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KHAIRUDDIN HASYUDEEN & RAZIChartered Accountants
1.0 INTRODUCTION
1.1 COMPANY BACKGROUND
Khairuddin Hasyudeen & Razi is a chartered accountant firm that has been established its
practice in since 1992. Khairuddin Hasyudeen & Razi (KHR) is a medium size audit firm in
Malaysia and provides many services such as assurance, taxation and other services such as
enterprise risk management and internal audit. There is about 20 to 30 staff that holds variety
position that available in this firm. Khairuddin Hasyudeen Razi’s head office is located in Kuala
Lumpur and has other three branches which located at Kota Bharu, Alor Star and Melaka. Those
branches have been managed by certified partners.
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KHAIRUDDIN HASYUDEEN & RAZI
B-5-7 MEGAN AVENUE II
12 JALAN YAP KWAN SENG
50450 KUALA LUMPUR
TELEPHONE: 03-2710-7717
FACSIMILE : 03-2710-7727
KHAIRUDDIN HASYUDEEN & RAZIChartered Accountants
1.2 PARTNERSHIPS
Partnerships of Khairuddin Hasyudeen & Razi consist of certified partners which are:
Ahmad Khairuddin Mat Salleh
Managing Partner
Ahmad Khairuddin is accountancy graduate from University Kebangsaan Malaysia. Presently he
is a member of the Malaysian Institute of Accountants (MIA) and CPA Australia.
Ahmad Razi Mohd Noor
Partner
Ahmad Razi, a member of the Malaysia Institute of Accountants (MIA), CPA Australia and he is
responsible for the operation and development of the firm’s practice in Alor Setar.
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KHAIRUDDIN HASYUDEEN & RAZIChartered Accountants
Mohd Arif Haji Yusa
Partner
Mohd Arif is responsible in managing our Melaka office operations and has experience in public
practice since 1987. He holds an Advanced Diploma in Accountancy from ITM, is a member of
the Malaysian Institute of Accountants (MIA) and CPA Australia.
Tengku Shahrizanny Tengku Abdullah
Partner
Tengku Shahrizanny is responsible for managing KHR office in Kota Bharu. He holds a
Bachelor in Accountancy degree from UKM. He joined KHR upon graduation in 1994. In 1997
he was entrusted to manage the-then newly established Kota Bharu office.He is also a member of
the Malaysian Institute of Accountants (MIA) and CPA Australia.
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KHAIRUDDIN HASYUDEEN & RAZIChartered Accountants
Ahmad Shahrul Hj. Mohamed
Partner
Shahrul is the partner in charge of the firm’s operations. A graduate from Universiti Utara
Malaysia (UUM) with a degree in Accounting, he is a member of the Malaysian Institute of
Certified Public Accountants (MICPA), Malaysian Institute of Accountants (MIA), Certified
Information Systems Auditor (CISA) and Institute of Chartered Accountants in Australia.
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KHAIRUDDIN HASYUDEEN & RAZIChartered Accountants
1.3 SERVICES
Khairuddin Hasyudeen & Razi had provided much type of services from basic
financial accounting, taxation, auditing, and other services.
1.3.1 ASSURANCE
KHR is dedicated to provide assurance on financial reporting infrastructure and
operations, helping to improve the standards of reporting and adapt to the regulatory
requirements.
Going beyond providing traditional assurance services, KHR business
professionals adopts strategic and risk-based approach in assisting you to improve your
performance, mitigating risks as well as enhancing your enterprise value.
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KHAIRUDDIN HASYUDEEN & RAZIChartered Accountants
KHR facilitate to maximize value through:
FINANCIAL STATEMENTS AUDIT
KHR Financial Statements Audit service provides assurance and attestation to the
information regarding your financial performance in order to address the statutory
requirements of corporate reporting and manage any existing or potential regulatory risks.
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KHAIRUDDIN HASYUDEEN & RAZIChartered Accountants
FINANCIAL DUE DILIGENCE
KHR’s Financial Due Diligence Services provides you with an independent and
professional perspective on the potential acquisition encompassing its strategic and
financial aspects.
FINANCIAL INVESTIGATION
Through our Financial Investigation services, KHR are involved in obtaining, collating
and analyzing information to help you make the best decisions on specific transactions or
segments of your business.
KHR assist you in investigating and evaluating financial discrepancies and improper
business conducts to reduce the risk of fraud and disputes as well as providing
independent and professional advice on handling these sensitive matters confidentially.
FINANCIAL PROJECTIONS REVIEW
For this purpose, KHR Financial Projections Review service conducts assessment on
your financial projections, assisting you to plan your financial requirements strategically
in a practical and realistic manner thus enabling you to accomplish your objectives
OTHER SPECIAL PURPOSE ASSURANCE AND INVESTIGATION
ASSIGNMENTS
In ensuring credibility and quality financial information, KHR Special Purpose
Assurance and Investigation services are designed to assess and attest to the specific parts
of the information to ensure its accuracy and in adherence to the requirements.
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KHAIRUDDIN HASYUDEEN & RAZIChartered Accountants
1.3.2 TAX
1.3.3 OTHER SERVICES
I. ENTERPRISE RISK MANAGEMENT
The risk management framework focuses on the enterprise wide risk identification,
assessment and control measures that would assist clients to improve the organisations’
risk management approaching enabling their organisation to achive its corporate
objectives. In addition to that, KHR provide recommendations for improving the risk
management processes by encouraging risk awareness among the team members as well
as enhancing the sharing of risk related information.Through the firm’s approach, it aims
to enhance the enterprise and shareholder value through improved business performance
by having better risk management.
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KHAIRUDDIN HASYUDEEN & RAZIChartered Accountants
II. INTERNAL AUDIT
There are several approaches that are used by the firm:
o Setting up of the Internal Audit function within clients organization
o Total outsourcing of the Internal Audit function
o Assisting clients’ Internal Audit department through co-sourcing of the specific
functions in the Internal Audit Department.
o Independent assessment and quality review of your existing Internal Audit
Department
1.4 CLIENTS
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KHAIRUDDIN HASYUDEEN & RAZIChartered Accountants
1.5 VISION & MISSION OF THE COMPANY
VISION
MISSION
Khairuddin Hasyudeen & Razi (KHR) mission is “Linking strategy to value”. Basically,
it focused on enterprise value. Enterprise value is enhancing through attainment of
achievement of strategic goals. For instance, each strategic objective is accomplished; they
will enhance the enterprise value.
KHR has enhance their enterprise value by emphasizing working together with client to
increase the understanding of the organization and enabling in developing strategic plans and
risk management in order to have proper strategic actions. Besides, by utilizing all resources
like knowledge and experiences, human capital, KHR will try to address any solutions for
their clients and delivers integrated business solution in order to achieve their clients’
corporate goals.
