Every organization like Syarikat Alpha must have auditor in their organization. The auditor has their own duty and position in that company. Auditors play an integral part in a company as the companys financial standing. Regarding on case study, Syarikat Alpha need to enhance the effectiveness of the company's purchase and stock management systems. Auditors need to recognize their duty, status and also the liability in the company such as Syarikat Alpha.
1.1 Three Duties of the auditor Syarikat Alpha
Duty is also can call as responsibility. Auditor's responsibility are detecting material misstatements in the financial statements and also identifying material weakness in internal control. There are three duties of the statutory auditor in the Syarikat Alpha. The duties are reports to members, inclusion of further information and also reports in prospectuses.
Report to Members
The most important duty of each auditor in the organization is to report to the members under section 236 of the Act. The report on the accounts of a limited company that make by each auditors must state that, the balance sheet gives a true and fair view of the state of the company's affairs at the balance sheet date, the profit and loss account gives a true and fair view of the profit or loss for the period ended on that date, and also the accounts have been properly prepared in accordance with the provisions of the Companies Act 1985.
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Inclusion of further Information
There are five requirements on disclosure of information in published accounts are all supported by a stipulation which requires the information specified to be given in the auditors report. The five requirements are director's emoluments, emoluments of the chairman, total directors' emoluments waived, employee's emoluments, and also loans and quasi-loans to officers, credit transaction and directors' interests in contracts.
Reports in Prospectuses
Next duty is report in prospectuses. If a company makes an issue of shares to the public, a report must be placed in the prospectus by the company's auditors. The auditors of that company must giving details on the report. The details are the profits and losses arising in each of the previous five years, rates of dividend in each of the previous five years, and also all the assets and liabilities as at the latest balance sheet date.
Three Status of the auditor of Syarikat Alpha
There are many statuses or positions of the auditor in the Syarikat Alpha. Auditor occupies a statutory position because he is appointed strictly in accordance with the provisions of the Companies Act. Furthermore, auditor functions in various capacities. The statuses of an auditor are can be as an agent of the members, as an officer of the company and not as guarantor of the company.
As an Agent of the Members
Auditor is appointed by its shareholders. An auditor is representatives of the shareholder and it is his statutory duty to safeguard their interest. Besides that, an auditor acts as an agent of the shareholders and performs the duties in the Companies Act 1956 and also audit agreement between him as an auditor and the client.
As an Officer of the Syarikat Alpha
An auditor is deemed to be an officer of the company for the some purposes such as in the section 633, power of the court to grant relief to officer in proceedings for negligence, default, breach of duty, and etc. Next purpose is in the section 539, which is penalty for the damage of books of the company. Besides that, auditor can be as an officer of the company in the section 478, where there is the power of the court to order public examination of person guilty of fraud of the company.
Not as guarantor
The auditor of a Syarikat Alpha does not give guarantee that the financial statements of the company show the true position or accurate according to the books. Rather his duty is to ascertain and certify to the shareholders the true financial position of the company at the time of the audit.
Liabilities of the auditor of Syarikat Alpha
There are many liabilities or problems of the auditor that Syarikat Alpha having. Liability of auditors is liability for pure economic loss. It proposes liability for disloyal and gross negligent behavior if a wrong audit cause damages in the secondary market. Besides that, an auditor has to render his services with care, skill and diligence and according to GAAP, standards of performance. The auditors may be field liable for any careless act done by him
Always on Time
Marked to Standard
As a conclusion, an auditor has the roles and responsibilities towards company that they work in. Besides that, an auditor also has their own position in the company such as Syarikat Alpha. They also cannot escape if they liable on some liability of the Syarikat Alpha. There are many duties of auditors except that I already stated at above. The duties of auditor are examine loans and advances, examine entries, examine investments and also examine expenses.
Task 2 ( LOC 3 / AC 2 )
Describe the relationship between internal and external auditors of Syarikat Alpha.
There are two types of auditors in Syarikat Alpha which are internal auditors and external auditors. According to Woolf (1986), internal auditors are employed by companies to do both financial and operational auditing and report to the management. Internal auditors are expected to provide value to the organization such as Syarikat Alpha through improved operational effectiveness on purchase and stock management system. Many internal auditors are involved in operational auditing or have expertise in evaluation computer system. To operate effectively, an internal auditor must be independent of the line function in an organization, but he cannot be independent of the entity as long as an employer-employee relationship exists. Internal auditors provide management with valuable information for making decisions concerning effective operations on the business.
