AUDITING

BAC 2664

Introduction Merami Berhad has been a client for our public accounting firm for five consecutive years. As the senior auditor, I am given the clients financial statement and am tasked to perform the audit for Merami Berhad. Normally, preliminary engagement activities will be conducted before accepting a new client or continuing an existing client in compliance with ISA 300. The preliminary engagement activities includes procedures regarding the acceptance and continuance of the client relationship and the audit engagement, evaluation of independence and other ethical requirements and finally, establishing the terms of the engagement. Since it is known that we have been auditing Merami Berhad for the past five years and that the audit fee has been finalized to RM 50, 000, it is understood that the Merami Berhad and our public accounting firm has come to an agreement on the engagement letter. As such, the preliminary activities have been previously conducted successfully. As an audit senior, I am given the responsibility to assist the audit manager in the preparing of the audit plan. This is a crucial part as it determines the nature, time and extent of the audit procedures to be performed. I am also in charge of preparing the budget for the auditing to enable them to carry out their tasks efficiently and in a cost-efficient manner. Directing the day-to-day audit operations also rests on my shoulders as I am required to monitor and review the work of the audit assistants. Below is the audit process that is to be performed:

Planning

Field Work

Review

Reporting
1

AUDITING

BAC 2664

Planning Stage In conducting an external audit for a company, detailed planning has to be done to ensure the effective performance of the audit work. Audit planning is defined as the audit process stage whereby an overall strategy is developed to identify the expected conduct and scale of the audit task needed to be performed.

Deermine significant changes to the understanding of the client

Establish materiality & assess risks

Develop audit program

The first step in audit planning is to review the past years working paper file. The working paper file can be retrieved from the audit companys filing room. Since Merami Berhad has been the client of my audit firm, the working paper files serves as a general guideline on how the audit is to be carried out this time as well as the number of personnel who will be involved in audit planning etc. In other words, by looking into the Merami Berhads prior year working paper file, information such as the size of the company, industry of the company, nature of the companys activities and the consideration of any historical records of major events can be readily obtained. I will also question the clients management to determine as to whether there have been any changes being made to the business structure. To audit effectively, these information is essential because although having a detailed understanding of the client for the past five years, we still need to study the company to detect any changes in circumstances. Such
2

AUDITING

BAC 2664

information about the company is obtained to provide a current up-to-date picture of the company. The size of the company provides a rough estimate on how many people in the audit team is required to recruit. 2 to 3 staff will be required for a private limited company while 3 to 4 staff is allocated for a public listed company. If the company is a group and has several subsidiaries, then it is best to allocate a number of 7 to 8 people. Since Merami Berhad has been audited before, there shouldnt be many changes to the number of people to be included in the audit team. The time frame can also be estimated, judging from the companys size and business. This allows me to draw up a predictable dateline on when the audit report must be completed and finalized. After having thoroughly reviewed the previous years working paper file, a new file will be opened for the present audit conduct. The next phase is to establish contact with the management of Merami Berhad. This is done for to discuss on several issues pertaining to the audit services agreed. We will discuss matters such as the date at which the audit work can be performed. The auditing work should not intensively interfere with the business operations of the company. For example, the audit team should make an appointment with the management of the company on the date for the audit team to visit the company to do a stock count. Besides that, arrangements for the assistance of clients staff and for their working space are also made to ensure a smooth flow of audit operation. Merami Berhads staff should be helpful in assisting the auditors with any company information required to perform their audit by acquiring or directing them to the right source of information. The working space is important as well because the audit team can readily obtain information directly from the clients staff. Next, test controls will be performed by audit assistants to assess the control risks. A deep understanding and study of the clients internal control is crucial at this stage because it helps to reveal areas that have the potential to be misstated. Auditors obtain information from their clients understanding and the environment to highlight account balances, transactions, and disclosures that
3