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To be the preferred business advisor in enterprise value enhancement
Linking strategy to value
KHAIRUDDIN HASYUDEEN & RAZIChartered Accountants
1.6 ORGANIZATION CHART
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Nor SyalizaSenior 3
Nur FitrahAssociate
Nurul HasnaAssociate
Wan M. Al AminSenior 3
Syahril EzehamSenior 3
Rosidah AhmadCleaner Clerk
Afiq IsmailSenior 3
BasriSenior 3
Lina FarhanaAssistant
Puan Siti SalwaHead
Norazlina Mohd Nor
AbidahAssociate
Fairuz YasminSenior 2
Mohd FaizSenior 2
Wandi SelamatDespatch Clerk
OsmalinaCredit Control
Nor SobahSenior 1
ZulfikriSenior 1
Khairul AnuarManager
Juhara Md AliAccount
Internal Business
Audit & Assurance
Tax Department
Ahmad Khairuddin Mat
Salleh
Ahmad Shahrul MohamedPartner
TashaAssociate
Afif NabihahAssociate
AtikahAssociate
NawawiAssociate
NorzarifahAssociate
Wan Suziana Fazlica
Sakina
Assistant
Azira
Tax Consultant 1
Nor Atikah
Tax Consultant 2
KHAIRUDDIN HASYUDEEN & RAZIChartered Accountants
1.7 DAILY ACTIVITIES
I am very pleasure can have a practical training at Khairuddin Hasydeen & Razi. I
was placed at audit department. It is a good chance for me learns more about audit in the
real working life. During the practical training, I learn so much of valuable knowledge in
the audit field. All my daily tasks are relating about audit matters. I will do the audit work
such as vouching documents, statutory audit, filing documents, preparation for
confirmations letters, casting and call over audit report.
Besides that, it is a great experience for me when Company sent me to outside
audit. It is because I can perform audit duties in different culture of company. I very
thanks to my audit manager to give me chance for handle audit case. This experience can
let me learn the whole audit framework from beginning until sent out of draft account to
clients. I will more understand about the audit procedures. From this, I also have a chance
to communicate with clients for asking some questions. It can improve my
communication skills. This practical training brings me a lot of benefit experience and
good for my future career.
So, in this report, I choose to do a topic or title that related to audit procedure. I
will explain about accounting process and procedure in order to prepare the account for
clients which involve many steps in accounting processes.
1.8 BACKGROUND OF STUDY
In this report, I prefer to choose the topic of audit process because it is can
provide detailed audit steps to be performed during the audit fieldwork that will achieve
the specific audit objectives. In conjunction with the risk assessment, audit procedures
will be developed by the auditor and approved by audit management prior to performance
of the audit procedures.
Besides that, as we known audits are an essential management tool to be used for
verifying objective evidence of processes, to assess how successfully processes have been
implemented, for judging the effectiveness of achieving any defined target levels, to
provide evidence concerning reduction and elimination of problem areas.
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KHAIRUDDIN HASYUDEEN & RAZIChartered Accountants
2.0 OBJECTIVE
2.1 OBJECTIVE OF THE STUDY
1. To know deeply about audit assurance and its purpose.
2. To expose in working field environment.
3. To understand the theory of audit planning
4. To get details of audit steps and the procedures (process of audit).
5. Understand the problems while preparing audit.
6. To give recommendations from the problems.
2.2 SCOPE OF THE STUDY
Objective of this study is wanted to go thoroughly regarding the process of audit
procedures. First of all, we need to known what are the purposes of audit, the steps and
procedures to do the audit, then identify and understand the problems while preparing the
audit. Also, give some recommendation or suggestion for the problems’ solution.
3.0 METHODOLOGY
There is some method that used several methodologies in completing this report. Those
methods are:
3.1 Primary data
3.1.1 Observing
I made an observation on the audit’s works that has been done for different kind of
client. During the practical training at Khairuddin Hasyudeen & Razi (KHR) I had a
great experience and opportunity to know more about audit work and audit
procedures. I will ask the opinion and solution from audit seniors when I faced
problem for preparation of practical report. They give me advices or some
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KHAIRUDDIN HASYUDEEN & RAZIChartered Accountants
information relating my topic chosen. Besides that, they explained me about audit
procedures and some of problem that will meet during the audit process.
3.2 Secondary Data
3.2.1 Interview
This information gets through interview session with the senior auditors to better
understanding regarding the audit process for each types of business. They had a great
experience in auditing and had much of information about auditing from their seminar
training before. So that they really help me much in this study of topic I had chosen.
3.2.2 Internet
Find the related information with the topic. All information can assist me in further
understanding about the topic. I had browsed through internet to get additional
information about topic I had chosen. For built up the strong base for my practical
report. It is to help me for further detail about my topic.
3.2.3 Textbook
I’m using this method to get preliminary understanding regarding the all topic that
related to audit process.
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KHAIRUDDIN HASYUDEEN & RAZIChartered Accountants
4.0 DISCUSSION
4.1 DEFINITION OF AUDIT
First of all, according to encyclopedia, the general definition of an audit is an evaluation
of a person, organization, system, process. The term most commonly refers to audit in
accounting; Audits are performed to ascertain the validity and reliability of information, also
to provide an assessment of a system’s internal control. The goal of an audit is to express an
opinion on the person, organization, system and others
Due to practical constraints, an audit seeks to provide only reasonable assurance that the
statements are free from material error. Hence, statistical sampling is often adopted in audits.
In the case of financial audits, a set of financial statements are said to be true and fair when
they are free of material misstatements
Auditing is a vital part of accounting. Traditionally, audits were mainly associated with
gaining information about financial systems and the financial records of a company or a
business .However, recent auditing has begun to include non-financial subject areas, such as
safety, security, information systems performance, and environmental concerns.
Besides that, according to companies Act, audit is primarily an opinion as to whether the
profit and loss account and balance sheet show a true and fair view and comply with statute.
In my opinion Audit is a quality improvement process that examination and verification
of a company's financial and accounting records other relevant documents, and physical
inspection of inventory by qualified accountants (called auditors). Or audit can be the
accumulation and evaluation of evidence about information to determine and report on the
degree of correspondence between the information and establish criteria. Auditing should be
done by competent and independent person.
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KHAIRUDDIN HASYUDEEN & RAZIChartered Accountants
4.1.1 TYPES OF AUDIT
In general, there have 3 types of audit, which are:
Operational audit
An operational audit evaluates the efficiency and effectiveness of any part of an
organization’s operating procedures and methods. At the completion of an operational
audit, management normally expects recommendations for improving operations. For
example, auditors might evaluate the efficiency and accuracy of processing payroll
transaction in a newly computer system.
Compliance audit
A compliance audit is conducted to determine whether the auditee is following specific
procedures, rules or regulation set by some higher authority. Results of compliance audits
are typically reported to someone within the organizational unit being audited rather than
to a broad spectrum of users. For example, determine whether bank requirements for loan
continuation have been met.
Financial Statement audit
A financial statement audit is conducted to determine whether the overall financial
statements are stated in accordance with specified criteria. Normally, the criteria are FRS;
although it is also common to conduct audits of financial statement prepared using cash
basis or some other basis of accounting appropriate for the organization. In determining
whether financial statements are fairly stated in accordance with FRS, the auditor
performs appropriate tests to determine whether the statement contains material errors or
other misstatement.
