Analysing the auditing process for Syarikat Alpha

Category: Accounting

Syarikat Alpha is a company that run their business in trading industry. From the scenario, they are dealing with buying and selling their stocks. In order to ensure that their operations run smoothly, an audit must be perform in the company. For Syarikat Alpha to realize this task, a qualified auditor is needed in this situation. Audit is mainly a statutory concept, and eligibility to conduct an audit is often set down in law.

1.1 Duties of the auditor

According to ACCA Study Text (2002), the auditors should be required to report on every balance sheet and income statement laid before the company in general meeting. It stated that the duties of auditor in the company are:

1.1.1 Compliance with legislation

The auditor of the company must check whether the accounts that have been prepared by the account department follow the regulation stated in the law. As an auditor, I must ensure that the account must be in accordance with Financial Reporting Standards (FRSs) which is one of the legislation that applied in this country. For example, Syarikat Alpha must recognise all assets and liabilities whose recognition is required by FRSs. This shown that the company comply with legislation.

1.1.2 Truth and fairness of accounts

As an auditor, I should planned and performed work to obtain reasonable assurance as to whether the financial statements of Syarikat Alpha are free from material misstatements and give a true and fair view in accordance with reporting framework and where appropriate, comply with statutory requirements.

1.1.3 Proper records and returns

The responsibility of an auditor is to report the financial statements as prepared and presented to the management of Syarikat Alpha. Furthermore, the report should be dated earlier than the date on which the financial statements are accepted by management. Proper records must be prepared

1.2 Status of the auditor

According to Millichamp (1996), in Section 389A stated that the auditors of a company have a right of access at all times to the company's books, accounts and vouchers, and are entitled to require from the company's officers such information and explanation as they think necessary for the performance of their duties as auditors. This section gives the auditor some rights. He has a right of access at all times to the company's books, accounts and vouchers. In practice this right is exercised with courtesy and reasonableness. Auditors do not appear their client's premises at two in the morning demanding to see the petty cash book.

An auditor of a limited company is given burden by the Companies Act. He is required to make a report on, amongst other things, the truth and fairness of the Annual Accounts. If he is negligent in any way and fails to discover that the Accounts contain an untruth or do not fairly present the position then he may be legally required to compensate from his own pocket any persons who lose money as a result of actions taken as a result of the false Accounts.

1.3 Liability of the auditor

According to (2010), from 6 April 2008 new provisions introduced by the Companies Act 2006 enable auditors to limit their liability in respect of statutory audit work carried out for a company by entering into specific agreements with their clients. The new provisions contained in sections 534 to 538 of the Act allow the validity of liability limitation agreements that purport to limit the amount of liability owed to a company by its auditor in respect of any negligence, default, breach of duty or breach of trust occurring in the course of the audit of accounts, of which the auditor may be guilty in relation to the company. For a liability limitation agreement to be effective it needs to fulfil the conditions that it is approved by a resolution of the company's shareholders and that the arrangements contained are fair and reasonable having regard to the particular circumstances. Furthermore a liability limitation agreement cannot cover more than one financial year and must expressly indicate the financial year in relation to which it applies. According to ACCA Study Text (2002), auditors' liability can be categorised under:

1.3.1 Liability under contract law

When auditors accept appointment, they enter into a contract which imposes certain obligations upon them. These obligations arise from the terms of the contract. Both express and implied terms of contracts impact upon auditors. Express terms are those stated explicitly in the contract while the implied terms are those which the parties to a contract may have left unstated because they consider them too obvious to express.

1.3.2 Negligence and the duty of care

Negligence is some act or omission which occurs because the person concerned has failed to exercise the degree of professional care and skill, appropriate to the case, which is expected of accountants or auditors. It would be a defence to an action for negligence to show that:

There has been no negligence

No duty of care was owed to the plaintiff in the circumstances

No financial loss has been suffered by the plaintiff (in tort actions)

The third defence would not be available to a claim in contract, but only nominal damages would be recoverable and in those circumstances it is unlikely that such an action would be brought. Recently, there have been a number of cases where substantial sums have been claimed as damages for negligence against accountants and auditors. In a number of cases the claims may have arisen as a result of some misunderstanding as to the degree of responsibility which the accountant was expected to assume in giving advice or expressing an opinion rather than negligence in carrying out agreed terms.

