Audit Manual

i 2012 CCH Asia Pte Limited
Malaysia Audit Manual

(3rd Edition)
vi 2012 CCH Asia Pte Limited
TABLE OF CONTENTS
Chapter 1 General Outline Glossary............................................................................................................. 1
Chapter 2 Audit Philosophy............................................................................................................................ 27
Chapter 3 Planning ........................................................................................................................................... 65
Chapter 4 Administration.............................................................................................................................. 143
Chapter 5 Internal Control Evaluation......................................................................................................... 249
Chapter 6 Trial Balance and Equity.............................................................................................................. 375
Chapter 7 Assets.............................................................................................................................................. 399
Chapter 8 Liabilities........................................................................................................................................ 503
Chapter 9 Income Statement ......................................................................................................................... 583
Chapter 10 Indirect Taxes................................................................................................................................. 593
Chapter 11 Others ............................................................................................................................................. 599
Findling List ............................................................................................................................................................. 647
Index.......................................................................................................................................................................... 653

3
PLANNING
Table of Contents
Audit plan..............................................................................................................10-000
Planning programme.............................................................................................10-200
Checklist ................................................................................................................10-300
Inter-rm engagements .........................................................................................10-500
Sample audit planning memorandum..................................................................10-550
Analytical review...................................................................................................11-000
Audit risk indicators..............................................................................................12-000
Related parties .......................................................................................................12-300
Going concern........................................................................................................12-500
Audit budget..........................................................................................................12-900
Questionnaire for outside auditors.......................................................................14-100
Using the work of an expert ..................................................................................14-500
Computer audit......................................................................................................15-000
Electronic commerce..............................................................................................15-600
Statutory records....................................................................................................16-000
The materials in this chapter (including audit programmes, checklists and working papers) are
illustrative only. The materials do not purport to be either all-inclusive or prescribed minimums.
Although the Manual incorporates a considerable degree of standardisation, such standardisation does
not preclude the subjective judgement of the user.
This Manual is an audit aid and cannot be expected to replace the professional judgement of the auditor.
All auditors must rely on professional standards and individual professional judgement in determining
the audit programmes, checklists and working papers required in any given circumstance.
Users of this Manual should also read the important disclaimer on the front title page of the Manual.
66 Chapter 3 Planning
10-000 2012 CCH Asia Pte Limited
10-000 Audit plan
An important part of every engagement is the planning stage. During this phase of engagement, the
engagement partner and audit staff obtain (or renew) the necessary level of knowledge of the clients
business and the industry in which it operates and develop an overall strategy for the expected conduct
and scope of the engagement.
International Standards on Auditing ISA 300: Planning an Audit of Financial Statements sets out the
mandatory basic principles and essential procedures required during the planning stage of an audit. In
summary, the auditor is required to:
plan the audit work so that the audit will be performed in an effective manner;
establish the overall audit strategy for the audit;
develop and document an audit plan describing the expected scope and conduct of the audit;
develop and document an audit programme setting out the nature, timing and extent of planned
audit procedures required to implement the audit plan; and
revise the overall audit plan and audit programme, as necessary, during the course of the audit. The
reasons for signicant changes would need to be recorded.
International Standards on Auditing ISA 315: Identifying and Assessing the Risks of Material
Misstatement Through Understanding the Entity and Its Environment also requires the auditor to:
obtain an understanding of the entity and its environment, including its internal control, sufcient to
identify and assess the risks of material misstatement of the nancial statements whether due to
fraud or error, and sufcient to design and perform further audit procedures.
The standard provides guidance on environmental matters which may have a material impact on
nancial statements and also examples of possible impacts of environmental matters on nancial
statements.
When developing the overall audit plan, matters to be considered by the auditor include:
(a) knowledge of the business ie economic factors and industry conditions, nancial performance and
reporting requirement changes since the last audit conducted and the general level of competence of
management;
(b) understanding the accounting and internal control systems whether there are new accounting
policies adopted by the entity and whether there are changes to existing policies, the effect of new
accounting or auditing pronouncements, the emphasis expected to be placed on tests of controls and
substantive procedures based on the auditors cumulative knowledge of the accounting and internal
control systems (see 30-000 and following);
(c) risk and materiality the expected assessments of inherent and control risks and the identication
of signicant audit areas, the setting of materiality levels for audit purposes; the possibility of
material misstatement, including the experience of past periods or fraud; the identication of
complex accounting areas including those involved in accounting estimates;
(d) nature, timing and extent of procedures the auditor needs to be aware of possible change in
emphasis on specic audit areas or consider the effect of information technology and/or the work of
internal audit on the external audit procedures;
(e) co-ordination, direction, supervision and review the involvement of other auditors in the audit of
components (for eg subsidiaries, branches and divisions), experts, locations of other related
businesses and stafng requirements; and
Planning programme 67
Malaysia Audit Manual 10-200
(f) other matters the auditor needs to be aware of potential going concern issues that may be subject
to question, conditions that require special attention in the audits such as the existence of related
parties, the terms of engagement of the audit, any other statutory responsibilities or the nature and
timing of reports or other communication with the entity that are expected under the audit
engagement.
Effective planning requires the identication and assignment of priorities as to audit emphasis and
timing. It allows early identication of any problem areas and development of appropriate audit
procedures to ensure the audit is completed on a timely basis.
10-200 Planning programme
CLIENT: INDEX REVIEWED REVIEWED
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
SUBJECT: Planning Programme
INITIALS &
DATE
W/P REF
Objectives
The objectives are to:
1. plan and control the audit, develop and document an
overall audit plan describing the expected scope and
conduct of the audit in accordance with the International
Standards on Auditing ISA 300: Planning an Audit of
Financial Statements;
2. obtain knowledge of the clients business in accordance
with the International Standards on Auditing ISA 315:
Identifying and Assessing the Risks of Material Misstatement
Through Understanding the Entity and Its Environment.
3. assist in forming a nal audit conclusion; and
4. perform necessary administration and plan for next years
audit.
Planning procedures
1. Review the following, noting items of special and
continuing interest:
(a) Correspondence les.
(b) Prior years audit working papers and suggestions
for revisions.
(c) Permanent les.
(d) Prior years nancial statements and auditors
reports.
(e) Prior years tax return.
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
INITIALS &
DATE
W/P REF
(f) Obtain last years actual time for comparison to
this years time budget.