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4.2 ADVANTAGES OF WORKING AUDIT FIELD
The benefits of an audit are numerous. Audits can improve a company’s
efficiency and profitability by helping the management better understand their own
working and financial systems. The management, as well as shareholders, suppliers and
financers, is also assured that the risks in their organization are well-studied, and
effective systems are in place to handle them.
Fieldwork is the process of gathering evidence and analyzing and evaluating that
evidence. The purpose of fieldwork is to accumulate sufficient, competent, relevant, and
useful evidence to reach a conclusion concerning our performance expectations, and to
support our audit comments and recommendations. Audit evidence is sufficient when it is
factual and would convince an informed person to reach the same conclusion. Evidence is
competent if it consistently produces the same outcomes. It is relevant when it is directly
related to the audit comments, recommendations, and conclusions.
Besides that, an audit can uncover inaccuracies and discrepancies within an
organization’s records, which may be indications of weak financial organization or even
internal fraud, although fraud detection is not the main purpose of an audit.
The benefits of an audit:
Analyze and understand company’s financial records.
Identify key areas for improvement in the company.
Assess risks, economy, efficiency and quality.
Uncover fraudulent or other illegal activities within the company.
Reinforce and strengthen internal control.
Auditors have a unique broad perspective of a company which they apply to deliver
effective analyses and relevant information. Management can use this information to
evaluate the company and implement measures necessary to meet their objective.
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KHAIRUDDIN HASYUDEEN & RAZIChartered Accountants
4.3 PLANNING OF AUDIT
Before want to start doing the audit, First of all must know the planning in audit.
I. The auditor decides whether to accept a new client or continue serving and existing one.
Decision must be making before incurring any significant cost that cannot recover.
II. A thorough understanding of client’s business and industry and the knowledge about the
company’s operation are essential for doing an adequate audit.
III. Auditor uses knowledge gained from the strategic systems understanding of the client’s
business and industry to achieve its objectives.
IV. Performance of analytical procedures during planning helps the auditor identify
significant matters.
V. Materiality is a concept or convention within auditing and accounting relating to the
importance/significance of an amount, transaction, or discrepancy.
VI. Perform the audit.
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Accept client and perform initial audit planning
Understand the client’s business and Industry
Access client business risk
Perform preliminary analytical procedures
Set materiality
Develop overall audit plan
KHAIRUDDIN HASYUDEEN & RAZIChartered Accountants
4.4 FINDINGS
4.4.1 WORKFLOW IN KHR
There is a lot audit procedures, it depend on the company. In KHR, the audit
procedures based on section, which is starting from A section until N section. Proper
planning of audits and reviews is essential to the effective conduct and completion of the
work. This is an overview that KHR apply in the organization.
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KHAIRUDDIN HASYUDEEN & RAZIChartered Accountants
This is some description about the model above:
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4.4.2 Received full set of accounts.
4.4.3 Compare the accounts with the opening balance. Opening balance is taken from
previous audit file.
4.4.4 Provide estimated audit fee by referring to client income statement and balance
sheet for the related year. The estimated fees are set up by using the fee
computation from Malaysian Institute of Accountants (MIA).
4.4.5 Casting checks the calculation in client’s management account to make sure the
truth of the figure and records.
4.4.6 Prepare the audit working paper for income statement and balance sheet.
For the audit working paper, there are some indexes in order to do the audit
working paper, the index was mentioned below:
1. Job Administration
AA – audit checklist – completion
AB – audit checklist – final
AC – audit checklist – draft
AD – audit checklist – current audit file (CAF)
AE – draft bills, estimated fees and time and claim record
AF – management letter
AG – notes for next year
AH – partner review
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AI – outstanding matters
AJ – manager review
AK – working paper review
AL – financial statement review
AM – confirmation and others
2. Audit Planning
BA – audit planning memorandum
BB – audit planning program
BC – audit planning checklist
BD – analytical review
BE – audit risk
BF – related parties
BG – going concern and letter of support
BH – others
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3. Financial Reporting
CA – Opening Balance
CB – Audited Financial Statements
CC – Adjustment journal entry (AJE), reclassification journal entry (RJE) and
client journal entry (CJE)
CD – Extended Balance Sheet and Income Statement
CE – Management Accounts
CF – Audited Financial Statement (Previous)
CG – Working Paper for Consolidation
4. Statutory Audit
N – Information about the directors, members, shareholders, manager,
secretary, transfer of share, authorized capital and issued share capital
– fulfil the form
5. Balance Sheet items
C – Intangible Assets and Property, Plant and Equipment
D – Amount due from / to director or affiliated company
E- Inventories and Work In Progress
F – Trade Receivables
G – Other Receivables, Deposit and Prepayments
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KHAIRUDDIN HASYUDEEN & RAZIChartered Accountants
H– Cash and bank balances
J – Trade Payables
K – Other Payables and Accruals
L- Loans and Borrowings
6. Taxation
M – Tax computation done with manual, computation capital allowance done
with schedules.
7. Income Statement
B – Revenue / Turnover
B – Cost of Sales
B – Gross Profit Margin
B – Other Operating Income
B – Distribution and Selling Expenses
B – Administrative Expenses
B – Other Operating Expenses
B – Finance Cost
B – Others
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4.4.7 Performing statutory audit at company secretary office (registered office).
Statutory audit is a process of gathering the latest information about the directors,
members, shareholders, manager, secretary, transfer of share, authorized capital
and issued share capital.
4.4.8 Once the process of audit is finish, prepare the draft audit report and send it for
typing. The draft audit that has been type will be reviewed by audit manager
assigned for each assignment.
4.4.9 The draft audit report can be released after being reviewed by audit manager if
there is no amendment.
4.4.10 Draft audit report is sent to client together with the signing pages for directors.
The draft will be sent for review purposes and the signing pages should be
returned back once being signed by the directors.
4.4.11 when the client agreed with the draft audit report and there is no amendment need
to be done, the audit manager will continue to release the final audited report.
4.4.12 Administration department will prepare the auditor’s report that need to be signed
by the partner of the audit firm.
4.4.13 After all the procedures are completed, final audit report can be released.
Administration department will print out 7 copies of final audited report and
compile it together with the signing pages and the auditor’s report. 2 copies are
sent to clients, 2 copies for company secretary, 1 copy for tax department, 1 copy
for Permanent Audit File (PAF) and Current Audit File (CAF).
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KHAIRUDDIN HASYUDEEN & RAZIChartered Accountants
4.5 AUDIT PROCESS IN KHR
In Khairuddin Hasyudeen & Razi (KHR), the first step in performing audit is
audit engagement. An engagement letter defines the legal relationship between a
professional firm and its clients. This letter stated the terms and conditions of the
engagement, principally addressing the scope of the engagement. This audit
engagement is appointment with client before the fieldwork is started. Basically, audit
manager and partner will involve in the engagement to evaluate the client acceptance
of first appointment and continuance. It same goes with theory that I have learnt in
university. Besides that, in this engagement, auditor also can know the nature of
business for the first appointment of client. Yet, evaluation of issues that have arise in
previous year can be discusses for continuous client appointment. In engagement as
well, they will talk about the audit fees, audit team involved and timing of audit
engagement
When the fieldwork is started, first of all need to do Audit Planning Memorandum
or called APM. The objective of APM is to obtain understanding of the company as
well as guidance for auditor to do audit process. APM can help auditor to obtain
understanding in clients’ environment as well as their internal control. Other than that,
for recurring audit, we would try to understand the result of previous audit and would
stress on the issues previous year. Thus, in APM, it divides in two parts which is
comparison of the financial statement for the previous year with the financial
statements for the year to be audited. It is called preliminary analytical procedures.
