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Assignment

Description :
ASSIGNMENT

15 MARKS

You are an audit senior in a public accounting firm. The audit manager of your firm, Rositah, gives you the
financial statements of Adibah Berhad for the year ended 31 December 2014 and asks you to carry out the audit
for this year.
Adibah Berhad is a public listed company, whose sales, for the year 2014 was over RM 40 million. Adibah Berhad
has been your firms client for the past three years.
The audit fee is RM 100,000.
You are required to describe how you would carry out the audit.
No. of words: Not less than 2,500 words.
Due date: Not later than 18 September 2015.
Group members: Not more than five members in a group.

Before starting an audit, it is essential for the auditor to have a copy of the previous year
audited files of Adibah Berhad. In the given assignment, the 2014 file is given by Rositah, my
audit manager. The file is used only as a guide as the auditing must always be tailored
according to the events which occur during the financial year. Once last years file is
retrieved, a new audit file for Adibah Berhad current years audit will be opened.
Next, the senior auditor is required to contact the client to make arrangements as to when the
audit can commence. It is required that an audit should always be done at the clients place in
order to obtain all the information needed for auditing. The client should also be free and
available throughout the whole period to assist and provide the auditors all the necessary
information.
An audit can be divided into 3 major stages which are:
1. Planning Stage
2. Field Work Stage
3. Review Stage
STEP 1: PLANNING
As a senior auditor in a public accounting firm, I will start off with a well-planned schedule
before carrying out the audit. The planning stage is essential as it helps the auditor to obtain
sufficient and appropriate evidence for the circumstances, help to keep the audit costs at a
reasonable level and to avoid any misunderstanding with the client. According to ISA 300
Planning an Audit Financial Statements, the planning stage of the audit should be used to
establish an overall strategy for the audit, develop an audit plan, and reduce audit risk to an
acceptable low level. Moreover, the standard procedure also requires that auditors should
plan the audit work so that the engagement is performed in an effective manner. Firstly, I
will establish an updated overall audit strategy and an amended version if necessary, during
the procedure of the auditing. I will then take the following procedures in order to respond
quickly (if there are any unexpected events that occur):

the characteristics of the audit engagement, such as the reporting framework that is

used to set the scope of the engagement.


specific or key dates for reporting and other communicational purposes.
the setting of materiality and assessing audit and inherent risks.

implementation of preliminary risk assessment and internal controls (when needed).


consideration of resources available and how they are to be used.
gathering information to assess fraud risks.

I will gather all the information about my clients business and industry, understand their
external environment, including the economic condition, impact of competition, reporting
obligation, legal and regulatory requirements. Besides that, I will make inquiries on the
management and others within the entity to identify factors such as major sources of income,
key customers and suppliers, sources of finance, transactions with related parties and any
requirement of disclosure that might be high-risk for the client. Furthermore, I will also
scrutinise all the financial statements, perform rational analysis, and inquire about key
performance indicators that they use to measure progress towards the companys objectives.
In addition, previous reports can also be inquired from the management as a reliable source of
reference to carry out this years audit. Other audit procedures to be performed before the
beginning of the audit fieldwork includes:

discussing matters that may affect the audit with the firms personnel responsible for

providing audit and non-audit services to the client


discussing with the management current business developments affecting the client
reading the current years interim management accounts, if available
establishing the timing of work done.
arranging with the client for adequate working space
coordinating the assisting staff requirements, including time budget
holding a planning conference with members of the audit team and discuss possible

risks and fraud-related issues.


determining the extent of involvement if any, of consultants, specialists, and internal

auditors
considering the effects of applicable accounting and auditing pronouncements,

particularly the recent ones


setting forth the preliminary audit plan, and
updating the prior year's written audit programme.

Next, I will select the appropriate staff. In the selection process, the one who is more
knowledgeable on the clients industry will carry out the audit. In this case, Adibah Berhad is
the continuing client. ISA 300 states that the auditor should plan the nature, timing, and

extent of direction and supervision of engaging team members and review of their work.
Thus, reviewing the work of engaging team members will be done first to ensure that:
1. work will been performed in accordance with professional standards and regulatory
2.
3.
4.
5.
6.

as well as legal requirements.


work performed supports the conclusions reached.
work performed is appropriately documented.
sufficient evidence is obtained and support the auditors report appropriately.
the engagements objectives are achieved.
revise the nature, timing and extent of audit work performed has been identified, if

necessary
7. significant matters have been raised for further consultations.
8. appropriate consultations have taken place and resulting conclusions have been
properly documented and implemented.