2. Discuss matters that may affect this examination with other
rm personnel who render non-audit services to the client.
If needed, prepare appropriate memorandum for inclusion
in this section.
3. Consider any special requirements and modify this
programme for any additional procedures considered
necessary.
4. Read the current years interim nancial statements, if any.
5. Discuss the type, scope and timing of the examination with
the clients management, board of directors or audit
committee and document matters discussed.
6. Consider the effect of any new accounting or auditing
recommendations or other requirements of the MIA and
other statutory authorities eg Malaysian Accounting
Standards Board (MASB) pertinent to the client. Also
consider any new activities, conditions or operations of the
client in relation to existing requirements.
7. Consider the effect of accounting policies adopted by the
client and changes in those policies.
8. In cooperation with appropriate client personnel, prepare a
schedule of working papers, analyses, computer runs and
other data to be provided by the client.
9. Complete the audit risk indicator programme if considered
necessary by the partner-in-charge (use checklists at
12-100 and the following).
10. Establish the timing of audit work and estimated date of
completion for particular auditing procedures. Key dates to
be addressed include:
Stocktakes....................................................................................
Trade payables circularisation ................................................
Internal control evaluation commencement .......................
Issuance of management letter...........................................
Substantive audit procedures commencement....................
Planning programme 69
NOTE: THESE ARE SPECIMEN TESTS ONLY. AUDIT PROGRAMMES SHOULD BE TAILORED TO
SUIT THE CIRCUMSTANCES OF THE PARTICULAR CLIENT.
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
INITIALS &
DATE
W/P REF
Financial statements completion .............................................
Accounts to be signed off..........................................................
Annual general meeting............................................................
Others, please state: ...................................................................
......................................................................................................
......................................................................................................
......................................................................................................
......................................................................................................
......................................................................................................
11. Prepare a current years time budget.
12. Establish and co-ordinate stafng requirements.
13. Determine the approach to the whole audit including
preliminary assessment of risk and materiality level and
clearly document this for the audit le.
14. Ensure that audit staff assigned to the client have sufcient
knowledge of the clients business to enable them to
properly carry out the audit work delegated to them.
15. For the initial audit of the nancial statements of a new
client, consider the audit position with regards to opening
balances refer to International Standards on Auditing
ISA 510: Initial Audit Engagements Opening Balances.
16. Using the planning checklist at 10-300, prepare an audit
planning memorandum incorporating all the relevant
items therefrom and other matters identied above.
10-300 Checklist
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
SUBJECT: Planning Checklist
INITIALS &
DATE
W/P REF
1. History and background of client
Nature of business
Number of years in business
Main products sold
Turnover
No. of employees
Business locations
Industry details (including any specic industry
requirements and regulations)
Organisational structure
Overview of nancial position
2. Group structure
Controlled entities
Parent entities
Related entities
3. Accounting staff and systems
Names of accounting staff
Duties of accounting staff
Overview of accounting and control levels
Degree of computerisation
4. Relevant information from prior year
Management letter
Points for partners attention
Points forward
Financial statements
Checklist 71
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
INITIALS &
DATE
W/P REF
5. Known changes since previous year
New accounting standards adopted
New auditing standards adopted
Changes in Companies Act 1965
Changes in other relevant legislation
Changes in clients accounting systems
Changes in nature of clients business
Changes in clients accounting policies
6. Audit administration
Client-imposed deadlines
In-house deadlines
Budgets
Stafng requirements and considerations
Possible client assistance in preparing schedules
7. Extent of responsibility of auditors
Audit
Tax
Accounting
Secretarial
Management letter
Additional work requested by client
8. Audit approach and scope
Scope of audit
Materiality guidelines
Outline of audit approach
Timing of tests (circularisation, attendance at
stocktaking, etc)
10-500 Inter-rm engagements
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
INITIALS &
DATE
W/P REF
Use of computer-assisted auditing techniques
Analytical review procedures
9. Risk and special considerations
Audit risk
Control risk
Detection risk
Inherent risk
Risks associated with clients situation (business/
management environment, nancial position, specic
industry requirements and regulations)
Tax position
Others (please specify)
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
SUBJECT: Planning Inter-rm engagements
INITIALS &
DATE
W/P REF
Where inter-rms are to be involved with the work for a client,
written notication to those rms regarding the engagement must be
sent on a timely basis to ensure adequate planning and scheduling.
Advance notication and planning is essential to successful, efcient
administration.
Procedure
Prepare the inter-rm memorandum detailing the following:
1. Name of client: ______________________________________
2. Address of client: ____________________________________
____________________________________________________
Checklist 73
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
INITIALS &
DATE
W/P REF
3. Names and titles of executives:
_________________________ _________________________
_________________________ _________________________
_________________________ _________________________
_________________________ _________________________
4. Nature of business:
____________________________________________________
____________________________________________________
5. Brief history of client and general comments:
____________________________________________________
____________________________________________________
6. Names of parent entities, controlled entities, associated
entities and related parties:
7. Nature of work to be undertaken:
audit
accounting
tax
secretarial
other
8. Date of year end: ____________________________________
9. Date report required: ________________________________
(Tentative deadline for receipt of working papers, reports,
management letter, tax data, billing date, etc).
10. Date of commencement of work: ______________________
11. Fee arrangements: ___________________________________
Details of responsibility for payment of fees and billing
frequency, eg monthly, with report.
12. Name of parent entity auditors: _______________________
10-550 Sample audit planning memorandum
(Note: This sample Audit Planning Memorandum is in respect of a manufacturing company. The sample
should be used strictly as an Example only and be tailored to cover key risk areas in other industries. It
should also highlight critical audit areas that may be specic or unique to individual companies.)
XYZ Sdn Bhd
AUDIT PLANNING MEMORANDUM
Year Ended 31 December 2009
1. PRINCIPAL ACTIVITIES
The principal activities of the Company are the manufacture and sale of chemicals, adhesives and
sealant for the construction and automotive industries. There have been no signicant changes in the
clients business during the year.
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
INITIALS &
DATE
W/P REF
13. Importance of local client: ____________________________
Detail as to the relative size and importance of the
engagement to be performed locally.
Materiality levels to be used.
14. Time budget and estimated fees: ______________________
Estimated hours by staff classications, and any special
industry expertise or experience that will be required.