Then, each variance or difference will come out with our audit procedure which is
related to nature, extent and timing. Next is to evaluate the business risk and doing
planning materiality. In this part, it is as a guidance to assess risk of material
misstatement in the financial statement. Basically, in theory APM was covered three
processes in audit process which is obtaining understanding of entity and establish
material and risk and set overall audit strategies and audit plan. The example of APM
can be referring in appendix 1.
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In audit business process, in KHR, it will divide into two parts which is Profit and
Loss part and Balance Sheet Part. Basically, after doing Audit Planning Memorandum
(APM), next step is to check opening balances of balance sheet items. This can be done
by check whether the amount reflected in previous audit report same as the opening
amount in client’s account. If there is any difference, note of that amount and make
adjustment of the amount.
The next step is to check journals whether have been posted to correct nominal
ledger account or not. Scrutinize nominal ledger journals made during the period for
evidence of any unusual journal entries. For such items, obtain satisfactory explanations
from the client. Then obtain a closing trial balance for the current period. Check that the
trial balance is mathematically accurate and trace numbers to the draft financial
statements and lead schedules. For agreed post trial balance audit adjustments, check that
the client has processed agreed journals into the nominal ledger and financial statements
properly
After all audit process is complete (including balance sheets and income statement’s
items) next is auditor need to do the Summary Review Memorandum (SRM). (Appendix
9) SRM is the summary of audit evidence that auditor get from the audit process.
Basically, auditor will make analytical procedures the audited financial statement for
current year that need to be audited and audited financial statement for previous year.
Thus, auditor will summarized why the variance is arise regarding to audit evidence.
Besides that, SRM is a tool to know which kind of audited report need to be issued
whether unqualified, qualified, adverse, and disclaimer report. After fieldwork is done,
then client need to fill the form related to their independence.
Basically, in this stage, auditor must evaluate the results of audit procedures which
are concerned on sufficiency of the audit evidence and overall effect of detected
misstatements on the financial statements. In this stage, auditor consider on the effects of
unadjusted material misstatements on assets, liabilities, equity, revenues, and expenses.
In other words, concentrate on the effects on the financial statements. After all is done,
then the work will be reviewed by senior in charged or leader of the team. After senior is
satisfied, it will be reviewed by manager. The manager will always follow up the any
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unresolved issues or give some point need to be cleared. After satisfied, then it will be
reviewed by engagement partner as a final check to ensure that sufficient appropriate
audit evidence has been obtained to support the conclusions and the audit opinion. In this
stage auditors and managers in charged and engagement partner need to fill the checklist
related to independence and professional code of ethic. After all, the report will be issued
and send to client.
4.6 WORKING PAPERS
4.6.1 Section B- Income Statement items Section/ Profit And Loss Account.
B section, which is include Income Statement, Analytical review for Income
Statement, Details of Balance Sheets, Ninth Schedule, test of control (TOC) for sales and
purchase cycle, treasury and payroll. But actually it is depending on the company, if the
company is big and has a lot of transaction, it needs TOC cycle, but if the company is
dormant (company with small transaction) company only, hence no need to do TOC
cycle. Same goes to Completeness and cut-off, if TOC done, hence the completeness and
cut-off must be done together. The purpose of this, just to make sure all the transaction is
correctly and accurately recorded.
First of all, for this section, there are few items that compulsory to perform an
audit. This is due to the tax computation. By doing this, detailed information on taxable
items easily can be obtained from this schedule. This schedule actually represents an
operating costs which incurred by the business. Generally, for all expenses, obtain an
analysis of operating costs showing accounts included in the cost headings disclosed in
the financial statements.
Test the mathematical accuracy and agree balances to the nominal ledger. Obtain
an analysis of employee costs analyzed by payroll cost, tax and pension contributions.
Test the mathematical accuracy and agree balances to the nominal ledger. Obtain or
prepare a monthly schedule of cost of sales and gross profit percentage analyzed by
department, location, segment or product.
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Compare with prior periods. Explain significant or unexpected changes and
trends. Be vigilant in particular for evidence of unrecorded purchases or overstated stock
or sales. The example of B section can be refer in Appendix 2
4.6.2 Sales
Firstly, obtain an analysis of sales by location and product. Check the casts and
ensure it agrees to the nominal ledger. Besides, obtain a schedule of monthly, quarterly or
annual sales, value and quantities if available, analyzed by geographical area, market and
major product or major contracts and compare with prior periods. Review the schedule
taking into account business and consumer trends, product mix, technology, new
products, discontinued products, expansion etc.
Besides that, compare miscellaneous and cash sales by product and location with
prior periods and at the same time, investigate any significant differences. Calculate the
percentage credit notes by value and quantity with sales and compare with prior periods.
Scan sales accounts in nominal ledger for evidence of unusual entries. Examine
supporting documentation in respect of unusual items detected. For a selected month,
check that the total number of sales invoices and dispatch notes issued and properly
reconciled.
Test that a sample of dispatch notes have been properly invoiced by checking to
invoice details such as customer, quantity and price and customer order. To check the
validity of credit notes issued in the period can be by vouching credit notes recorded in
sales to the credit note or examining valid supporting documentation or inspecting
evidence of authorization.
4.6.3 Cost of Sales
For cost of sales, compare analyses of distribution costs and administrative
expenses with prior periods. Prepare a predictive estimate or proof in total of payroll
costs of gross pay by obtaining prior period payroll costs, the numbers of employees in
the period year including starters and leavers from Personnel Department and considering
the effect o pay rises and changes in the staff mix in the period.
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For sample of employees include on the payroll master, check that the gross pay
agrees to a contract of employment or subsequent authorized amendments to pay rates.
Compare with recorded payroll costs. Ensure description of employee as either full time
or part time is accurate. Compare purchases by month with prior period.
Explanation needed from the client the reason for significant or unexpected
changes and trends. For discounts allowed, calculate as a percentage of sales and
compare with prior periods, company policy and credit control trends. For all operation
categories, scan the nominal ledger accounts, journals or transaction files and list major
transactions which normally those in excess of adjusted materiality limit and unusual
transactions which those that indicate an accounting or disclosure matter. Examine
documentary evidence underlying identified major and unusual transactions to ascertain
that underlying evidence supports the recorded amount and description of the transaction.
Ensure that revenue transactions are recorded in the proper period properly
classified and recorded in accordance with accepted accounting principles and the client's
revenue recognition policy and cost of sales transactions are recorded in the proper period
and properly classified as well.
