Chapter 1 - Introduction To Financial accounting
- 2. After studying this chapter, you should be able to: Differentiate between the different types of audit Describe the auditing profession and its requirements Explain the framework in the auditing profession LEARNING OUTCOMES
- 3. DEFINITION An audit is a complete and careful examination of selected financial records of a business or person. At the end of an audit, auditors prepare a report of their findings, where they express their opinions on the truthfulness and fairness of the financial statements, as well as whether the statements comply with the required regulations and accounting standards.
- 4. DIFFERENCES BETWEEN AUDITING AND ACCOUNTING Auditing Accounting Framework International Auditing Standards (IAS) Malaysian Financial Reporting Standards (MFRS) Relevant Acts Malaysian Financial Reporting Standards Scope Provide opinion of financial statements Prepare financial statements Reporting structure Shareholders of client’s company Management
- 5. TYPES OF AUDITOR AND AUDIT
- 6. TYPES OF AUDITOR AND AUDIT (Cont.)
- 7. PROFESSIONAL SCEPTICISM Professional skepticism emphasizes having an inquisitive mind, which means that auditors should have a questioning mind when they encounter an event or evidence. They should not be easily satisfied with one observation, but instead delve deeper into the matter to get the right answers.
- 8. REGULATORS OF THE AUDITING PROFESSION International Local International Federation of Accountants (IFAC) Ministry of Finance International Accounting Standards Board (IASB) Malaysian Institute of Accountants The Institute of Internal Auditors Malaysia (IIAM) Securities Commission Malaysia Bank Negara Malaysia (BNM)
- 9. CONTENT OF AUDITOR REPORT An audit report is a written opinion of the reliability of the business’s financial statements and is provided by the chartered accountants auditing the company.
- 10. CONTENT OF AUDITOR REPORT Auditor's reports must adhere to accepted standards established by governing bodies such as IAS and MFRS. A typical auditor's report will state: 1. The company that has been audited and what their accounting method is 2. The responsibility of the auditor and their report 3. Reservations or modification (if any) 4. Conclusion 5. Any additional information* 6. A management report* 7. The date and auditor’s signature Items 5 and 6 are omitted if there is no additional information and/or if management has chosen not to prepare a management report.
- 12. TYPES OF AUDITOR REPORT A. THE CLEAN OR UNQUALIFIED OPINION. The advice given by the auditor will be unqualified, without any adverse comments or any disclaimer about any clauses or process. As per the auditor, by this report, they are satisfied with the company’s performance and finding its functions in sync with governance and applicable statute. The report indicates the auditor’s opinion that all documents provided for the evaluation indicate that the company’s financial activities and records are correct and acceptable.
- 13. TYPES OF AUDITOR REPORT B. THE QUALIFIED OPINION. This report is generally positive because it indicates that the auditor has found nothing wrong in the financial documentation. However, a qualified opinion means that the company audited has not adhered to the standards set by UK GAAP. This report will include an extra section addressing why it could not be considered an unqualified opinion.
- 14. TYPES OF AUDITOR REPORT C. THE ADVERSE OPINION It reflects that the financial statements of an entity are materially misstated, misrepresented, and do not reflect its correct financial performance. Opinion provided by the statutory auditor in his audit report denotes that the company’s financial statements do not show a ‘True & Fair’ view of the organization’s business practices and have been misrepresented or misstated.
- 15. TYPES OF AUDITOR REPORT D. DISCLAIMER OF OPINION If the auditor fails to frame an opinion about the company’s financial statements, then he gives a disclaimer of opinion. The disclaimer can be the lack of audit evidence or the restriction by the client to examine all the records etc. This simply means that the auditor couldn’t complete the audit due to a particular reason.
- 17. USES OF AUDITED INFORMATION a. THE END PRODUCT OF AUDITING An audit report is the final outcome of the auditing process that must be included an overview of the evaluation of the correctness and reliability of the financial statements of a company. b. AUDITOR’S OPINION ON ACCOUNTS audit report expresses the auditor’s opinion on the company’s accounts and records as examined by auditor. Auditor will determine if the they are prepared in conformity with appropriate financial reporting standards or principles applicable to the company under audit.
- 18. USES OF AUDITED INFORMATION c. REFLECTION OF AUDITOR’S WORK The work done by the auditor is reflected in the audit report. It showcases the nature and extent of audit procedures adopted by the auditor to carry out the examination of accounts. d. MEASURES AUDITOR’S RESPONSIBILITY The audit report is the instrument that measures the auditor’s responsibility with regard to the assessment of financial statements.
- 19. USES OF AUDITED INFORMATION e. USED AS A RELIABLE SOURCE OF EVIDENCE The audit report reveals the true state of the company’s financial situation. It is recognized as a reliable document by a variety of people. It assists the users of financial statements in determining whether or not the financial information is correct. f. ADVICE TO THE MANAGEMENT Internal auditors offer advice to management on business & operational areas that require improvement, whereas management may consult with their external auditor and seek advice on some technical issues, even though it is not the external auditor’s duty to provide advice.
- 20. THE DEMAND FOR AUDITING The audit market is broad and stretches over many industries. Both the private and public sectors require auditing. Financial statements of departments and ministries of the federal government, as well as every department under the state government are required to submit their audited financial statements. So long as there are governing standards and bodies, and financial statements of business entities are required to be credible, audits will be necessary.
- 21. TUTORIAL 1. Distinguish between internal auditor and external auditor. 2. In your words, explain THREE (3) impact auditing towards business. 3. Explain qualified opinion and clean opinion in auditor report.