15. Special instructions or information: ____________________
Any signicant problems expected to be encountered with
background and details.
Copies of correspondence of importance.
Tentative audit programme including any scope restrictions
or areas where special emphasis is required.
[Note: Where different ofces within an audit rm carry out audit
functions for a client / economic entity, the various participating
ofces must acknowledge engagement requirements.]
Sample audit planning memorandum 75
2. SIGNIFICANT ACCOUNTING AND AUDITING ISSUES
2.1 Stocks
2.1.1 Costing and valuation
Stocks are costed using the weighted average basis, and includes all the relevant direct
materials, packing materials and overhead absorbed. We will review the costing of the
closing stocks as at year end, including clients basis for the absorption of production
overheads during the year end audit.
2.1.2 Obsolescence
As at 30 June 2009, approximately 2% (2008: 2%) of total stocks have been placed under
quarantine. These items represent stocks which are slow moving, damaged or nearing
expiration. The Companys procedures in identifying stocks placed under quarantine
are described in the relevant audit working paper/schedule. We will, at year end, ensure
that there is adequate provision for stock obsolescence at year end taking into account
the shelf life of the products.
2.1.3 Stockcount
A stockcount was carried out on 31 May 2009. The net variances between the physical
count and the stock records was RM XX which represents 0.14% of gross stocks. We
noted that the largest variance, on an individual stock item basis, was RM XX.
We will attend the year end stockcount expected to be in December 2009 and review the
Stock Variance report resulting from this stockcount to ensure that there are no material
stock variances and that any variances have been properly adjusted in the accounts.
We will also ensure that any damaged stocks (other than those placed under quarantine)
are separately identied during the stockcount and compiled accordingly, with
appropriate write-off effected in the year-end accounts.
2.2 Trade Receivables
The average debtor turnover ratio noted as at 30 June 2009 was approximately 180 days (2007:
161 days). This indicates a possible slowdown in collections and also the existence of additional
doubtful debts for this period. The total provision of doubtful debts as at 30 June 2009 has
increased to RM XX (2008: XX), being 43% (2008: 43%) of total trade receivables, which also
includes a general provision of RM XX (15% of net trade receivables balance, after specic
provision).
In view of the above and the inherent risk of this account, we will review the trade receivables
aging and ensure that adequate provision for doubtful debts has been made for long
outstanding or doubtful debts at year end. We will also assess whether the general provision
made in the accounts is conservative, and not excessive, taking into account factors such as the
current economic conditions and the effects on the industry in which the client operates in, the
average aging of the debts, etc.
2.3 Income Tax
Tax assessments have been agreed by the Inland Revenue Board (IRB) up to YA07. As noted in
the previous year, there is a potential overprovision of tax of approximately RM XX, in relation
to YA08 and YA09, which has not been adjusted then, pending agreement by IRB to the revised
tax computation for YA08 and YA09 tax computation.
We will conduct a review of the Companys income tax status at year end to update the tax
position of the Company, and determine any adjustments required for any over/under
provision of taxation in the prior years.
2.4 Other Matters
2.4.1 Dividends payable
The shareholder, (name of shareholder), has proposed to waive the dividends of RM XX
million in respect of the nancial years ended 31 December 2006 and 2007. Instead it is to
be satised by way of a bonus issue in lieu of cash payments. We will sight the relevant
approvals, including that from the Malaysian Industrial Development Authority
(MIDA) at year end and ensure that proper disclosures are made in the accounts. An
update will be obtained on the situation during nal audit to determine any further
disclosures required.
2.4.2 Restructure of equity
Noted in the prior years that, due to the limitation of RM XX million placed on its
shareholders funds by MITI (under the manufacturing licence), the Company was
considering long term measures to overcome this restriction placed. Management had
however deferred any restructuring plans in recent years in view of the economic
slowdown.
In October 2003, client had obtained a conrmation from MIDA that under the new
liberalisation policy (effective 31 July 2008 to 31 December 2010), clients possible new
expansion to be nanced by an estimated equity injection of RM XX million to RM XX
million from its holding company would not be limited by the RM XX million threshold.
We would review the status of any restructuring plans at year end, for appropriate
disclosure to be made in the accounts.
3. OVERALL ANALYTICAL REVIEW
The annualised turnover as compared to last year has decreased, mainly due to the lower demand
from the construction industry. Generally, the GP margin has increased as compared to previous year,
as there were sales of expiring stocks below cost to related companies in 2008.
Operating expenses mainly comprise of salaries and related expenses, depreciation, provision for
doubtful debts, royalties and interest charges payable to inter-companies. Due to the semi-xed
nature of some expenses, the PBT margin has increased marginally.
Annualised 2009 2008 Variance
RM000 RM000 RM000 %
Turnover 19,904 23,000 3,906, 13
Cost of Sales (9,728) (12,415) 2,687, 22
Gross prot 10,176 10,585 509, 4
GP Margin 51% 46% 5%
Operating Expenses (9,147) (9,619) 472, 5
Prot before Tax (PBT) 1,029 966 63, 7
Prot before Tax margin 5% 4% 1%
Sample audit planning memorandum 77
4. CONTROL ENVIRONMENT
The Companys structure of data processing has not undergone any signicant changes during the
year. It uses the Distribution System software, which is a widely distributed software modied to
meet the clients need.
The Financial Controller and Managing Director review the monthly management accounts. The
holding company also monitors the monthly results against that budgeted. The Company has a
multi-tiered organisation structure with distinct lines of reporting and responsibilities.
Based on our review, no signicant changes have occurred in the overall control environment and we
continue to assess it as effective.
5. AUDIT PLAN AND STRATEGY
We will update all the signicant routine applications (Sales, Purchases, Receipts, Payments and
Production Systems) and perform walk-through tests on each application. On a rotational basis, we
have performed compliance testing on the Sales and Purchase systems during the interim audit. For
items below the tolerable error limit, only a high level review will be done during the audit, which
includes agreeing the balances to the General Ledger and obtaining comments from the client.
6. PLANNING MATERIALITY
As in previous year, 10% PBT is used for PM. Based on the low number of audit differences noted in
the previous year, the TE is set at 75% of PM and Schedule of Audit Differences (SAD) is at 33.3% of
the TE.
We will not carry audit differences below RM 26K to the SAD.