Besides, ensure other transactions are recorded in the proper period and in a
manner that properly matches revenue and expenses. Test a sample of purchases recorded
in the nominal ledger in the period and inspect authorized invoice by checking the
accounts classification and ensure that agree to other evidence of work done.
4.6.4 Section C – Property, Plant and Equipment
There are few procedures to be followed during the audit work for this section.
Firstly, obtain a summary schedule of each significant class of property, plant and
equipment to satisfy disclosure requirements, showing opening balances, additions,
disposals, revaluations and closing balances.
Ensure that the property, plant and equipment exist and are genuine assets of the
business and are beneficially owned by the business and any restrictions, pledges or liens
on the property, plant and equipment are identified and adequately disclosed in the
financial statements.
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At the same time, this fixed assets schedule need to be prepared as to attachment
for this section. Test the mathematical accuracy, agree opening balances to prior period
working papers and agree closing balances to the nominal ledger and investment ledger
where maintained. Vouch against invoices, contract notes, and agreements for any
additions or disposals.
Confirmation of documents needed from the client. Ensure that all property, plant
and equipment are included in the balance sheet, income from investments is complete
and gains or losses on realization of property, plant and equipment are correctly stated. In
additions, ensure the property, plant and equipment are properly disclosed and
capitalized.
Ensure that property, plant and equipment are accurately stated at cost or revalued
amounts and provided against where necessary. In KHR, normally do not conduct
physical verification of the assets to ensure its existence. It is only applicable to a very
large amount of assets.
Then, check calculation of the rates of depreciation to ensure that the rates used
are reasonable and consistent with previous years. If the assets are charged, ensure that
the particular charge is contained in the register of charges and relevant forms are filed.
Where possible, obtain a copy of the relevant forms. The example of plant, property and
equipment (PPE) can be referring to Appendix 3.
4.6.5 Section D – Amount due/to affiliated/associated company
Disclosure of inter-company balances and transactions is required in respect of
the Company and related corporations, for an example, between the Company and other
companies within the same group as well as companies or firms in which the directors
have interest. Inter-company balances include those arising in the ordinary course of
business or from loans and advances or payments made on behalf of each other.
For this section, obtain an analysis of amounts due to and due from group, joint
venture and associated undertakings, analyzed by type between amounts due within one
year and those due after one year, including movements in the year where necessary.
Check the casts and agree balances to the nominal ledger. Then compare balances due
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from group, joint venture and associated undertakings with prior periods and explain
significant change as well as taking group payment policies into account. Lastly, obtain a
confirmation letter from the related party of the balance due and any repayment and
interest terms. The example of confirmation can refer to Appendix 4
4.6.6 Section E – Inventories and Work In Progress
For this section, first of all obtain stock list and vouch as follows:
a) Test additions and extensions.
b) Check pricing with latest purchase invoices and compare with previous year.
c) Check to the company's stock records
The next step is to ensure the valuations of stocks shown are at the lower of cost or
net realizable value or other accepted Accounting Standard. After that, obtain stock
certificates signed by the directors confirming the total stock and the location of the
stock.
Ensure that closing stocks do not include stock owned by third parties held by the
company on their behalf. Besides that, check for stock located or held by third parties
which belongs to the company is taken up properly. If stock take was carried out at year-
end, ensure that stocks shown in the balance sheet reconcile to the inventory records
taken at the stock take.
4.6.7 Section F - Trade Receivables/ Trade debtors
For this section, balances must be traced to schedule of debtors, cast schedule to
agree with control account, balance sheet and debtors’ ledger. Scrutinize schedule of
subsidiary or associates or related companies accounts and non-trade items which should
be shown separately.
1. Test check selected accounts as follows:
a) Check casting.
b) Enquire into large credit balances.
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c) Scrutinize for unusual entries.
Then, review long outstanding accounts with management as to its collectability
and the necessity to provide for bad and doubtful debts. Check subsequent receipts.
Scrutinizes all accounts not supported by subsequent receipts and note or list debts
outstanding for over one year. Seek explanation from the client as to the delay in
payments. Besides that, obtain direct confirmation of balances especially large balances
where possible. Lastly, must sent confirmations to client then the client sent to third
parties. This is because to make sure balance as per book client same with the balance in
third parties’ book. The example of confirmation can refer to Appendix 6.
4.6.8 Section G – Sundry Receivables, deposit and prepayment.
The first procedure for this section is to obtain a listing of other receivables,
deposit and prepayments. First things, is analyzed by category and between amounts due
within one year and those due after one year. Test the mathematical accuracy and agree
or reconcile balances to the nominal ledger. Then, compare an analysis of other
receivables, deposit and prepayments with prior periods. Explanation needed for any
significant or unexpected changes.
In addition, review related income and expense accounts for evidence of omission
of significant prepayments. Obtain confirmation of significant advances, for an example,
staff loans and inquire into the reason for such advances. Other than that, here, can obtain
direct confirmation from all entities, this is applicable only for large amounts, with which
the entity has loans or notes receivable at the balance sheet date.
This can be done by preparing a confirmation requests from the respective parties.
Ensure loan and notes receivable balances reflect a proper cut off of receipts and
disbursements. Obtain an analysis of any loans and notes receivable written off by
determine that significant write-offs have been properly authorized, for an example, in
Board minutes.
Review the propriety of recoveries if there is any. Other than that, check
translation of any foreign currency loans and notes receivable balances and cash
movements and treatment of exchange differences. Besides hat, review document and
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then test the process used by management to determine any allowance or provision for
irrecoverable loans and notes payable. Review subsequent events or transactions for any
indications of required adjustments to the allowance or provision for irrecoverable loans
and notes payable for the old and unusual outstanding balances with the client. Review
subsequent cash receipts for evidence of significant collection problems and assess
percentage of period end debts collected by the date of audit fieldwork.
For significant other receivables, perform vouching to supporting documentation
and consider recoverability and if there is no movement between a year, the company
needs to provide a provision. Besides that, test the calculation of material prepayments
and vouch to supporting invoices and other documentation. The example for this section
can be referring to Appendix 7.
4.6.9 Section H – Cash and Cash Equivalents.
Procedures that to be followed for this section is, firstly obtain a schedule of all
cash and bank accounts open at the balance sheet date or existing during the period
showing the account number and balance per the nominal ledger. Check the casts and
agree balances to the nominal ledger.
Compare the list of cash and bank balances with prior periods and budgets.
Ensure cash balances as presented in the balance sheet, properly reflect all cash and cash
items on hand, in transit or on deposit with third parties. Compare total petty cash
payments with prior periods and on a monthly basis. In addition, obtain an analysis of
interest received and paid in respect of bank deposits and bank overdrafts.
Obtain direct confirmation of period end balances from all banks with whom the
entity conducted business during the year by the use of bank confirmation letter.
Besides that, ensure cash balances reflect a proper cut-off of receipts and
payments. This can be done by reviewing review receipts and payments in the cash book
for 5 items either side of the balance sheet date and check the validity and timing of
material items and trace transfers between bank accounts, including related parties for a
selected period either side of the balance sheet date and determine that transfers are
properly recorded in the correct period.