Lastly, I will evaluate the need for outside experts. ISA 620 defines an expert as a person or
firm possession of special skills, knowledge and experience in a particular field other than
accounting and auditing. Evaluating an experts skills and competency will include the
consideration of professional qualifications, experiences, reputation and objectives before
allowing them to have access to the report.

STEP 2: AUDIT FIELDWORK


After planning the audit, I will proceed to the audit fieldwork. Fieldwork is where evidences
are gathered, analysed and evaluated as directed by the approved Audit Procedures. I will
ensure that the audits objectives and procedures will be performed to ensure that the most
important and significant audit steps are completed first. On the other hand, working papers
including Audit Observation Forms, will be forwarded for review by the audit management
upon completion of a meaningful section of the audit rather than waiting for the completion
of all the fieldwork. Furthermore, the basis for an audit opinion will be formulated based on
the conclusion of the audit objectives.

Based on the auditing standards, it has been stated that throughout the fieldwork process ,
professional judgment will be used to determine whether sufficient evidence that has been

gathered is relevant, competent and useful to conclude on the established objectives. Apart
from ensuring that my professional judgment is based on the information available,
reassessment of the audit objectives, scope and procedures are crucial in ensuring the
efficient use of audit resources. For example, I will determine whether:
i. should the remaining audit steps be eliminated,
ii. should the audits objectives or scope be modified,
iii. Rectification of any additional procedures to increase efficiency,
iv. should additional hours be allocated to achieve an extension of the audits objectives,
v. any documental changes in audit objectives, scope and procedures in the working papers.

The audit fieldwork includes:


1. Gaining an understanding of the activity, system or process under review and the
prescribed policies and procedures.
When carrying out the audit fieldwork, it is very important to gain an in-depth understanding
of the activity, system or process under review and the prescribed policies and procedures in
supplementing and continuing to build on the information that has already obtained during
the risk assessment process. As Adibah Berhad has been the firms client for the past three
years, I will assess the companys database and search for its last years working paper. I will
then note down all the important procedures, in order to prepare the audit by identifying,
evaluating and responding to the identified business risks. Apart from that, I will also include
the process on how the firms management identifies the risks relevant to the preparation of
financial statements, estimate their significance, assess the likelihood of their occurrence, and
decide on actions to manage them. In the process of auditing Adibah Berhads financial
statement, the auditor has to be responsible to ensure that all the information obtained must
have appropriate evidence to support it so that it can be categorised as audit evidence. This
will enable appropriate conclusions to be formed on which recommendations are based upon.
It is the duty of an auditor to ensure that all the collection and assessment of the audit
evidence should be recorded and reviewed to provide reasonable assurance that conclusions
are soundly based and the audit objectives are achieved at the same time.

2. Observe the conditions or operations of Adibah Berhad

In order to determine whether there is a change in the company environment, a review of the
companys financial statement, examining its assets and accounting, business and other
operational records are needed. A better understanding of the clients industry and external
environment help me to identify the risks related to the specific industries that may affect the
auditors assessment of the clients business and audit risks.
Every industry has its own unique accounting requirements. Thus, it is essential for the
auditor to evaluate whether the clients financial statements are prepared in accordance with
the generally accepted accounting principles. Besides, auditor should also evaluate the
clients external environment, including the economic conditions, the extent of competition,
and regulatory requirements that are related to clients industry. I also will note down any
relevant information such as the information systems, software, people, procedures (manual
and automated), and data. It is of utmost importance to obtain sufficient knowledge about the
information system thats relevant to financial reporting: the classes of transactions, the
procedures by which transactions are initiated, recorded, processed, and reported with its
supporting information including significant accounting estimates and disclosures.