AUDITING

BAC 2664

may have the tendency to be misstated. Questioning the clients management to determine for any changes in the internal control will also be conducted. Performing the risk assessment procedures not only helps identify risks of potential material misstatements, as the auditor, I am able to gather important information that is used to evaluate the control designs. In this context, inherent and control risks related to the respective assertions form the material misstatement risks. Control tests are usually performed at this stage to help verify whether the internal control is effective at addressing the risks. If I conclude that the internal control is weak for an assertion, then I will deem the risk of material misstatement to be high. On the contrary, I will deem the risk of material misstatement to be low if I determine that the internal control is strong at detecting, preventing and controlling such risks. This is an important finding as it determines the extensiveness of the auditing work to be performed. Once having thoroughly analysed the clients internal control, I will then make a judgment on the adequacy of the system in dealing with preventing, detecting and correcting material misstatements. Once done, I will gather up all the information and discuss on the findings on the clients internal control with the audit manager. Our discussions provide an insight as to how much auditing work is required and the extensiveness of the operations. It is also used to decide on an audit strategy whether to use the substantive strategy or the reliance strategy for the client. The clients previous working papers are reviewed, the companys ratios are compared and the sample of the source documents is checked together. Having audited the client for 5 years consecutively, we will most probably use the reliance strategy unless there are some sudden changes in the internal control or business operations. From the discussion, the audit program is prepared and is sent to the audit manager to be reviewed. An audit program is a detailed procedure prepared by the auditing team to guide the actions of the auditors when conducting the audit. It describes the assignment of tasks, task completion dates, task objectives and
4

AUDITING

BAC 2664

compliances.

It is basically the blueprint of the audit planning.

The audit

manager will go through it thoroughly and will raise any queries should the need arises. If all is well, the audit manager will give a green light by approving the audit program. The audit manager may also provide additional notes or advice to the audit senior. Once approved, the audit senior together with the audit team is given the permission to perform the audit of Merimah Berhad.

Field Work Stage The field work stage is basically the execution or implementation of the audit planning. After the planning has been accepted by the audit manager, an audit fieldwork will be conducted by an audit team. It is an audit process that is to be performed at the clients workplace in order to collect evidences and examine that evidences as identified in the planning process. The purpose of gathering such evidences is to provide a reasonable basis for an audit opinion towards the financial statement of Merami Berhad. In addition, the fieldwork audit is also conducted to achieve the audit objectives as set out in the audit program. In fact, the fieldwork phase is where a number of audit procedures occur and it is usually the longest phase among the four stages of basic auditing processes. The field audit procedures comprises of the following six steps:

Planning and scheduling of audit tasks

Preparation of audit budget

Distribution of audit works

Learning the client's operating environment

Perform audit procedures by test of control

Carry out audit procedures by substantive transaction testing

AUDITING

BAC 2664

First and foremost, the audit manager will begin the fieldwork audit with the planning and scheduling of audit tasks to be completed by audit staff. As such, the audit manager will specify the area of audit works and the type of audit to be carried out as well as the time frame required to complete the audit works. Generally, the scope of such field audit is depends on the number of material misstatements found within the phase itself. As a rule of thumb, if more material misstatements are being found during the field audit, then it is advisable to take on substantive procedures for the audit of the companys financial statement. Likewise, in the event that smaller amount of errors and irregularities are being identified in the fieldwork process, thereby it is preferable for the auditor to perform test of controls for the purpose of inspecting the financial statement of the company. In this case, the test of controls are better means of conducting the audit on the financial statements of Merami Berhad as the company has been my firms continuing client for over the past five years. In such a manner, the auditor of my firm would have more knowledge regarding the operations and managements integrity of the company. Therefore, it is obvious that the test of controls is a better choice for me to carry out the financial statement audit due to superior understanding of the companys internal control. Although the test of controls is being implemented, a handful of substantive procedures would still be performed on certain transactions. After the whole process of field audit is properly planned by the audit manager, and as an audit senior of the public accounting firm, I will prepare an audit budget for the field audit plan. The audit budget is useful for the execution of the field audit plan as it would facilitate the development of that audit plan. The aim of preparing such budget is to ensure efficient and effective allocation of expenditures incurred for the fixed resources such as money and audit staff within a given period. In this way, the budget is crucial to the sufficiency of the audit fees in covering all the expenditures incurred during the field work stage. Therefore, we are often encouraged to spend within the budget so that the audit
6