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If control over cash is weak: obtain returned cheques in respect of any unusual
payments identified and examine details of payees and amounts recorded in the cash
payments book and check propriety and review or prepare a proof of cash reconciliation
and corroborate the totals of receipts and payments recorded in the selected period.
The next step is to obtain a copy of the bank reconciliation for each account at the
balance sheet date and ensure it agrees the bank balance figure to the bank statement and
bank confirmation letter. Then trace deposits in transit and uncleared cheques to after
date bank statements and reconcile the balance with the nominal ledger.
Examine documents supporting significant uncleared deposits and outstanding
cheque payments which are not cleared at the audit date for cut-off. Scan the cash and
bank nominal ledger accounts for evidence of unusual or reconciling entries.
Explanations needed for such items from the client.
4.6.10 Section J – Trade Payables
For this section, trace balances to schedule of creditors, cast schedule to agree
with control account, balance sheet and creditors’ ledger. Scrutinize schedule of directors'
accounts, subsidiary, associates or related companies accounts and non-trade items which
should be shown separately.
Verify balances with creditors' statements. Where no statements are available,
select material balances for circularization, vouch with purchase invoices and check for
subsequent payments after year-end. Besides, verify large balances, especially on the
nature of such balances and on how they arise.
Conduct a search for unrecorded liabilities after year-end and ensure that such
liabilities pertaining to the year under review are taken up in the accounts as accruals.
Obtain direct confirmation of balances, especially large balances where possible.
Liabilities need to be segregated into short-term and long-term, where amount due within
12 months fall under short-term liability meanwhile amount due after 12 months fall
under long-term liability. The example of confirmation trade payables can refer to
Appendix 8.
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4.6.11 Section K – Sundry Payables and Accruals
Obtain a lead schedule supporting required disclosures for other creditors and
accruals and deferred income. Test the mathematical accuracy, agree comparatives to
prior period working papers and agree or reconcile closing balances to nominal ledger.
Compare an analysis of other creditors, accruals and deferred income with prior periods.
Compare related income and expense accounts with prior periods. Explanation
needed for any significant or unexpected changes and consider any evidence of omitted
accruals or deferred income. Besides, obtain a list of bills of exchange outstanding at the
year end.
Test the mathematical accuracy and agree to the lead schedule. Agree details of
bills to the clients bills register and check that bills were subsequently met on the due
date. Review the summary of other creditors. Test the calculation of significant other
creditors and vouch to relevant supporting documentation.
Besides, review the pension contributions control account in the nominal ledger
and ascertain if payments to the pension scheme were properly made on a timely basis in
respect of employees and employers contributions. Review an analysis of accruals
including interest separately and deferred income. Test the calculation of material
accruals and vouch to relevant supporting documentation.
For test pension costs accruals, enquire into pension scheme position and
ascertain how and when accrual will be eliminated. In addition, review the effect of
changes to benefits in the year. Sometimes we need to discuss with management the
method for establishing the completeness of accruals and estimating the accrual needed.
Develop an independent expectation of accruals and consider reasonableness in
comparison with amount recorded.
For accrued payroll costs, ensure that it agrees the calculation and subsequent
payment of accrued salaries and wages and check the calculations of holiday pay and
ensure that the accrual is adequate. For deferred income, obtain an analysis of all items
included in the period end balance and of movements in the period. Check the validity of
deferred income and vouch to relevant supporting documentation. Besides, check that the
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amount of deferred income released to the profit and loss account is properly calculated
based on a consistent basis with prior periods and the related asset.
4.6.12 Section L – Loan and borrowings
There are few procedures to be followed in preparing Schedule L. First of all,
obtain an analysis of loans and finance lease obligations due within one year and due
after more than one year including the issue date, maturity date, face value, interest rate
or terms, opening amounts, increases in loans and finance lease obligations, repayments,
unamortized and amortized discounts and closing balances.
Test the mathematical accuracy and agree or reconcile balances to the nominal
ledger. In addition, obtain an analysis of interest payable on finance lease obligations,
bank loans and overdrafts and other loans.
Ensure the balances agree to the nominal ledger. Compare debt balances such as
loans and finance leases with prior periods and budgets. Consider the interest
amortization of debt issued at a discount or redeemable at a premium. Calculate interest
expense as a percentage of average debt for evidence of unrecorded liabilities.
Other than that, ensure that all relevant terms and details of loans are known
including name of lender, original issue date, proceeds received means the net of eligible
issue costs, security, interest rates applying and repayment terms. Update permanent file
with relevant information for material new loans and finance lease agreements which
includes finance costs profile as necessary. Request confirmation of balances payable
from lenders with whom there was a significant loan outstanding at the balance sheet date
or at any time during the period. Include in confirmation request, details of accrued
interest, security and repayment terms. For repayments of loans, vouch that repayments
are in accordance with loan agreements and vouch to approve documentation.
Meanwhile, for loan drawdown in the period, have to check authorization to
minutes or other documentation and vouch to cash received records and bank statements
as well. Ensure it agrees details to loan agreements. Vouch issue costs to invoices and
other supporting documentation.
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For the debt was issued with net proceeds less than the repayable amount, check
that the interest amortization of the discount or premium is on an acceptable basis and has
been accurately calculated and the balance sheet/net asset statement liability
correspondingly increased. Ascertain from management or trustees details of any
covenants included in bank loans or other debt agreements need to test compliance with
debt covenants by agreeing covenant details to loan agreements or permanent file.
Discuss with management what remedial action has been taken to deal with any
non compliance and if necessary ask the client to obtain a waiver from the lender in
respect of any non compliance which could accelerate debt repayment. To perform test
on interest payable on loans by vouching interest payable to supporting documentation
and recalculating interest accrued.
For lease agreements, inspect for new finance leases incepting in the period,
check suitable authorization and confirm finance lease classification. Check that a proper
allocation of interest deferred to future periods has been made that the amount capitalized
is correct. For repayments of finance lease obligations, check that rental payments are in
accordance with the lease agreements and that payments have been properly split
between repayments of capital and interest.
4.6.13 Statutory Audit- N Section
For this section, any important changes need to be noted. If the is any acquisition
of assets during the financial year, resolution regarding that matter need to be
photocopied. For an example change of bank signatories to current bank account, transfer
of securities, director’s remuneration, all the resolution regarding this matter need to be
photocopied.
Besides, form of annual return as well as all the related form such as Form 49 also
has to be photocopied for reference. Three books that need to be referred are minute
book, secretarial book and register book.
Firstly, go through the minute book. While extract the information, browse
through the minute content. Secondly, obtain all the latest dated forms from secretarial
book. Finally, reference made on register book to fill statutory programme.
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4.6.14 Dormant Company
For dormant company, most of the schedules are not applicable. The procedures
for this type of company is confirm that the company has indeed been dormant. Then
ensure that unresolved items brought forward from previous year have been cleared.
