Stakeholders of Financial Statements

Present and potential

1. Owners or shareholders
2. Lenders or debenture holders
3. Employees
4. Customers
5. Suppliers
Note: the above include people who provide advice
or consult the above stakeholders.
6. Government and regulatory bodies
7. Public or layman

Stewardship (Fiduciary relationship) and

Concept of Agency
A legal framework is needed for how companies
should be operated, in order to :
protect business owners from unscrupulous
managers
protect the business world and the public at large
from owners taking unfair advantage of limited
liability status.
Thus, accounts need to be produced by
management on a regular basis to the
shareholders for their stewardship of the
business. (stewardship accountability)
Meanwhile, each principal (shareholders) needs to
recognise that, although he / she is employing the
agent (directors and management), the agent will
have his / her own interests to protect and thus,

Types of auditors
Major types of auditors
1. Company auditors or independent or external auditors
: is the auditor governed by Companies Act, to act as
auditors, to audit companies that limited by shares.
2. Internal auditors
: is an employee of a company who performing task
associated with assessing the internal affairs of a
company which, either financial and/or operation related.
Normally the internal auditor will report to board of
directors which comprises a majority who are
independent directors.
3. Government auditors
: Overseas the operations and financial of government
departments and, report to Auditor General.

Who may act as auditor?

Qualification
A member of a recognised supervisory body, eg Malaysian
Institute of Accountants (MIA) and allowed by the rules of
that body to be an auditor; or
Someone directly authorised by the state.
Individuals who are authorised to conduct audit work my be
-sole practitioner; - partners in partnership
Note: Unincorporated entity
To be eligible to offer audit services, a firm must be
:controlled by members of a suitable authorised supervisory
body; or
:a firm directly authorised by the state.

Who may NOT act as auditor?

Those who are unable to comply with ethics rules

with respect to Independence, Objectivity and
Competence to act as auditor for a particular client.
Those who are prohibited by law from acting as
auditor for particular clients, eg
1. An officer (director or secretary) of the company
2. An employee of the company
3. A business partner or employee of the above.
Note : Independence is necessary in term of Mind and
Appearance , in order to
4. Have an objective view of the FS of an entity
5. Express a conclusion and opinion without bias,
conflict of interest and undue influence of others.

Duties and responsibility of auditors

The objective of an audit is to provide a
reasonable level (not high absolute level) of
assurance when forming an opinion.
However, public often believed the role of
auditor is to discover all frauds and errors. This
phenomenon is known as expectation gap.
The role of auditor is to form an independent
opinion about the truth and fairness of
financial statements and their compliance with
legal and regulatory requirements. (statutory
independent audit).

Audit Engagement
Publicly quoted and large companies are required by
law to produce annual FS and have them audited by
external auditors
Objective of external audit
: to enable the auditor to express an opinion on
whether the FS
Give a true and fair view (or present fairly in all
material respects)
Are prepared, in all material respects, in accordance
with an applicable financial reporting framework.
General principles to be followed
Compliance with applicable ethical principles,
i.e.IFAC
Compliance with applicable auditing standards, ISAs
Planning and performing the audit with an attitude

Key concept
1. Materiality .Information is material if its omission
or misstatement could influence the economic
decisions of users taken on the basis of the
financial statements. (IAASB)
In practice, any amount <5% of profit before tax is
probably not material, and any amount > 10% of
profit before tax is probably material.
2. True and Fair. No official definition in IAASB.
True: in accounting term, mean not factually
incorrect. For audit, it embodies that FS are free
from material misstatement and, prepared in
accordance with applicable laws and regulations.
Fair: Clear, distinct and plain, and
impartial/unbiased, just and equitable.

Benefits and Limitations of Statutory Audits

Benefits

Limitations

High quality and reliable

information. (investors
faith and reputation of
market)
Independent verification
risk of mgt bias, fraud
and errors (deterrent)
Enhance creditability of
information(fund raising
and tax)
Highlight deficiencies in
mgt letter.

Financial information
subjective and judgemental
matters.
Inherent limitations of
controls used as audit
evidence.
Rely on mgt
representations for source
of evidence in some areas.
Evidence is persuasive, not
conclusive.
Do not review 100% of the
transactions.

Code and Ethic of professional auditor

The conduct of audit governed by three sets of rules:

1. The Code of Ethics (International Federal of Accountants,
IFAC Code of Ethics for Professional Accountants; MIA Bylaws, On Professional Conduct and Ethics )
2. Auditing Standards (International Standards on Auditing,
ISAs). Set by International Auditing and Assurance Standards
Board, IAASB. There are > 30 ISAs
3. Company law or Companies Act, 8th Schedule (legal
requirement to all companies or incorporation business
entities, EXCEPT for an exempt private company, as defined
in Section 4 of the Act i.e. small or owner managed
companies, annual turnover RM50 m or 200 employees
for manufacturing; RMRM20 m or 75 employees for service
sectors)

IFAC Code of Ethics For Professional

Accountants (updated by 2005 version)
Key issues
1. Established 5 fundamental principles of professional
ethics that all professional accountants must comply
2. Conceptual framework approach (for independence
requirements) extended to all fundamental ethical
principles.
3. Has the authority of an international standard. National
ethical standards must based on the IFAC Code or
stricter , but not less than IFAC Code, unless certain
rules are prohibited by local laws or regulations.
IFAC Code is set in 3 parts, i.e. General application of the
code; Professional Accountants in Public Practice; and
Professional Accountants in Business.

General Application of the Code: Fundamental

Principles of Ethics (Part A)
5 fundamental principles of professional ethics
1. Integrity
2. Objectivity
3. Professional competence and due care
4. Confidentiality
5. Professional behavior
IFAC Conceptual framework is essentially a principlebased approach, by providing a set of specific rules
for each identified ethical situation. The framework
requires professional accountants to identify,
evaluate and address any threats to compliance with
the fundamental principles.