7. DELIVERABLES
2009 (annualised) 2008
RM000 RM000
Planning Materiality (PM) 10% PBT: 103 97
Tolerable Error (TE) 75% PM: 77 73
SAD 33.3% TE: 26 25
By 31 July 2009: Interim limited review report by fax*
End of week 2, 2010 Sales information by fax*
Share capital by fax*
Earnings of managing director by mail*
End of week 4, 2010 Standard forms and consolidation questionnaire*
End of week 5, 2010 Auditors report
Management letter
Letter of Representation
Local report for annual general meeting
ANALYTICAL REVIEW
Introduction .....................................................................................11-000
Audit procedures .............................................................................11-200
Ratio analysis ...................................................................................11-400
11-000 Introduction
International Standards on Auditing ISA 520: Analytical Procedures sets out the mandatory basic
principles and essential procedures required during the analytical review stage of an audit. In summary
the auditor is required to:
(a) apply analytical procedures at the planning and overall review stages of the audit;
(b) apply analytical procedures at the planning stage to assist in understanding the business and in
identifying areas of potential risk;
(c) apply analytical procedures at or near the end of the audit when forming a conclusion as to whether
the nancial report as a whole is consistent with the auditors knowledge of the business; and
(d) investigate and obtain adequate explanations and appropriate corroborative evidence, when
analytical procedures identify signicant uctuations or relationships that:
(i) are inconsistent with other relevant information; or
(ii) deviate from predicted amounts.
Analytical review procedures are substantive tests of nancial information made by a study and
comparison of relationships among data.
The purpose of analytical review procedures is to identify and investigate unusual uctuations and
items in balance sheets and prot and loss accounts. This analysis will assist in audit planning and the
formation of the audit opinion on the nancial statements.
Analytical review procedures include:
(a) comparison of nancial information with information for comparable prior periods;
(b) comparison of nancial information with anticipated results (for example, budgets and forecasts);
(c) study of the relationships of elements of nancial information that are expected to conform to a
predictable pattern based on the clients experience;
* Requested by the parent company overseas.
Prepared by: ___________________________________________________
(Senior)
Reviewed by: ___________________________________________________
(Senior Manager)
Approved by: ___________________________________________________
(Partner)
Analytical review 79
(d) comparison of nancial information with similar information regarding the clients industry; and
(e) study of relationships of nancial information with relevant non-nancial information.
Consideration should be given to the following factors when planning and performing analytical
review procedures:
(a) objectives of the analytical procedures and the extent it can be relied upon;
(b) the nature of the entity;
(c) the availability of nancial information about the entitys nancial position and results of operations
(including budgets or forecast);
(d) the availability of relevant non-nancial information (such as units produced or sold, number of
employees, direct labour hours, square feet of selling oor space, etc);
(e) the reliability of nancial and non-nancial information available;
(f) the relevance of the information available (for eg, whether budgets have been established as results
to be expected than as goals to be achieved);
(g) the source of the information available (for eg, sources independent of the entity are ordinarily more
reliable than internal sources);
(h) comparability of the information available (for eg broad industry data may need to be supplemented
to be comparable to that of an entity that produces and sells specialised products; and
(i) knowledge gained during previous audits and the auditors understanding of the effectiveness of the
accounting and internal control systems and the types of problems that has in the prior period given
rise to accounting adjustments.
11-200 Audit procedures
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
SUBJECT: Analytical Review Procedures
INITIALS &
DATE
W/P REF
1. Consider the various methods which may be used in
performing the analytical procedures. These range from
simple comparisons to complex analyses using advanced
statistical techniques. For example, comparison may be
made using ringgit value, physical quantities, ratios, or
percentages or mathematical techniques such as trend
analysis, graphs and charts, and nancial models etc. (Refer
to International Standards on Auditing ISA 520: Analytical
Procedures.)
2. Review prior years analytical review working papers for
items or information which should be brought forward to
the current year review:
Consider the use of prior years analytical review
data as a base for the current year.
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
SUBJECT: Analytical Review Procedures
INITIALS &
DATE
W/P REF
3. Investigate uctuations that are not expected, the absence
of uctuations that are expected, and other unusual items
identied by analytical review procedures when those
uctuations or unusual items are indicative of matters that
have a signicant effect on the examination:
Determine the materiality level of uctuations where
differences will require further investigation.
4. Identify and document those uctuations requiring further
investigation.
5. Inquire of management and appropriate client personnel
the reasons for signicant uctuations noted.
6. Determine the audit procedures necessary to quantify and
substantiate the replies given by management to ensure
signicant uctuations are adequately explained and
veried:
The extent of documentary and other appropriate
evidence required to corroborate managements
replies should be determined.
7. Compare balances in the current nancial statements with
those of the preceding year(s). Ensure the working papers
explain any signicant uctuations.
8. Consider the attached ratio analysis list and calculate the
appropriate ratios signicant to the clients operations for
the current and preceding year(s).
Consider the results of ratio analysis, for impact on
other audit programmes, (eg going concern,
inventory, receivables) and the communication of
results to management.
Analytical review 81
11-400 Ratio analysis
The following list of principal ratios available for use in analytical review are summarised for the
auditors use.
The auditor should select those ratios that are suitable to the particular audit engagement.