Besides, obtain photocopies or extract of minutes of AGM, directors’ meetings and
EGMs if any. Ensure the trial balance agree to general ledger. Ensure the opening
balances of general ledger agree to previous year’s financial statements. In addition, for
share capital and statutory records, ensure that authorized share capital agree to
Memorandum of Association. Vouch movements in issued capital, if any and obtain copy
of returns on allotment. Finally sight statutory records, complete the statutory registers
checklist.
4.6.15 Audit Report
The final stage in the auditing process is preparing the audit report, which is the
communication of the auditor’s findings to users. Audit journal entries have to be
prepared if the is any adjustments in accounts. After all this documents have been
prepared, the audit file will be given to the manager for review. The review notes given
by the manager after he reviewed have to be cleared. After cleared all his review notes,
the documentation can be prepared. The documentation that needed to be prepared is:
Note of fees
Draft audited accounts
Two copies of audit journal entries
Twelve copies of the Director’s Report, Directors’ Statement and Statutory
Declaration
Register – Form 7
Letter of representative
Stock certificate
Cash in hand certificate
Certificate of directors’ remuneration and shareholdings
Bank confirmation
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Confirmation of balance
Cover sheets, Tax cover letter, Form C and Form R
It is important to note that auditor's reports on financial statements are neither
evaluations nor any other similar determination used to evaluate entities in order to make
a decision. The report is only an opinion on whether the information presented is correct
and free from material misstatements, whereas all other determinations are left for the
user to decide.
There are four common types of auditor’s reports, each one presenting a different
situation encountered during the auditor’s work. The four reports are as follows:
Unqualified Opinion
An opinion is said to be unqualified when the Auditor concludes that the
Financial Statements give a true and fair view in accordance with the financial
reporting framework used for the preparation and presentation of the Financial
Statements. An Auditor gives a clean opinion of Unqualified Opinion when he does
not have any significant reservation in respect of matters contained in the Financial
Statements
An Unqualified Opinion indicates the following:
(1) The Financial Statements have been prepared using the Generally Accepted
Accounting Principles which have been consistently applied;
(2) The Financial Statements comply with relevant statutory requirements and
regulations;
(3) There is adequate disclosure of all material matters relevant to the proper
presentation of the financial information subject to statutory requirements, where
applicable;
(4) Any changes in the accounting principles or in the method of their application and
the effects thereof have been properly determined and disclosed in the Financial
Statements.
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Qualified Report
A Qualified Opinion report is issued when the auditor encountered one of
two types of situations which do not comply with generally accepted accounting
principles, however the rest of the financial statements are fairly presented. This
type of opinion is very similar to an unqualified or “clean opinion”, but the report
states that the financial statements are fairly presented with a certain exception
which is otherwise misstated. The two types of situations which would cause an
auditor to issue this opinion over the unqualified opinion are:
I. Single deviation from GAAP – this type of qualification occurs when one
or more areas of the financial statements do not conform with GAAP (e.g.
are misstated), but do not affect the rest of the financial statements from
being fairly presented when taken as a whole. Examples of this include a
company dedicated to a retail business that did not correctly calculate the
depreciation expense of its building. Even if this expense is considered
material, since the rest of the financial statements do conform with GAAP,
then the auditor qualifies the opinion by describing the depreciation
misstatement in the report and continues to issue a clean opinion on the
rest of the financial statements.
II. Limitation of scope - this type of qualification occurs when the auditor
could not audit one or more areas of the financial statements, and although
they could not be verified, the rest of the financial statements were audited
and they conform GAAP. Examples of this include an auditor not being
able to observe and test a company’s inventory of goods. If the auditor
audited the rest of the financial statements and is reasonably sure that they
conform with GAAP, then the auditor simply states that the financial
statements are fairly presented, with the exception of the inventory which
could not be audited.
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Adverse Opinion report
An Adverse Opinion is issued when the auditor determines that the
financial statements of an auditee are materially misstated and, when considered
as a whole, do not conform with GAAP. It is considered the opposite of an
unqualified or clean opinion, essentially stating that the information contained is
materially incorrect, unreliable, and inaccurate in order to assess the auditee’s
financial position and results of operations
Disclaimer Opinion
A Disclaimer of Opinion, commonly referred to simply as a Disclaimer,
is issued when the auditor could not form, and consequently refuses to present, an
opinion on the financial statements. This type of report is issued when the auditor tried to
audit an entity but could not complete the work due to various reasons and does not issue
an opinion.
These are situations which Statements on Auditing Standards (SAS)
would cause an auditor to issue a disclaimer of opinion:
A lack of independence, or material conflict(s) of interest, exist between the
auditor and the auditee (SAS No. 26)
There are significant scope limitations, whether intentional or not, which
hinder the auditor’s work in obtaining evidence and performing procedures
(SAS No. 58);
There is a substantial doubt about the auditee’s ability to continue as a going
concern or, in other words, continue operating (SAS No. 59)
There are significant uncertainties within the auditee (SAS No. 79).
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4.7 PROBLEMS WHILE PREPARING AUDIT
Firstly, the problem when doing audit in KHR is client does not give the details in
the certain significant account. So, it is hard for me to state the details in the audit
working papers and to gather the evidence of documentation.
Secondly, the documentation such as, payment vouchers and invoices, purchase
order not separated, supposedly should be separated by month and correctly rearrange the
document. This is because to ensure that all of the records are fairly stated and all
supporting document needed are arrange in order.
Thirdly is about, sometimes they figured cannot found out for example the
amount of plant, property and equipment is RM 2,000, 000 but after recalculated the
Fixed Asset registered is not tally. So, the common reason is because they is a new
person in charge, the person in charged was resign and the others reason is this amount
just brought forward from previous year.
After discussion with the audit senior, I decided to issue the qualified report for
the audit because of scope limitation. This report issue because the auditors cannot obtain
sufficient evidence. The client company must take seriously and properly documentations
on accounting records. If records are too bad, the auditors will issue the qualified reports.
Besides that, the awareness towards the documentation and proper accounting records
should be stressed because it will affect the company performance.
Actually, in the other side, there are a lot of problems when preparing the audit; it
is not only at KHR, but almost all the company had been faced the same problems. For
example:
Lack of facility
KHR is a medium audit firm which uses the manual system to construct the working
paper. They use old operating system, application system and hardware. At the same
time, the printer provided in KHR only can be access by the network, hence sometimes if
the networks problem, all the work done also be problem because all the staff needs to
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wait until the system okay, then the print can be done. From that, I can see, there is a lot
of wasting time to wait until the machine will be okay.
Lack Of Staffs Skill
From the observation that I do, it can says that lack of staffs skill because the lack of
senior staffs compared to fresh graduate. As we know, fresh graduate not have any
experience in doing the audit. Its take time for them to familiar with the flow of audit in
order to make sure they really understand and able to handle the audit progress. Hence,
supposedly must be lead by the senior audit. But in KHR, sometimes, it doesn’t care if
you are trainee or what, you must complete the task within the period given.
