS
No NC suspected 3 Levels NC do exist
To conduct normal Suspect NC exist Communicate with clients

audit procedures
You encounter
indications of fraud
Only for material
Eg. Review minutes of non-compliance
meeting
Eg. From review of
Don’t have to look further minutes, govt agency is
unless you found conducted an
something investigations
•To know the nature of fraud

•Consider the effect on to financial statements
•Consult with management
Thank You

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AUDIT RESPONSIBILITIES AND

EPPA 3013 AUDITING

ARZIM NAIM CA(M). CPA(M). FCCA. CPIF. ACPA. Ph.D (INCEIF)

 Companies Act 1965 Section 169 stipulates that every company

Section 2: Defines who is approved company auditor. Requires that an

Section 263: Auditors must be an approved company auditor by the

Section 263(4): Auditors must not an officer of the company.

 Section 263: Qualification for appointment as company auditor

 Prohibits from acting or accepting an appointment as an

 Recognition of audit firms registered as LLP:

 The auditor of a company has statutory rights and duties under

 Sections 266; appointment, powers and responsibilities of auditors.

 Section 266(4) indicates the right of auditors, whereby it describes

Why is audit necessary ? (cont’d)

 Financial statement 'users' include such groups as shareholders,

Why is audit necessary ? (cont’d)

Why is audit necessary ? (cont’d)

Auditing standards? … cont’d

 Auditing standards help to ensure that financial statements audits

 Auditing standards in general do not address every specific audit

Auditing standards? … cont’d

 International Federation of Accountants (IFAC) plays a very

Auditing standards? … cont’d

 International Auditing and Assurance Standards Board (IAASB) is

 Currently, IAASB is responsible for developing & issuing of

Auditing standards? … cont’d

 ISAs are generally similar to Malaysian Approved Standard of

 ISAs do not override local regulations.

Auditing standards? … cont’d

 An audit in accordance with ISAs is designed to provide reasonable

 Reasonable assurance is less than certainty or absolute assurance

Auditing standards? … cont’d

 It is important to consider how approved accounting standards and

 Management & their accountants record business transactions in

Auditing standards? … cont’d

Approved standards on auditing, on the other hand, guide the auditor

Ifauditor has gathered sufficient evidence to provide reasonable

 The overall objective of the audit of the financial statements

Explanation of the meaning of this definition

 Principal objective: The principal objective of a financial

 The principal objective noted above may be expanded by

How the objective is achieved ? … cont’d

 The objectives of the audit of financial statements are the

ISA 200 - Objective & General Principles Governing an Audit

 Companies Act, 1965; Auditors of the company are

 BOTH ISA 200 and section in Companies Act 1965

“Primary Focus”: Opinion on Financial

 ISA 200 also states that;

 ISA 400 emphasis that;

 Although AUDITOR is not an insurer or guarantor of the

 If AUDITOR believes that the Fin. Stats. are not fairly

Adopting accounting policies & maintaining

 Mgmt’s responsibility for the fairness on the

 Although mgmt has the responsibility for the preparation

 In the event that mgmt insists on the financial statement

 It is also noted in ISA 200 that;

 This paragraph discusses the auditor’s responsibility

 When the auditor also reports on the effectiveness of