(a) Statement of nancial position ratios
(b) Prot and loss or other operating statement ratios
Ratio Components
Gearing/debt equity ratio External liabilities to equity or current liabilities to
equity or long-term liabilities to equity or interest
bearing liabilities to equity or debt to equity plus debt
Current ratio or working capital ratio Current assets to current liabilities
Liquid ratio, or quick asset ratio, or
acid test
Cash and marketable securities to current liabilities
Equity ratio Total shareholders equity to total assets
Debt ratio Total liabilities to total assets
Asset-equity ratio Current assets to equity, xed assets to equity
Stock-working capital ratio Stock on hand to working capital
Ratio Components
Gross prot ratio Gross prot to net sales
Operating ratio Cost of sales plus other operating expenses to net sales
Operating expense ratio Cost of sales to sales; each individual item of expense to
net sales; group expense item to net sales eg nance
expenses to net sales; administration expenses to net
sales; distribution expenses to net sales
Net prot ratio Operating prot to net sales
Times dividend earned Operating prot to annual ordinary dividend; operating
prot to annual preference dividend
Number of times interest earned Operating prot before interest to annual interest
expense
Earnings per share Operating prot to paid-up capital (number of shares)
(c) Statement of nancial position and prot and loss or other operating statement ratios
(d) External ratios
AUDIT RISK INDICATORS
Audit risk..........................................................................................12-000
12-000 Audit risk
Audit risk is the risk that an auditor may express an inappropriate opinion on the nancial
statements that is materially misstated. Audit risk encompasses:
the risk that material errors will occur (inherent risk);
risk that the entitys system of internal control will not prevent or correct such errors (control risk);
and
Ratio Components
Return on total assets Operating prot to total assets
Return on shareholders equity Operating prot to ordinary shareholders equity
Turnover of xed assets Cost of sales to xed assets
Turnover of total assets Cost of sales to total assets
Stock turnover Cost of sales to average stock
Debtors turnover average to collect Debtors to net sales, multiplied by number of days
in the period
Sales to total assets Net sales to average total assets
Average days to sell stock Cost of sales to average stock
Average days to convert stock to cash Average days to collect plus average days to sell
Plant ratio Sales to average plant assets
Cash ow Cash ow before income tax expense to current
liabilities
Ratio Components
Price/earnings ratio Share price at the end of the reporting period to
earnings per share
Earnings yield Earnings per share 100% to share price at the end
of the reporting period
Dividend yield Dividend per ordinary share 100% to share price
at the end of the reporting period
Audit risk indicators 83
the risk that any remaining material errors will not be detected by the auditor (detection risk).
Due to the test nature and other inherent limitations of any audit, together with the inherent
limitations of any system of internal controls, there is an unavoidable risk that some material
misstatements may remain undiscovered. Because of the sampling aspect associated with auditing and the
chance that auditors may draw inappropriate conclusions from the available audit evidence, there is
always a probability that an auditor will issue an inappropriate opinion as to whether the nancial
statements present a true and fair view.
The audit examination should be planned so that the risk of issuing an inappropriate opinion is
reduced to a sufciently low level to meet the expectations of users regarding a true and fair presentation
of the nancial statements.
The scenarios within the audit risk indicators programme (refer 12-100) are set out as a guide for the
identication of special audit risks that may exist within a client. The listing is not an exhaustive
compilation of audit risk areas and audit staff should give due consideration to the particular
circumstances of each client.
Where a special audit risk is identied which may affect the true and fair presentation of the nancial
statements, the audit approach and procedures adopted to address the risk must be carefully detailed in
the working papers.
International Standards on Auditing ISA 315: Identifying and Assessing the Risks of Material
Misstatement Through Understanding the Entity and Its Environment sets out the mandatory basic principles
and essential procedures which are required, together with related guidance, during the risk assessment
stage of an audit. The auditor should gain a thorough understanding of this approved auditing standard.
To assist the auditor in the assessment of control risk, standard working papers are provided
commencing at 30-100.
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
SUBJECT: Audit risk indicators Procedures
COMMENTS
(Comments are required if answered
N or NA)
Operations
1. From the analytical review working
papers, have any of the following
been identied:
(a) a material increase or decrease in
the clients turnover? Y/N/NA
(b) a material increase or decrease in
the clients protability? Y/N/NA
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
COMMENTS
N or NA)
2. Do the clients operations appear
signicantly better or worse than the
industry or economy as a whole? Y/N/NA
External environment
3. Do developments in the clients
industry indicate potential future
problems for the industry as a whole? Y/N/NA
If so, in which areas:
new products? Y/N/NA
competition? Y/N/NA
reducing market? Y/N/NA
others? Y/N/NA
4. Is the clients market limited to a small
number of customers? Y/N/NA
5. Is the clients main product supply
concentrated to a small number of
suppliers? Y/N/NA
6. Have economic, environmental or
political issues arisen which may
jeopardise the operations and
nancial position of the client? Y/N/NA
7. Has the client analysed the nancial
impact of the self-assessment systems,
for example, on taxation? Y/N/NA
8. Is there evidence of a change in
ownership of the client, or increased
share trading activity? Y/N/NA
Internal environment
9. Are managements decision-making
policies rmly established and
consistent with prior years? Y/N/NA
Audit risk indicators 85
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
COMMENTS
N or NA)
10. Does management appear competent
and creditable? Y/N/NA
11. Has there been a high turnover of
important management or accounting
personnel? Y/N/NA
12. Is management remunerated by way
of turnover or prot related bonuses? Y/N/NA
Financial
13. From the analytical review working
papers, have any of the following
been identied: Y/N/NA
(a) a signicant decrease in the
clients working capital ratio? Y/N/NA
(b) a signicant unfavourable
movement in other key ratios
applicable to the client and
industry? Y/N/NA
14. Has the client fully drawn all credit
facilities? Y/N/NA
15. Does the client have the ability to raise
further debt nancing? Y/N/NA
16. Are the clients current liabilities past
due? Y/N/NA
17. Has the client prepared budgets and
cash ows for the next nancial year,
indicating variable operation? Y/N/NA
18. Has there been a change in the
accounting policies adopted by the
client? Y/N/NA
RELATED PARTIES
Introduction .....................................................................................12-300
12-300 Introduction
International Standards on Auditing ISA 550: Related Parties sets out the mandatory basic principles
and essential procedures required in the conduct of an audit of related parties.
Related parties are parties considered to be related if one party has the ability to control the other
party or exercise signicant inuence over the other party, to the extent that it prevents the other party
from fully pursuing its own separate interest, in making nancial and operating decisions.
In summary the auditor is required to:
(a) consider the substance of the relationship and/or transaction being tested and not merely the legal
form;
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
COMMENTS
N or NA)
Audit
19. Have there been any serious
disagreements between the auditors
and management regarding
accounting treatments in the past? Y/N/NA
20. Has a qualied audit report been
issued in the past? Y/N/NA
21. Are the operations of the client
specialised so that it is necessary to
utilise the services of an expert in
forming the audit opinion? Y/N/NA
Related parties
22. Have related parties audit procedures
checklist at 12-350 and the risk of
related party transactions remaining
undetected been completed and assessed? Y/N/NA
Related parties 87
(b) review information provided by directors, management, and those charged with governance,
identifying the names of all known related parties, and perform specic audit procedures to ensure
the risk of related parties remaining undetected is reduced to an acceptably low level;
(c) recognise fraud risk factors, if any, arising from related party relationships and transactions that are
relavant to the identication and assessment of the risks of material misstatement due to fraud;
(d) be alert for other material related party transactions; and
(e) obtain sufcient appropriate audit evidence as to whether the identied related party transactions
have been properly recorded and disclosed.