3. Interviewing people.
I will interview the people from Adibah Berhad to obtain more information especially on the
internal accountant and auditors whenever I have doubt on the financial statement. I will
inquire for the service form from the internal auditors of Adibah Berhad to enhance the
efficiency of the auditing process and at the same time, lowering the cost rather than seeking
service from other party.

4. Examining assets, account, business, other operational records and analyzing data
and information.
For the clients business operation and processes, an auditor should consider the factors
which include the sources of revenue, finance, and information on related party that may
indicate areas of increased clients business risk. In order to obtain a better understanding of
the clients business operations, I will have a tour of the clients facilities as it provides an

opportunity for an auditor to observe operations first-hand and to meet key personnel. The
auditor will be able to assess physical safeguards over assets and interpret accounting data
that are related to the assets by viewing the physical facilities. Such first-hand knowledge will
enable the auditor to discuss with non-accounting employees which are helpful in assessing
the clients business inherent risk.

5. Reviewing systems of internal control and identifying internal control points.


An internal control system creates an environment in which effectiveness and efficiency of
the operation, reliability and timeliness financial reporting, prevention and detection of fraud
and error, as well as compliance with applicable laws and regulations.

5 points of internal control


1. Control Environment
The control environment sets the tone of an organisation influence on the consciousness of its
people. The importance of internal control to an entity is reflected in the overall attitude and
actions of the management, those charged with governance (directors) and owners
(shareholders) with regards to its control.

2. Entity's Risk Assessment Process


An entity's risk assessment process is the process of identifying, evaluating and responding to
the identified business risks. This process includes how management identifies risks relevant
to the preparation of financial statements, estimates their significance, assesses the likelihood
of their occurrence, and decides upon actions in managing them.

3. Information Systems and Communication


An information system consists of the infrastructure (physical and hardware components),
software, people, procedures (manual and automated), and data. The information system

relevant to the financial reporting includes the accounting system and consists of procedures
and records established to initiate, record, process, and report an entity's transactions and to
maintain accountability for the related assets and liabilities.

4. Control Procedures
Control procedures refer to the policies and procedures that help ensure that management's
directives are carried out accordingly.

Control procedures that are relevant to the audit include:

Performance Reviews
A strong accounting system should have controls that independently check the
performance of the individuals or processes in the system. Some examples include
comparing actual performance with budgets, forecasts, and prior-period performance ;
investigating the relationship of operating and financial data followed by analysis,
investigation of unexpected differences and corrective actions; and reviewing
functional or activity performance.

Information Processing Controls


A variety of controls are used to check accuracy, completeness, and authorisation in
the processing of transactions.

Physical Controls
These controls include the physical security of assets. Physical controls include
adequate safeguards, such as physical safeguards of inventory, security over facilities,
authorisation for access to information and data files, and periodic counting of assets
such as inventory and comparison to control records.

Segregation of Duties
It is important for an entity to segregate the authorisation of transactions, recording of
transactions, and custody of the related assets. Independent performance of each

function reduces the opportunity for any one person to be in a position to both
perpetrate and conceal errors or fraud in the normal course of his duties.

5. Monitoring of Controls
Monitoring of controls is a process that assesses the quality of internal control over time. To
provide reasonable assurance that an entity's objectives will be achieved, the management
should monitor controls to determine whether they are operating effectively. Management
should also use internal auditors to monitor the effectiveness and efficiency of operating
internal controls.

6. Evaluating and concluding on the adequacy (effectiveness and efficiency) of internal


controls.
I will provide a testing control for each component of internal controls by using entity-wide
controls. Entity-wide control (the size of an entity) may affect how the various components of
internal control are implemented. This will enlighten me to evaluate which one is most
effective way to control the company.

7. Conducting compliance testing.


A compliance test may come in many different forms:

7.1 Operating Systems and Applications:


A verification that an operating system and/or applications are configured appropriately to
the companys needs and lockdown requirements.

7.2 Systems in development:

A verification that the intended system under development meets the configuration and
lockdown standards requested by the customer.

7.3 Management of IT and Enterprise Architecture:


A verification that the in-placed IT management infrastructure encompasses all aspects of
the system support that has been put in place.