AUDITING

BAC 2664

fees of RM50, 000 is more than enough for our firm to meet all the costs that arise from the field audit at the clients worksite. Besides that, numerous field audit works will be distributed to the relevant audit staff accordingly. This is to make sure that the audit work will be completed within the specified stipulated period. As a rule, the audit work will be delegated to those audit staff in terms of their seniority in the accounting firm. Such phenomenon is prevalent when the audit senior usually in charge of significant matters in the financial statement such as valuation of stock and analysis of the aging of trade debtors. Sometimes, an audit senior is required to review and supervise the works of his assistants from time to time so that they always follow the time frame as stated in the timelines for the field audit. Subsequently, the audit team involved in the audit of Merami Berhad must study the routine operating activities of the client for the sake of getting more knowledge about its business processes. In order to reduce the time spent on the learning of the clients operations, the audit team is only required to review any changes in operations based on prior years operational records instead of look through the whole operating process in detail. This is due to the fact that the client has been audited by my firm for the past five years. Generally, this can be done by interviewing the operating manager and its staff to obtain firsthand information about the clients operating cycle. Alternatively, the audit team can learn the clients operating environment by discussing any significant matters with its internal auditor. Also, carry out a direct observation at the clients workplace is another method to get through its operating processes and it is usually the most effective way for us to gather extra information about the clients operation. Once the audit team has fully understood the operations of the client, they would perform the audit procedures identified in the audit program. The main areas covered in the audit procedures include the test procedures on internal control and substantive transaction testing. On one hand, the auditors in the audit

AUDITING

BAC 2664

team would examine and evaluate the clients internal control whether adequate control is existed to safeguard its assets and records. As such, the system of the clients internal control plays an important role in ensure that the items presented in its financial statement are reliable and accurate. Such control system is important to make sure that the clients financial statement is complied with the requirements as set forth in the approved accounting standards. On the other hand, the audit team would carry out the substantive testing as well. In such testing, the auditors of the audit team would check on the documents and other records for evidence to support the functioning of the clients internal control. This is to confirm that the clients internal controls are actually in function to assure high level of control over the clients documents and other records. In general, the auditors would apply the audit sampling technique to execute the substantive testing of transaction. By using the sampling technique, the auditors have to select a sample of transactions or account items and test those transactions against the companys accounting policies. This is to ensure that the financial statement of the client is prepared in accordance with its own accounting policies.

Review Stage

Reviewing & approval from audit manager

Reviewing & approval from audit partner

Approval from client

Submission to the regulatories

8

AUDITING

BAC 2664

After all the audit work is completed, the audit file will be arranged properly before it is handed over to the audit manager. At this moment, the audit manager will properly check the work that is done by the audit team. If there is any doubt, the audit manager will ask me to explain to him since I am the audit senior. Therefore in essence, as the audit senior, I am responsible for explaining all the queries that may be raised by the audit manager until satisfied. After the audit manager has approved the audit file, the file will then be passed on to the audit partner to be reviewed. At that moment, if there are any queries raised by the audit partner, the questions will be answered by the audit manager instead. Since Merami Bhd. is a public listed company, the manager and I will then do a frontal clearance together with the partner and they will also discuss matters pertaining to issues that will be asked during the Audit Committee meeting. A copy of the draft account will be given to the client for approval after it is approved by the audit partner (after all the pending documents have been cleared). The audited account will be sent for printing and the number of copies will be as required by Merami Berhad. The clients director will receive all the printed accounts and is required to sign on it with the confirmation by a Commissioner of Oaths. After that, the account will be sent back to the audit firm for further inspection. The full audit is completed when the printed account is signed by the clients director and also the audit firms partner. The complete account will then be sent to the client to be presented to the Registrar of Company. For this case, Merami Berhad will send it to Bursa Malaysia before at the end of February. The audit file will finally be sent to the filling room for spiking.

AUDITING

BAC 2664

Reporting Stage In reporting stage, ISA 700 requires us to perform the audit report in a general format as the contents of the auditors report must aligned with the purposes of financial statements. A standard auditors report on financial statements must follow the steps given and all the basic elements must be included in it: y y y y y y y y y y y y Report title Addressee Introductory paragraph Managements responsibility Auditors responsibility Scope paragraph Methodology Auditors opinion on financial statements Other reporting responsibilities Auditors name and signature Date of the report Auditors address

Report title We will include the titles of the financial statements in which we have audited so that users know that Merami Berhads financial statements have been audited.