If an auditor is unable to obtain sufcient appropriate audit evidence regarding related parties and
related party transactions or is unable to form a conclusion as to the completeness of the disclosure of related
party relationships and transactions, then the auditor should modify the audit report appropriately.
The procedures set out in the related parties programme at 12-350 are a guide for the identication
of related party relationships and transactions. The listing is not exhaustive and audit staff should give due
consideration to the particular circumstances of each client.
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
SUBJECT: Related parties Audit procedures
INITIALS &
DATE
W/P REF
Audit objectives
1. To obtain sufcient appropriate audit evidence regarding
the identication of related parties and the effect of related
party transactions on the nancial statements.
2. To ensure that all material related party relationships and
transactions are properly disclosed in the nancial
statements in accordance with the relevant approved
accounting standards.
3. To ensure the risk of related parties remaining undetected
is reduced to an acceptably low level.
Audit procedures
1. Review past years working papers for names of known
related parties.
2. From discussions with management and from knowledge
of the client, prepare or update a list of related parties.
3. Ensure that the names of current related parties and other
relevant information obtained from directors, management,
and those charged with governance are brought to the
attention of the audit staff before the audit programme
commences.
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
INITIALS &
DATE
W/P REF
4. Review the clients internal procedures for identication of
related parties.
5. Enquire as to the afliation of those charged with
governance with other entities.
6. Enquire whether management is aware of any signicant
transactions with related parties, and if so, does
management believe they were on arms length terms?
7. Review the accounting and other records for large or
unusual transactions or balances, in particular transactions
recognised at or near the end of the nancial period and for
those outside the normal course of business.
8. Discuss the nature, purpose and terms of any unusual
transactions with management and enquire as to whether
related parties are involved.
9. Consider whether there is any reason to doubt the
representations of management; and
Whether there is any reason to think that management
may not be aware of certain related party transactions.
10. Inquire of other auditors currently involved in the audit, or
predecessor auditors as to their knowledge of additional
related parties.
11. Review clients income tax returns and other information
supplied to regulatory bodies.
12. If the audit procedures indicate the possible existence of
undisclosed related party transactions, consider the
following additional audit procedures which are not an
exhaustive list:
(a) A review of major contracts may disclose abnormal
terms of trade, eg unusual prices, interest rates,
guarantees, repayment terms, etc.
(b) The register of directors will contain details of other
directorships. Consider comparison with major
suppliers and customers and if there is a connection
consider whether there are any abnormal terms of trade.
Related parties 89
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
INITIALS &
DATE
W/P REF
(c) Obtain the names of senior management which may
identify a connection with major suppliers and
customers. If a connection is identied, consider
whether there are any abnormal terms of trade.
(d) If any member of senior management is also a
signicant shareholder, consider if they also have a
connection with any of the major suppliers or
customers of the client. If there is a connection,
consider whether there are any abnormal terms of
trade.
(e) Consider whether the nature and extent of
investment transactions during the period create
related parties and, if they do, compare such new
related parties with major suppliers and customers to
identify whether there are any abnormal terms of
trade.
(f) Consider reviewing conrmations from third parties
received during the audit for evidence of relevant
related party transactions.
(g) Consider when scrutinising minutes of meetings of
shareholders, directors or other committees whether
there is any evidence of related party transactions
authorised or discussed at these meetings, or
declarations by directors of interest or conicts of
interest.
(h) A review of the directors report attached to the
nancial statements should disclose details of
benets to directors from contracts with the company.
(i) Consider whether transactions are occurring but are
not being given accounting recognition, eg receiving
or providing services at no charge.
(j) Consider whether there are any loans of a back-to-
back nature.
(k) A review of loans receivable and payable may
identify abnormal terms and conditions.
GOING CONCERN
Introduction .....................................................................................12-500
Understanding the client .................................................................12-550
Audit considerations........................................................................12-600
12-500 Introduction
International Standards on Auditing ISA 570: Going Concern sets out the mandatory basic
principles and essential procedures required in examining the appropriateness of the going concern basis
in the preparation of a nancial report. In summary the auditor is required to:
(a) consider the appropriateness of the going concern basis underlying the preparation of the nancial
report when planning and performing audit procedures and in evaluating the results thereof;
(b) obtain sufcient appropriate audit evidence that it is appropriate, based on all reasonably foreseeable
circumstances facing the entity, for management to prepare the nancial report on the going concern
basis;
(c) consider the likelihood that, during the relevant period, the entity will liquidate, wind up its
operations or be unable to pay its debts as and when they fall due;
(d) be alert to the possibility that reasonably foreseeable circumstances may exist beyond the relevant
period that bring into question the appropriateness of management preparing the nancial report on
a going concern basis;
(e) specically assess the risk of going concern problems as part of the audit planning process; and
(f) gather sufcient appropriate audit evidence to attempt to resolve any question which arises
regarding the appropriateness of the going concern assumption.
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
INITIALS &
DATE
W/P REF
13. Ensure that related party disclosures in the nancial
statements are in accordance with the requirements of the
relevant approved accounting standard and the Companies
Act 1965.
14. Prepare a conclusion statement based on the audit
evidence.
Going concern 91
The approved auditing standard also establishes standards and provides guidance to auditors in
connection with audit reporting considerations. These provisions of the standard should be consulted
when the auditor determines that the going concern basis is in question, or where there is signicant
uncertainty regarding the appropriateness of the going concern basis.
12-550 Understanding the client
An important element in assessing the risk of going concern problems is a sound understanding of
the entitys business and, in particular, any external and internal conditions and events that may have an
adverse effect on the entity. When gaining or updating this understanding the following should be
considered:
(a) internal organisational and operational matters, for example management style, marketing and
production strategies and whether the entitys business is expanding or declining;
(b) appropriate international, national and regional economic factors, including the entitys position
within its industry and the industrys position within the economy;
(c) conditions and events within the entitys industry, or industries, including those affecting customers,
competitors and suppliers;
(d) existing government policies which affect the entity and the effect of any foreshadowed changes;
(e) the nature and stability of relationships with key nanciers, unions, customers, suppliers etc; and
(f) the existence of related parties and the nature, extent and basis of transactions with them and/or on
their behalf.
