Introduction of Auditing

CHAPTER ONE

INTRODUCTION OF AUDITING

1. Learning Outcome

At the end of this chapter;

1. Student should be able to explain the meaning and need of an audit in business field.
2. Student should be able to differentiate between auditing and accounting.
3. Student should be able to compare the three different types of audit and auditor.
4. Student should be able to relate the function of audit with recognized audit standards.

1. Diagram

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1. Nature of  Auditing

In general, to audit means to conduct an examination of anything which may be a document, an activity or a process in order to determine whether the item being examined is prepared or carried out as expected.

The concept of audit is not only use in business field, but also being used in other field. Below are the examples of two different types of auditing:

1. An examination of the accounts of a club with the objective of determining whether the accounts are in order.
2. An examination for the purpose of determining whether certain procedures are being followed by the employees of a department or an office.

1.2        Auditing as Assurance Service

Auditing sometimes is also referred as assurance service. Why? Because it provides assurance to the user of the information being audited. The users of this information will use it as a basis for them to make decision.

For example, investors and bankers would not simply invest their money in a company before knowing the performance of the business. Thus they will look for the company’s financial statement. However the information in the non-audited financial statement would not be reliable. Thus, they will only interested with audited financial statements because it provides reliable information.

1.3        Definition of Auditing

‘Auditing is the accumulation and evaluation of evidences about information to determine and report on the degree of correspondence between the information and established criteria and communicating the results to interested parties. Auditing should be done by a competent independent person’.

From the above definition, note the following:

1. The auditing is a systematic process which has rules; procedures and standards must be followed by auditors.
2. Evidence is very important in auditing. Auditor is only able to make decision with existence of evidence.
3. Establish criteria are the basis role and procedures that must be followed in the preparation of information. For example, in preparing financial statement, the standard must be followed are Generally Accepted Accounting Principles (GAAP) or Financial Reporting Standard (FRS).
4. Communicating the results. The result of the audit process will be communicated to the user of the information through the audit report prepared by auditor.
5. Competent Independent Person. The auditor must be qualified to understand the criteria used and must be competent to know the type and amount of evidence to accumulate to reach the proper conclusion after the evidence has been examined. The auditor must also have an independent mental attitude.

1. Auditing vs Accounting

Not all accountants are auditor but all auditors are accountant.

Accounting is a process of preparing financial statement based on standards requirement which is FRS, meanwhile auditing is the process to examine the completeness of the financial statement, and a process to evaluate the truth & fairness of all the information in the financial statement.

1. Who is qualified to be an auditor?

A person who has educational background in accounting (bachelor in accounting) and professional certificate as well as registered under Malaysian Institute of Accountant (MIA).