1.3.3 Professional Liability to Third Parties

In its report The Financial Aspects of Corporate Governance, the Cadbury Committee gave an opinion on the current situation as reflected in the Caparo ruling. The report was issued on the 27 May 1992. It felt that Caparo did not lessen auditors' duty to use skill and care because auditors are still fully liable in negligence to the companies they audit and their shareholders collectively. Given the number of different users of accounts, it was impossible for the House of Lords to have broadened the boundaries of the auditors' legal duty of care. The conclusion must be that the decision in Caparo v Dickman has considerably narrowed the auditors' potential liability to third parties and that the case could have far- reaching implications for the idea of there being various classes of 'user groups' who may make use of audited accounts. The judgement would appear to imply that members of various such user groups, which could include creditors, potential investors or others, will not able to sue the auditors for negligence by virtue of their placing reliance on audited annual accounts.

1.4 Conclusion

As for conclusion, auditor plays an important roles or responsibilities towards to the company that he serves. At the same time, he also can acquire high liabilities in his workplace. In order to prevent problem happens, auditor must apply the principles that relevant to be a good auditor.

2.0 Introduction

The coordination of internal audit activity with external audit activity is very important from both points of view: from external audit's point of view is important because, in this way, external auditors have the possibility to raise the efficiency of financial statements audit; the relevancy from internal audit's point of view is assured by the fact that this coordination assures for the internal audit a plus of essential information in the assessment of risks control.

2.1 Relationship between internal and external auditors

According to Millichamp (1996), the role of internal auditing is determined by management, and its objectives differ from those of the external auditor who is appointed to report independently on the financial statements. The internal audit function's objectives vary according to management's requirements while external auditor's primary concern is whether the financial statements are free of material misstatements; the external auditor should obtain a sufficient understanding of internal audit activities to identify and assess the risks of material misstatement of the financial statements and to design and perform further audit procedures. The external auditor should perform an assessment of the internal audit function, when internal auditing is relevant to the external auditor's risk assessments; Liaison with internal auditing is more effective when meetings are held at appropriate intervals during the period. The external auditor would need to be advised of and have access to relevant internal auditing reports and be kept informed of any significant matter that comes to the internal auditor's attention which may affect the work of the external auditor. Similarly, the external auditor would ordinarily inform the internal auditor of any significant matters which may affect internal auditing;

There is a complementary relationship exist where

Internal audit is a complement of external audit, because in those organizations where internal audit function is implemented, external audit is more determined to appreciate in a different manner the regularity, sincerity and fair view of the results and financial statements.

External audit is a complement of internal audit, starting from the idea that where an external specialist made his job, it is certain that there is a better control. Also, internal auditor could have significant benefits as a result of external audit activity, in order to express his opinion or to argue his recommendations.

2.2 Conclusion

As for conclusion, the ideal situation is when the internal and external auditors meet periodically to discuss common interests; benefit from their complementary skills, areas of expertise, and perspectives; gain understanding of each other's scope of work and methods; discuss audit coverage and scheduling to minimize redundancies; provide access to reports, programs and working papers; and jointly assess areas of risk. In fulfilling its oversight responsibilities for assurance, the board should require coordination of internal and external audit work to increase economy, efficiency, and effectiveness of the overall audit process.

3.0 Introduction

According to ACCA Study Text, an audit plan is the formulation of the general strategy for the audit, which sets the direction for the audit, describes the expected scope and conduct of the audit and provides guidance for the development of the audit program.

Referring to the diagram, Syarikat Alpha can start with accept or continue with the assignment until the last step which is discussing Audit Planning Memorandum (APM) with client of the company.


As for conclusion, planning is an important element in an audit process. Although the audit procedures carried out on specified audits will vary depending on the nature, size and complexity of an entity's operations, good audit planning is crucial if an auditor wishes to ensure that an audit is carried out in an effective, efficient and timely manner.

4.0 Introduction

Company who run their business in Malaysia must conduct a statutory audit report in their company. Since that Syarikat Alpha is a Malaysian's company, they must obey it. This can be proven by referring to (2010), statutory audit report is statutory prerequisite under the Malaysian Company Act, 1965 that a company built-in in Malaysia has to prepare its financial statements such as balance sheet and profit and loss statement in accordance with applicable approved accounting standards in Malaysia. Furthermore, the financial statement of the company has to be audited in accordance with approved standards on auditing in Malaysia.