Whereas, according to Tanna (1986), external auditors are known as Certified Public Accounting Firms (CA Firms) are responsible for auditing the published historical financial statements of all widely traded companies, most other reasonably large companies, and many smaller companies and non-commercial organization. External auditor is also known as independent auditor. The role of external auditors are identifying operational problems and making recommendation that may benefit the audit client. They must provide useful information and giving operational recommendation. Regarding on the case study, Mr Daniel made specific recommendation on how to enhance the purchases and stock management system by installing efficient computer system for the perpetual records for stock management towards Syarikat Alpha.
Three Relationships between Internal and External Auditor of Syarikat Alpha
There are many relationships between internal auditor and external auditor in the organization such as Syarikat Alpha. There are has many similarities and differences between them. Internal and external auditors have a common interest in accounting that there are an effective system of internal check to prevent or detect errors or fraud and that is operating satisfactorily and adequate accounting system to provide the information for preparing true and fair financial statements. Next similarity is both of the internal and external auditors must be competent as auditors and remain objective in performing their work and also reporting their result. Besides that, internal and external auditor use audit risk model and materiality in deciding the extent of their tests and evaluate the results and also they verification of assets and liabilities of the company.
Besides similarities between internal and external auditor, there is also has differences between of them. There is difference in the scope of the work. The extent of the work that undertake by the internal auditor is determined by the management, whereas the independent or external auditor arises from the responsibilities placed on him or her by statue which are chairman and shareholder. Other than that, the difference is approach by internal and external auditor. Internal auditor approach is with a view to ensuring that the accounting system is efficient, so that the accounting information presented to management is more accurate and discloses material facts. However, external auditor approach is governed by his duty to satisfy himself that the accounts to be presented to shareholders show a true and fair view of the profit or loss for the financial of the company affairs at the end of period.
Finally, the difference between of them is responsibility. The internal auditor's responsibility is to the management, whereas the external auditor is responsible directly to the shareholder of the company. It follows that the internal auditor being a servant of the company, does not have independence of status which the independent auditor possesses.
As a conclusion, internal auditor and external auditor has their own responsibility in the organization. There is also has similarities and differences in duties between of them. Wherever relationships which are the similarities and differences that has in their responsibility, there is for enhance or improve the efficiency of the operating in the organization or company which is Syarikat Alpha.
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Task 3 ( LOC 3 / AC 3 )
Plan an audit with reference to scope, materiality and risk.
According to Arens (1999), planning stated that every each auditor should plan the audit work so that the audit will be performed in an effective manner and audit plan also should be based on knowledge of the client's business. There are three main reasons why auditor should plan properly. The first reason is to enable the auditor to obtain sufficient competent evidence for the circumstances. Next reason is to avoid misunderstanding with the client. And the final reason is to help keep audit cost reasonable. In this task, auditor needs to plan the audit with reference to scope, materiality and also the risk.
Planning the audit involve close connection with the client company's financial director and his staff. Planning may take some time to perform. So, external auditor should be in close with the internal audit staff in order to avoid unnecessary overlap of work and also ensure that the detailed audit procedures are satisfactory completed. The figure below shows the steps that I planning an audit due to overcome the problem that Syarikat Alpha having which is the file that include all the records system about purchases and stock management crushed due to a system program bug.
Accept client and perform
initial audit planning
Understand the client's
business and industry
Assess client business risk
Set materiality and assess acceptable audit risk and inherent risk
Understand internal control and
assess control risk
Gather information to
assess fraud risk
Develop overall audit plan
and audit program
Source from: Auditing in Malaysia: An Integrated Approach
The scope that needs to be correct in Syarikat Alpha is the way to record all the transaction in that company by computer based system. The audit should include an audit control file containing full details of the system that include copies of all the forms which output documents might take, and details of their subsequent sorting and checking. Besides that, it includes details of physical control over source document, and any control totals of numbers, quantities, including the names of the person keeping controls. It also include the arrangements for retaining source documents for suitable periods that required for reconstructing stored files in the event of the error. First of all, Syarikat Alpha needs to accept their clients and perform the initial audit planning. In this stage, auditors need to decide whether to accept a new client or continue serving the existing one. This decision makes early in order to avoid any significant cost that cannot be recovered. The auditor identifies why the client wants or needs an audit. To avoid misunderstanding, the auditor obtains an understanding with the client about the terms of the engagement. Auditor also develops an overall strategy for the audit, including engagement staffing and any required audit specialized. Before accepting a new client, most CA firm investigate the company to determine its acceptability.