Other issue that should be highlighted is:
I. Application of FRS 139 – Financial Instrument: Recognition & measurement.
The Financial Reporting Foundation (FRF) and Malaysia Accounting Standards
Board (MASB) announced that the effective date of applying FRS 139 was on 1 January
2010. It is in line with the plans of both FRF and MASB to bring full convergence with
International Reporting Standards (IFRS) by 1 January 2012. As currently in Malaysia,
companies can choose whether to practice Private Entity Reporting Standards (PERS) or
FRS. Normally small-medium companies choose to practice PERS while big or listed
companies would practice FRS.
Issue highlight
FRS 139 is not compulsory to be practice and it will only commence until 2013.
However, if a holding company decides to implement FRS 139; therefore all its
subsidiaries must apply the FRS. The problem will be faced by company when the
holding company’s auditor is different with subsidiary company’s auditor in the
responsibility of the auditors to consult their clients regarding the application of FRS 139.
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Recommendation
As the auditor of the company, we consult our clients on the treatment for
significant accounting changes by FRS 139.
II. Inter-company loans
Prior to the adoption of FRS 139, inter-company loans were recorded at cost.
With the adoption of FRS 139, inter-company loans are now recorded initially at their
fair values, which are estimated by discounting the expected cash flows using the current
market interest rate of a loan with similar risk and tenure. Finance income and costs are
recognised in profit or loss using the effective interest method.
III. Property, Plant & Equipment
Recognition and measurement
Items of property, plant and equipment should be stated at cost less any
accumulated depreciation and any accumulated impairment losses. Cost includes
expenditures that are directly attributable to the acquisition of the asset and any other
costs directly attributable to bringing the asset to working condition for its intended use,
and the costs of dismantling and removing the items and restoring the site on which they
are located.
Issue highlight
We have reviewed one of our client’s additional assets for the year under review
and we noted that among the additional assets are six motor vehicles. We noted that the
costs of these six motor vehicles were recorded after deduction of deposits.
The actual costs recognized in financial statement were incorrect whereby there
are different amount of actual cost and recorded cost in general ledger.
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Recommendation
We proposed to the client for making necessary adjustment to reflect the accurate
balance of Property, Plant, and Equipment. As auditor, we do not make adjustment on our
client accounts. Our duty is to give opinion whether the financial statement present in
true and fair view.
IV. Control over issuance of cheques
Issue highlight
We noted that at year end, our client issue cheques to trade and other payables
amounting RM2.6 million. This was made in spite of the company’s cash balances
available at the bank account amounting RM1.5 million. However the company does not
have overdraft facility.
Recommendation
We recommend the company to only prepare cheques based on available cash
balances.
V. Control over revenue cycle
Issue highlight
During our test of control (TOC) on revenue cycle, we noted that there are
difference between general ledger and sales report amounting RM200,000. In addition,
after our review on trade receivable balances, we also noted the difference between
statement of account issued to client and trade receivable balance as per GL amounting
RM600,000
We were made to understand that the sales analysis report, billing system, and the
accounting system are not integrated, resulting the above different. The absence of
integration between these systems indicates lack of internal control of the company.
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Recommendation
We recommend the company to continuously monitor the above problems to
avoid any potential errors in the future.
VI. Inaccurate recording of long term creditor
Issue highlight
During our test of control (TOC) on purchase cycle, we find out that included
under long-term creditors is a repayment schedule of outstanding electricity charges
amounting RM15 million. There were no movement during the year under review.
However we noted that the company have paid instalment totalling to RM3 million as per
schedule proposed in the agreement during the year but recorded the said transactions in
trade creditors rather than reducing long-term creditors
As the effect of this treatment, the amount stated in the financial statement does
not represent the real transaction and misleading will occur and that it will be reported to
the user of this information.
Recommendation
We proposed the client to review the situation as soon as possible to ensure the
accurate balance is reflected in the financial statements
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4.8 RECOMMENDATION
I. Khairuddin Hasyudeen Razi (KHR) should improve the staff welfare and always
give continuously motivations to the staffs to increase their spirit doing their job.
In order to remain good staff, KHR can increase activities like super weekend. Super
weekend can make once per month. The activities can be done is like watching movie,
aerobic, dinner and other interesting activities. Besides, the overtime should be given
to the staff continuously as they worked out till night.
II. Audit software usage should be proposed.
Audit software is a tool for auditing. Currently, in KHR they used Microsoft Office
Excel to do working paper. However, since the work is too much, KHR can propose
audit software in future and giving some training for the usage. Audit software can
make auditor easier to audit, and fastened. Thus it will increase productivity of staffs.
In addition, if the audit software is too expensive, KHR should make provision for
audit software and make an analysis which one is the best way whether buy audit
software or just use Microsoft Office Excel.
III. Each staff needs to be updated with changes in accounting policies and issuance of
new audit standards.
KHR must subscribe each months some magazines related to the accounting matters
like Bloomberg, The Edge, and others. Thus, each staff will present the latest
accounting issue for that month in training course that has been organized each month
after presentation session.
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KHAIRUDDIN HASYUDEEN & RAZIChartered Accountants
5.0 CONCLUSION
In conclusion, after 6 months of practical training, this program successfully
reaches its objectives which are to expose student to the real situation of accounting,
auditing, taxation, and company secretary. I also got the real picture of accounts and not
just remembering the formulas. Even some of the above are not yet teach in the university
but I got experience to learn it earlier during this practical training. Practical training also
provides me with useful experiences that can be used in the future and also help me in
enhancing the communication skills.
At the same time, I think work in audit firm as an auditor needs patience and
focus. In my opinion, patience is needed because auditor needs to face with clients’
behavior, managers, as well as senior auditor. Focus is the most important element to be
an auditor. Hence, it is crucial when we are dealing with client regarding some issues to
avoid any miscommunication. I think audit is a process of learning. Every day, we will
find any kind of cases and from there, we have learnt to find the solution and during
struggling find the solution, actually it is a process of learning. What I can say that audit
is universal. We can find a lot of interesting issues or cases. Furthermore, to be an
auditor, we need to encourage ourselves to have professional skepticism. Professional
skepticism is very important to identify any risk of material misstatement. Auditor need
to avoid intuitive judgment in detect any material misstatement because intuitive is make
a decision based on feelings not based on the evidence.
Apparently, audit is a platform to those people whom willing to learn deeply in
this industry. I think six months in audit firm, I have learnt a whole idea about auditing
process for various clients. I have experienced in doing audit for trading company,
unprofitable company, government agencies, as well as services. The exposures given to
me really make me gain valuable knowledge.
I have been assigned to do big job with best audit team, as well as individual jobs.
Due to this, my confidence level is increasing slowly and my communication also
improved as well as better attitude and more professionalism.
Audit is an opportunity to expand and to growth. This is because audit can
improve our thinking, and our presentation skills.
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KHAIRUDDIN HASYUDEEN & RAZIChartered Accountants
6.0 REFERENCE
BIBLIOGRAPHY Alvin A.Arens, R. J. (2008). Auditing and Assurance Services in Malaysia. kuala Lumpur: Pearson.
http://en.wikipedia.org/wiki/Audit. (n.d.).
http://en.wikipedia.org/wiki/Auditor's_report. (n.d.).
http://www.khr.com.my/. (n.d.).
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