When, as a result of the initial risk assessment, it is considered highly improbable that the client will
encounter going concern problems during the relevant period, it is not necessary to design additional
procedures specically to test for the existence of such problems. When evaluating the results of other
audit procedures however, it is necessary to remain alert to the possibility that the going concern basis may
be subject to question. In particular, when forming an overall conclusion as to whether the view presented
by the nancial report as a whole is consistent with the knowledge of the business of the entity, the
continued appropriateness of the initial risk assessment should be considered.
12-600 Audit considerations
The following issues should be considered as part of the audit planning process, particularly where
the answers in the Audit Risk Indicators have indicated some doubt as to the ability of the client to
continue as a going concern in the foreseeable future. The early identication of a potential going
concern problem will assist in focusing audit effort on the appropriate assertions in the nancial
report, for example the valuation of assets, and allow for early communication with management
and the preparation and examination of any additional information that may be necessary.
1. When, at any stage of the audit, questions arise regarding the going concern basis:
(a) certain procedures will take on additional signicance and may need to be extended and/or
modied; and/or
(b) it will be necessary to employ additional procedures and/or to update information obtained
earlier.
2. Procedures that are relevant in the context of (1) above may include:
(a) reviewing events after the end of the nancial period;
(b) analysing and discussing the latest available interim nancial information, for example actual
versus budgeted cash ow;
(c) examining compliance with the terms of debenture trust deeds and loan agreements;
(d) attending or reading the minutes of meetings of shareholders, the governing body,
management committees or other important groups;
(e) requesting from the entitys solicitors, information regarding any material legal matters; and
(f) considering the position of the entity concerning unlled customer orders.
3. When going concern problems have been identied, they should be considered in the light of any
mitigating factors that may exist. In particular, it is necessary to consider and discuss with
management its plans for future action, the outcome of which is expected to improve the situation.
The relevance of such plans to an auditor generally decreases as the time period for planned actions
and anticipated events increases.
Particular emphasis should ordinarily be placed on plans that might have a signicant effect on the
solvency of the entity within the relevant period. It is necessary to consider the basis upon which
these plans have been prepared, to consider whether they conform with existing audit evidence and
compare them with such other evidence as is appropriate in the circumstances, so as to obtain
reasonable assurance as to whether they:
(a) are feasible;
(b) are likely to be implemented; and
(c) have the potential to improve the situation during the relevant period.
4. In such situations, written representations should be obtained from management concerning such
plans. These should be analysed and discussed with management, along with cash ow, prot, and
other relevant forecasts, at the latest practicable date before the date of the audit report.
5. A third partys conrmation of the existence of arrangements made should be obtained when their
support is signicant to the success of such plans, eg plans to dispose of assets, borrow, restructure
debt, obtain additional contributions by owners or rely upon guarantees provided by a related party.
When considering the reliability of conrmations received, the auditor should be satised that the
third party has both the capacity and the intention to honour the agreement. Factors that should be
considered in this context include the following (these factors will take on greater signicance when
the agreement is not legally enforceable):
(a) the willingness of the third party to supply written conrmation of their commitment;
(b) the willingness of the third party to have the existence of the agreement disclosed in the entitys
nancial statements or, when appropriate, in their own nancial statements as, for example, a
contingent liability or a capital commitment; and
(c) other matters that affect the commitment of the third party to support such agreements, for
example the economic consequences of not honouring the agreement and the effect that not
honouring the agreement may have on the reputation of the third party.
6. When analysing cash ow, prot and other relevant forecasts in the context of management plans,
the auditor should consider applying certain of the procedures outlined in the International
Standards on Auditing ISA 540: Auditing Accounting Estimates, Including Fair Value Accounting
Estimates, and Related Disclosures and the International Standards on Assurance Engagements ISAE
3400 (previously known as ISA 810): The Examination of Prospective Financial Information. In particular:
Going concern 93
(a) consider the reliability of the accounting system of the entity for generating such information;
(b) consider the support for material assumptions underlying the forecast, in particular those
which are especially sensitive or susceptible to change or which are inconsistent with historical
trends; and
(c) compare the prospective information for recent prior periods with historical results, and the
prospective information for the current period with results achieved to date.
7. If it becomes apparent that information has not been appropriately considered in the forecasts or
underlying assumptions, the matter should be discussed with management and, if necessary,
revision of the prospective nancial information requested.
8. Other considerations
(a) When at any stage of an audit conducted under the Companies Act 1965, the auditor is satised
that the entity is no longer a going concern, regard should be made to the requirements of s 174
of the Companies Act 1965, particularly in relation to the duties of directors.
(b) Working papers should contain a record of documents examined and a summary of facts on
which the auditors judgment was exercised. The basis of judgment and conclusions reached
should be noted.
A copy of the cash ow forecast and of the procedures carried out to conrm its reasonableness
should also be attached.
The action to be taken as a result of the examination is at the discretion of the supervising partner.
Where the going concern assumption is considered appropriate but a material uncertainty exists, the
auditor would consider whether adequate disclosure is made in the nancial statements of such
uncertainty. If adequate disclosure is made, the auditor should express an unqualied opinion but modify
the auditors report by adding an emphasis of matter paragraph that highlights the existence of a material
uncertainty relating to the event or condition that may cast signicant doubt on the entitys ability to
continue as a going concern and draws attention to the disclosures made. In extreme cases such as
situations involving multiple material uncertainties that are signicant to the nancial statements, the
auditor may consider it appropriate to express a disclaimer of opinion instead of adding an emphasis of
matter paragraph (para 10, ISA 705).
Where adequate disclosure is not made in the nancial statements of such uncertainty, the auditor
should express a qualied or adverse opinion, as appropriate (ISA 705: Modications to the Opinion in the
Independent Auditors Report). The report should include specic reference to the fact that there is a
material uncertainty that may cast signicant doubt about the entitys ability to continue as a going
concern (para 20, ISA 570).
If, on the basis of the additional procedures carried out and the information obtained, including the
effect of managements plans, the auditors judgement is that the entity will not be able to continue as a
going concern, the auditor concludes, regardless of whether or not disclosure has been made, that the
going concern assumption used in the preparation of the nancial statements is inappropriate and
expresses an adverse opinion (para 21, ISA 570).