7.4 Interconnection Policy:


A verification that adequate security and business continuity controls the governing
connection to other systems.

8. Conducting substantive testing.


Substantive testing is a test of account balances to verify the precision of the amounts. In
general, substantive tests include test of transactions, details of account balances and
analytical procedures. In testing transactions, the auditor is concerned with tests of
omitted transactions, account understatements and invalid or unsupported transactions as well
as account overstatements. However, in analyzing details of account balances, I will use
professional judgment in determining which accounts to observe. Some of the accounts
are repairs and maintenance, fixed assets, officers salaries, contributions, travel and
entertainment, and income tax provisions.
And lastly, analytical procedures. Analytical procedures is about the comparison of the
relationships between data. This comparison involves the current period financial information
such as, prior period information, expected results, predictable pattern information, intraindustry information, and non-financial information.

9. Determining if appropriate action has been taken with regards to significant audit
concerns and corrective actions reported in prior audits.

Standards for documenting fieldwork (for example, the evidence gathered, the analyses made,
the tests performed) to support the findings and conclusions are presented in the sections
Work papers and Audit Observations. In general, all audit work performed should be well
documented. Each audit procedure should be supported by and have DocLinks to work papers
(schedules, memos, spreadsheets) on which testing performed and results achieved are
properly documented.
Fieldwork should be performed at the auditee's location to facilitate communication with the
auditee. The auditor should maintain contact with the auditees management and keep them
informed of the audit observations and other development throughout the audit. They may be
able to provide additional information or may wish to adopt procedures quickly to rectify
deficiencies.

STEP 3: REVIEW
Review is the process of working on an issue-by-issue basis and typically occurs after the
completion date so that agreed-upon corrective actions can be implemented. When the first
analysis is completed, the Audit Assistant has to write all the balances in the audited year
column; however he has to make sure that there is no adjustment or reclassification. I will
ensure that he monitors the way of balances were calculated according to the working papers.
For the final report, one has to express opinions, present the audit findings and discuss
recommendations for improvements. The Internal Audit discusses the rough draft with the
client prior to issuing, facilitate communication and ensure that the recommendations
presented in the final report are practical.
On the other hand, one can prepare the draft audit report in order to ensure that the financial
statement link to the notes of the accounts. Before the financial statement is presented to the
client, the audit management thoroughly reviews the audit working papers and the discussion
draft. The discussion draft is prepared for the units operating management and is submitted
for the clients review before the exit conference. The written report includes an overall
assessment of the clients control structure, recommendations to the management (including
the anticipated benefits and basis), and managements action plan. In addition, the Internal
Audit has to work closely with its client to refine the wordings of the final report before it is
issued to ensure that it reflects the collaborative nature of the audit process.

The draft audit report needs to be printed out when the draft report is completed. The Audit
Assistant needs to read, check, cast the draft report for the first time before passing it to the
Audit Senior. After that, I will mark down all the errors and incomplete work. When there is
an error, the Audit Assistant needs to answer those queries and do the necessary corrections
until the top manager is satisfied with the draft audit report. Then the draft audit report will be
sent to the director for his review and approval.
Next, the manager and I will do the frontal clearance with the partner and discuss issues
before it will be tabled at the Audit Committee meeting. After getting the approval from the
director, the master copy of the report, an overall engagement memo, and billing will be
printed out. Then, the signing pages of the audit report with the firms letterhead at the top
will be printed out and it will be sent to the partner for review and signature. In addition, the
client also will receive the copies required so that it can be signed and declared valid by the
commissioner of oaths.
Besides that, two copies of the audited account will be sent to the firms secretary to be kept
as the audit working files: one copy for government income tax department and the other one
for keeps with the client. The Audit Assistant also needs to chop the declaration page on the
audit report with the same dates.
When finalising the process, it is better for the clients management and Internal Audit to
have a solid working relationship based on clear and continuing communication between
them. The auditor has the responsibility to interview the staff, perform tests and review the
new procedures which can support the verification. The client has the opportunity to
participate in each of the audit process such as preliminary review, field work, audit reports,
and follow-up. The purpose of the follow up is to verify that the implementation of the
agreed-upon corrective actions have been completed.

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