Addressee All the contents of the audited financial statements will be clearly written as to the understanding of shareholders of Merami Berhad as required by the Companies Act.
10

AUDITING

BAC 2664

Introductory Paragraph We will clearly state that the financial statements have been audited and also identify the entity, title, and the date and period covered by the financial statements. For example, We have audited the financial statements such as balance sheet, income statement of Merami Berhad as of December 31, 2009. These financial statements are to be directed to the shareholders. Our final responsibility is to evaluate the necessary financial statement and then express an opinion on the financial statements based on our audit.

Managements responsibility We will clearly state that the managements (directors) responsibility are preparation of financial statements in accordance with approved accounting standards. Besides, we will state directors responsibilities that the financial statements will give a true and fair value about the company.

Auditors responsibility In order to distinguish the auditors report and directors report, we are been suggested to emphasize our responsibilities by incorporating the following wording in the report: It is our responsibility to form an independent opinion, based on our audit, on the financial statements and to report our opinion, to you, as a body, in accordance with Section 174 of the Companies Act, 1965 and for no other purpose. We do not assume responsibility to any other person for the content of this report.

11

AUDITING

BAC 2664

Scope Paragraph We will conduct our audit in accordance with ISA. Those Standards require us to plan and perform the audit so that we will be able to come out with a reasonable assurance that the financial statements are free of material misstatement. Our audit will include examining on a test basis, finding evidence supporting the amounts and disclosures in the financial statement, assessing the accounting principles used and significant estimates made by the management as well as evaluating the overall financial statement presentation. After that, we will provide a reasonable explanation to our opinion.

Methodology We will state in the auditors report whereby the methods and estimates that Merami Berhad has used in his accounting measurements and computation such as straight-line method of depreciation accounting. Besides, we can make the consequences of such accounting measurements and computations known to the shareholders so they will have a better picture of the company.

Opinion Paragraph We will express our opinion whether the financial statements give a true and fair view of Merami Berhads financial position. Besides, we are required to state whether the financial statements are complying with the statutory requirements. For example, if the financial statements contained no issues of error or material misstatement, we will hand in an unqualified report. In our opinion, the financial statements are giving a true and fair view representing the financial position of Merami Berhad as of December 31, 2009 and the consequences of its Merami Berhads

12

AUDITING

BAC 2664

main operation as well as cash flow statements for the year ended are in accordance with [indicate ISA or relevant national standards].

Other reporting responsibilities We will express opinions on certain situations or cases in which they are required by the Act for example to give an opinion about the accounting and other records and registers of the Merami Berhad.

Name and Signature of Auditor We will sign in the name of the audit company and also the personal name (our names) who engaged with the audit engagement. Besides, we will state the Firm Number of our audit firm and the Approval Number of the auditor in the auditors report as required by Section 8A(5) of the Companies Regulation 1966.

Date of Report We will put on the date of the audit report after all the significant auditing procedures have done. The date will not be earlier than the date the financial statements are signed and approved by directors for issuance to members of Merami Berhad.

Auditors Address We will state our address at where the audit was carried out. For example, Bernard Chai 145, Jalan Raya 3, Taman Merbok, Ayeh Keroh.

13

AUDITING

BAC 2664

Modified Unqualified Auditors Report If there happens to have any emphasis on a matter which do not affect our opinion, we will come out with a modified unqualified auditors report. After that, we will add in additional explanatory paragraph in conjunction with the serious matter.

Qualified Report, Adverse Report, Disclaimer Report If we are not satisfied with the supporting documents as evidences or there are any non-disclosures of the management. We will issue a qualified report or a disclaimer report or an adverse report.

Conclusion Based on the planning stage, field stage, reviewing stage and also the reporting stage, the fundamental purpose of auditing the company is to ensure that the clients financial statements and reports project a true and fair value of the entitys well being. Here, independent or external auditors play a critical role in performing procedures in order to determine the degree of truthfulness if the financial statements. Due to the independent relation of external auditors with the companys management, the auditors opinion is designed to add credibility to the financial statements in ensuring the integrity of corporate governance in Malaysia.

14