Next stage is understood the client's business and industry. The nature of the client's business and industry affects client business risk and the risk of material misstatements in the financial statements. There have several factors that have to increase the importance of understanding the clients business and industry. First factor is information technology affects internal client processes, improving the quality and timeliness of accounting information. Next factor is each auditor need a better understanding of the client's business and industry to provide additional value-added service to the clients. For example, CA firms often provide assurance and consulting services related to information technology and risk management services for nonpublic audit clients that require an extensive knowledge of the client's industry. Besides that, the increased importance of human capital and other intangible assets has increased accounting complexity and the importance of management judgments and estimates. For this stage of the planning audit, there are three reasons for obtaining a good understanding of the client's industry and external environment which are inherent risks are typically common to all clients in certain industries. Next reason is risk associated with specific industries may affect the auditor's assessment of client business risk and acceptable audit risk and also many industries such as Syarikat Alpha has unique accounting requirements that auditors must understand to evaluate whether the client's financial statements are in accordance with accounting principles.
Besides those reason, auditor must also understand the client's external environment such as economic condition, extent of competition and regular requirements. Auditors must understand their clients objectives related to reliability of financial reporting, effectiveness and efficiency of operations and also compliance with law and regulation. In this stage also, there are must have the measurement and performance. A client's performance measurement system includes key performance that management uses to measure program or activities towards Syarikat Alpha objective. The key performance are market share, sales per employee, unit sales growth, web site visitors, same store sales and also sales per square foot for a retailer. This measurement includes ratio analysis and benchmarking against key competitors.
Another stage in this audit planning is assessing client business risk. According to Amran (2008), client business risk is the risk that client will fail to achieve its objective. It can arise from any of the factors affecting the client and its environment. The auditors only concern the risk of the material misstatements in the financial statement due to client business risk. There is relationship among the client's business and industry, client business risk and also the auditor's assessment of the risk of material financial statement misstatement. The auditor considers management controls that may mitigate business risk, such as effective risk assessment practice and corporate governance. Client business risk is then evaluated to assess the risk of material misstatement in the financial statement.
Other than that, perform preliminary analytical procedures is a fourth stage in this audit planning. In this stage, comparison of client ratios to industry or competitor benchmarks provides an indication of the company's performance. Analytical procedures are also important part of testing throughout the audit. There are five types of analytical procedures in this stage that are comparing of the client with others. First type is compare client and industry data. Next is compare client data with similar prior period data. Other than that is comparing client data with client determined expected results. Fourth type is compare client data with auditor determined expected results. And finally type is compare client data with expected results, using non-financial data. In identifying areas of specific risk, the auditor needs to focus on the liquidity activity ratios.
Next stage is set materiality and assesses acceptable audit risk and inherent risk. Materiality and risk are fundamental concepts that are important to planning the audit and designing the audit approach. Materiality depends on the size of the item or error judged in the particular circumstances of misstatements. Reason for setting a preliminary judgment about materiality is to help auditor plan the appropriate evidence to accumulate. According to Isa (1997), risk in auditing means that the auditor accepts some level of certainty in performing the audit function. The auditor of Syarikat Alpha recognize that there is uncertainty about the competence of evidence, the effectiveness of client's internal control and also whether the financial statement show true and fair view when audit is completed. In this stage, inherent risk is assessed by identifying any aspects of the client's background that indicates of high likelihood of misstatements in the financial statements. Inherent risk also can be extended to individual balance-related audit objectives. An example, auditor may conclude that there is a high risk of uncollectible accounts receivable realizable value objective because of the adverse economic condition in the client's industry.