4.1 Purpose of statutory audit report

According to Bagshaw (2003), internal audit reports are different to statutory auditors' reports produced by external auditors because statutory reports are governed by legislation and either national auditing standards, or International Standards on Auditing. Statutory auditors' reports are highly codified, and usually fairly brief by comparison with internal audit reports, and they are often available for public inspection. Statutory auditors' reports are produced for the benefit of shareholders and other stakeholders whereas internal audit reports are produced for the benefit of management; they are generally private documents and are not normally available for public inspection.

4.2 Content of statutory audit report

According to Mary and Tong (2007), ISA 700 requires the auditor's report to contain the following:

Title of report

The auditor's report should have an appropriate title.

Addressed to shareholders or members of the company

The auditor's report should be appropriately addressed as required by the circumstance of the engagement or by local regulations. The report is normally addressed either to the shareholders or the board of directors.

Opening or introductory paragraph

The auditor's report should:

Identify the financial statements of the entity audited

State the date of and the period covered by the financial statements

A statement regarding management's responsibility for the financial statements

Scope paragraph

The auditor should describe the scope of the audit by stating that the audit was conducted in accordance with approved auditing standards in Malaysia, as issued by the MIA and the MICPA.

Opinion paragraph

The auditor's report should clearly state the auditor's opinion as to whether the financial statements give a true and fair view in accordance with the financial reporting framework and, whether the financial statements comply with statutory requirements.

Date of the report

The auditor should date the report as of the completion of the audit. This indicates that the auditor has considered the effect on the financial statements and on the report of events and transactions of which the auditor became aware and that occurred up to that date.

Auditor' address

The auditor's report should name a specific location, which is ordinarily the city where the auditor maintains the office that has responsibility for the audit.

Auditor's signature

The auditor should sign the report in the mane of the audit firm and in the personal name of the auditor.

4.3 Conclusion

As for conclusion, audit report must be complete on the hand of the management. It can give a big view to the shareholders, board of directors and also public.

5.0 Introduction

According to Ricchiute (2006), an audit report is a letter of communicating what was audited, management's and the auditor's responsibilities, what an audit entails, and the auditor's opinion. Most financial statement audits result in a three-paragraph standard audit report. The report uses standard language stating that, in the auditor's opinion, management's financial statements present fairly, in all material respects, financial position, results of operations, and cash flow in conformity with generally accepted accounting principles (GAAP).

5.1 Types of qualification

According to Millichamp (1996), there are several types of qualification. These can be summarised as:

Limitation of scope

It means that a limitation of scope of the auditors' work that disable them from attaining

Qualified Opinion

A Qualified Opinion report is given when the auditors were not able to fully satisfy themselves on all aspects of the company's financial status. Specific records may be missing, or some parts of information may not be up to GAAP. In some cases, the auditor may be able to access data but not fully confirm it. All these problems are documented and make the auditor's evaluation more negative.

Adverse Opinion

An Adverse Opinion report is a negative response that occurs only when the auditor finds the company's records as a whole are uninformative and not in line with GAAP, or if the financial records have been falsified or are in other ways erroneous. The accountants add paragraphs explaining these problems and giving their opinions as to how the records differ from GAAP.

Disclaimer of Opinion

The Disclaimer report is issued only when the auditors are unable to perform their work. When not enough time or information is available, a disclaimer of opinion report is issued. This is rare where an auditor will often only make this report if the company refuses to reveal specific information or if the auditing firm and the company break their contract.

5.2 Conclusion

As for conclusion, there are four types of audits which are unqualified opinion, qualified opinion, disclaimer opinion and adverse opinion that can be used in order to produce the audit report for the company.

6.0 Drafting the management letter

According to Mary and Tong (2007), the suggested approach to drafting the management letter is as follows:

First of all, a simple title or heading must be created.

Secondly, the auditor must explain the issue or problems that rose. Furthermore, it must be truthful with no personal accent.

The auditor also must explain the possible allegation or effects in financial, operational or administrative section.

Last but not least, provide suggestions or recommendations for improvements to internal control weaknesses to correct the situation.

While Syarikat Alpha has a high risk of misappropriation of assets; I assess the likelihood of fraudulent financial reporting as low. Syarikat Alpha maintains an independent board of directors, does not practice aggressive accounting policies, and has an internal auditing system. Based on knowledge obtained from the questionnaire and the related risk factors Syarikat Alpha's overall control environment is moderate to weak.

Due to a weak control environment we cannot rely entirely on internal controls and more testing of internal controls during our audit. In order to provide a higher level of assurance we must substitute this work as the focus of an audit program and less tests of controls.