There is another three stages in this audit planning which is understand internal control and assess control risk. There are three concepts under the study of internal control and assessment of control risk which are management's responsibility, reasonable assurance and also inherent limitations. In management responsibility of Syarikat Alpha, they must maintain the entity's controls. This concept is consistent with the requirement that responsible for the preparation of financial statements. In reasonable assurance, Syarikat Alpha should develop internal controls that provide reasonable, assurance that financial statements present a true and fair view. Internal controls are developed by management after considering cost and benefits of the control. Finally is an inherent limitation. That internal control can never be regarded as completely effective, regardless of the care followed in the design and implementation. The effectiveness depends on the competency and dependability of the people using it.
Second last step is gather information to assess fraud risk. Syarikat Alpha needs to collect all the information about the company and financial statements in order to assess fraud risk in that company. And the final stage is developing overall audit plan and audit program. In this step, audit plan and audit program discussed in term of five types of audit test. Besides that, the auditor must give attention on both the design and the operation of aspects of internal control to effectively plan the audit. The purpose of the procedures is to obtain an understanding and also provide evidence to support that understanding.
As a conclusion, the auditor needs to understand internal control to determining the overall audit strategy. The auditor uses the understanding of internal control to identify factors that affect the risk of material misstatements and designed the nature, timing and extent of further audit procedures. Besides that, the major purpose of the audit planning is to provide information to aid the auditor in assessing acceptable audit risk and inherent risk. These will affect the auditor's client acceptance or continuance decision, audit fee, and the evidence decision. Another purpose is to obtain information that requires by follow-up during the audit. By doing that, it can obtain sufficient competent evidence.
Task 4 ( LOC 4 / AC 1 )
Explain the purpose and content of a statutory audit report.
Statutory audit is one of the core business activities in any companies in Malaysia. According to BDO Malaysia, It is requirement under the Malaysian Companies Act 1965, where company incorporated in Malaysia has to prepare the financial statements in accordance with applicable approved accounting standards and also has to be audited accordance with approved standards on auditing in Malaysia. Statutory audit have their scope determined by the governing legislation. All limited companies which are public or private require a statutory audit. It is provides assurance on the reality and fairness of an organization's financial information. Besides that, statutory audit provides advice on controls and processing system weaknesses. And lastly it is confirmation of accounting treatments on complex transactions.
Purpose and Content of Statutory Audit
Statutory audit report has content and purpose in that report. There are much content that include in statutory audit. The content are clearly indicate the scope of the statutory audit and in accordance with which auditing standards the statutory audit was conducted. Next content is whether the statutory audit results in an unqualified opinion, a qualified opinion, an adverse opinion, or if statutory audit is unable to express an audit opinion, in a disclaimer opinion. Besides these two contents of statutory audit, there is other content which is the matters to which the statutory auditors draws attention by way of emphasis without qualifying the audit opinion. Final content of statutory audit report is the financial reporting framework in accordance with which the accounts subject to the statutory audit are prepared.
The purpose of statutory audit is to enable shareholders to review the past management of the company. Next purpose is to exercise their rights to influence future management in company which is Syarikat Alpha. Besides these two purposes, there is another purpose of statutory audit which is to guarantee that no fraud is taking place. The statutory audit is not set up primarily to detect fraud, whereas the principal aim is to ensure that the accounts in the company are true and fair view.
As a conclusion, every company has statutory audit report that has own content and purpose. All entities, including companies, limited liability partnerships and charities, that meet certain criteria such as being above a certain size or of public interest, are required by law to have their financial statements audited. Others for various reasons, including agreement with shareholders to fulfill financing requirements, may require an audit.
Task 5 ( LOC 4 / AC 2 )
Explain and illustrate the different types of qualification within an audit report.
There are many types of qualification within an audit report. These can be summarized as nature of circumstances, very material and pervasive, and also less material. In the types of nature of circumstances, there are having limitation of scope and disagreement. Whereas in very material and pervasive there are have disclaimer and adverse. Last type is less material that has possible adjustment and except for.
Types of Qualification
According to Millichamp (1996), limitation of scope is a limitation of scope of the auditor's work that prevents them from obtaining sufficient evidence to express an unqualified opinion. Limitations on the scope of the auditor's work arise on those occasions when the auditor is not able to obtain for any reason, all the information and explanations which consider necessary for audit. It would include inability to carry out an audit procedure considered necessary or proper documents and accounting records. There are two categories of scope limitation which are caused by restriction imposed by the client and also caused by circumstances beyond either clients or auditor control. Disagreement means that auditor do not agree with the accounting treatment. The financial statements may have an accounting policy when the auditor considers that more complex distribution is essential to the true and fair view. Since true and fair view is the primary objective in the preparation of financial statements, it is overriding when in conflict with approved accounting standards.
A second type of qualification is very material and pervasive. This term applies when the possible effect of the limitation of scope is so material that the auditors are unable to express an opinion on the financial statements. In this type, there are having adverse opinion and also disclaimer of opinion. Adverse opinion is one where the auditors state that the financial statements do not give a true and fair view. This adverse opinion report can only arise when the auditor has knowledge, after an adequate investigation, of the absence of conformity. Another opinion is a disclaimer of opinion. It occurs when the auditors conclude that they have not been able to obtain sufficient evidence to support, unable to express and an opinion on the financial statements. Both disclaimers and adverse opinions are used only when the condition is highly material and pervasive.
Finally type of qualification within an audit report is less material. It means when the effect of the limitation is not so material as to require a disclaimer. There are possible adjustment and except for in this less material. Possible adjustment is the wording of the opinion should indicate that is the qualified as to the possible adjustments to the financial statements. Whereas except for is the opinion that qualified by stating that the financial statements give a true and fair view except for the effects of any adjustment.
As a conclusion, qualified reports are relatively rare. Small companies such as Syarikat Alpha with little control especially over cash transaction will often have qualified reports. There are different types of qualification within an audit report. The reason given for qualified reports are limitation in the scope of work of the auditor and disagreement. The effects of some limitation of scope are so material and pervasive that a disclaimer of opinion is required. The effects of some disagreements can be so material and pervasive that the financial statements are so misleading. An adverse opinion is required. With other less material limitation of scope a qualified opinion should be given with the wording that the opinion is qualified to the possible adjustment that might determine if the limitation had not existed. With less material and pervasive disagreements an except for qualification is required.
Task 6 ( LOC 4 / AC 3 )
Draft a suitable management letters in relation to a statutory audit.
The President and Board of Directors
10G Jln Matahari A4U 5/AA
Sec. U5 Subang 2, 40300
Shah Alam, Selangor
20th April, 2010
Dear Sir / Madam,
Subject : Recommendation for Improvement to Management System of
Internal Control of Syarikat Alpha
During my interim audit, I examined the accounting records of your company and the system of the internal control over those records established in your company. This system was designed to ensure accurate and reliable records and to safeguard the company's assets.
I set out below the weaknesses in the system which I found your company having it with the recommendations for improvement the system in your company.
Misstatement of the existing stock management system
Failure to recognize the existence of obsolete stocks
Omission in purchase transaction due to inadequate internal controls
I recommend that your company use computerized systems. Computer Assisted Audit Techniques (CAATs) have been developed to overcome some of the problems in your company and to grab some of the opportunities. The two principles techniques are use of 'test data' to test the operation of the client's programs and also use of audit software which is computer programs developed for audit purposes to examine the contents and do work on the contents of the client's computer files.
The computerized system that your company used should include an audit control file that containing full details of the system that include all the transaction in the purchase and stock management in your company. The full details of the system are:
Full descriptions of how the source documents are to be converted into input media, and the checking and control procedures.
Copies of all the forms which source documents might take, and details of the checks that have been carried out to ensure their accuracy.
Details of physical control over source documents including number, quantities and names of the clients.
Arrangements for retaining source documents that may required for reconstructing stored files in the event of error.
Details of all tapes and disc in use.
In computer systems, controls are tested of the evidence examination that will include exception reports, reconciliation reports, edit reports and also missing documents reports.
Company need to implement the statutory audit that is one of the core business activities in any companies in Malaysia. According to BDO Malaysia, It is requirement under the Malaysian Companies Act 1965, where company incorporated in Malaysia has to prepare the financial statements in accordance with applicable approved accounting standards and also has to be audited accordance with approved standards on auditing in Malaysia. Statutory audit have their scope determined by the governing legislation.
I wish to express my appreciation for the cooperation and assistance that I received from the officials and employees of Syarikat Alpha. I will review the status of these comments and assist your company in implementing the recommendation.
NUR SHAIDATUL SHAFFIQAH SALLEHUDIN
Chartered Accountant (1357-2121S)