Where the going concern assumption is not appropriate, the nancial statements need to be prepared
on an alternative authoritative basis and adequate disclosure made. If this is done, the auditor can then
issue an unqualied opinion but may require an emphasis of matter in the auditors report to draw the
users attention to that basis (para A26, ISA 570).
See 23-310 for sample of auditors report in respect of going concern that have been issued under
MIAs Recommended Practice Guide (RPG) 4 on Auditors Reports.
Conclusion
The auditor must conclude whether or not the entity will be able to pay its debts as and when they
fall due and whether the going concern basis of accounting adopted in the preparation of the nancial
statements is appropriate.
12-900 Audit budget
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
SUBJECT: Audit budget
Previous year
actual hours
Budget
hours
Current year
actual hours
Internal control evaluation audit
Planning and control
System/internal control assessment
Analytical review
Sales
Cash receipts
Purchases
Cash payments
Property, Plant & Equipment
Inventories
Cash at bank
Payroll
Journals
Other
Review
Total internal control evaluation audit
Staff Charge
rate
Previous Year Budget Current Year
Hours RM Hours RM Hours RM
Audit budget 95
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
SUBJECT: Audit budget
Previous year
actual hours
Budget
hours
Current year
actual hours
Substantive procedures audit
Planning and control
Analytical review
Review
Management letters/reports
Financial statements
Trial balance Consolidation
Share capital & reserves
Statutory records
Cash at bank/overdraft
Trade receivables
Inventories
Investments
Property Plant & Equipment
Intangible assets
Other assets
Trade payables
Provisions
Taxation
Loans
Lease/hire purchase liability
Other payables
Subsequent events/Contingent liabilities
Total substantive procedures audit
Total internal control evaluation audit
Total audit
QUESTIONNAIRE FOR OUTSIDE AUDITORS
Introduction .....................................................................................14-100
Questionnaire ..................................................................................14-200
14-100 Introduction
International Standards on Auditing ISA 600: Special Considerations Audits of Group Financial
Statements (Including the Work of Component Auditors) sets out the mandatory basic principles and essential
procedures required when an auditor, reporting on the nancial statements of an entity, uses the work of
another auditor on the nancial information of one or more components included in the nancial
statements of the entity. In summary the auditor is required to:
(a) determine how the work of the other auditor will affect the audit;
(b) consider whether the auditors own participation is sufcient to be able to act as the principal auditor;
(c) when planning to use the work of another auditor, the principal auditor should consider the
professional competence of the other auditor in the context of the specic assignment;
(d) perform procedures to obtain sufcient appropriate audit evidence that the work of the other auditor
is adequate for the principal auditors purpose, in the context of the specic assignment; and
(e) consider the signicant ndings of the other auditor.
The standard also imposes an obligation on the other auditor, knowing the context in which the
principal auditor will use the other auditors work, to co-operate with the principal auditor.
When the principal auditor concludes that the work of the other auditor cannot be used, and the
principal auditor has not been able to perform sufcient additional procedures regarding the nancial
information of the component audited by the other auditor, the principal auditor should express a
qualied opinion or disclaimer of opinion because of a limitation on the scope of the auditors work or
withdraw from the engagement.
The auditor should not refer to the work of another auditor in an audit report unless required by
legislation or as part of a qualication.
14-200 Questionnaire
Information required from auditors of controlled entities
(This questionnaire should be completed and returned to the group auditor, no later than ______________)
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
SUBJECT: Questionnaire for other auditors
Name of group auditor
_____________________________________
Name of parent entity
_____________________________________
Address of group auditor:
_____________________________________
_____________________________________
Accounting period of parent entity:
_____________________________________
_____________________________________
Partner responsible:
_____________________________________
Questionnaire for outside auditors 97
1 2 3
Name of controlled entity:
Auditor of controlled entity:
Address / telephone no of audit
rm:
Accounting period:
Partner responsible:
Questionnaire completed by: .........................................................................................................
(Block Letters)
................................................................................. /...... /20XX .
Signature
COMMENTS W/P REF
A. Instructions to other auditor
The following questionnaire is designed to assist in the audit
of the consolidated nancial statements. It is not the intention
of this questionnaire to specify the detailed audit procedures
that should necessarily be carried out or the extent thereof.
Complete the attached questionnaire, and mark all questions
that do not apply as NA. Where the answer to any question
is No, provide a brief explanation. Answers/explanations
provided should be cross-referenced to the nancial
statements where possible. Also, where necessary, copies of
supporting schedules should be provided to give a more
detailed understanding.
If you have qualied your audit report on the nancial
statements, or intend to do so, provide details and reasons for
the qualication, and attach as Annex A.
COMMENTS W/P REF
Provide details of signicant matters which arose during the
course of your audit, and which have not been covered in the
answers to the attached questionnaire and any other matters
which you consider should be brought to our attention as
group auditors. Details should be attached and marked as
Annex B.
B. Signicant matters not covered by the detailed audit
questionnaire
Indicate all matters of a signicant nature which you consider
should be made known to us as auditors of the parent entity
and other information which cannot be obtained from the
entitys nancial statements or from the information sought
in the questionnaire, ie:
Signicant related party transactions which you believe
we need to be aware of.
Matters which are not material in the entitys nancial
statements but may be material in the consolidated
nancial statements. In this regard, please provide a
schedule of errors / adjustments which you became
aware of during your audit which were not processed
due to the immateriality of the amounts.
Any signicant accounting or auditing matters which
remain unresolved?
Also comment on any signicant variances in the balance
sheet and the income statement from the previous year, and
whether these variances have been signicantly affected by
non-recurring or exceptional items.
COMMENTS
(Comments are required if
answered N or NA)
C. General
1. Have any limitations been placed upon the scope
of the audit? If so, provide details. Y/N/NA
2. Have the nancial statements been prepared on a
basis consistent with previous years? If not,
provide details. Y/N/NA
3. If the entity is a company, has the balance sheet
and income statement been prepared in
accordance with the Companies Act 1965? Y/N/NA
COMMENTS
answered N or NA)
4. If the entity is a company, has the balance sheet
and income statement been drawn up in
accordance with, and are consistent with,
approved accounting standards issued by the
Malaysian Accounting Standards Board
(MASB)? If not, give details of any material
departures therefrom. Y/N/NA
5. Was your audit conducted in accordance with
International Standards on Auditing adopted by
MIA? Y/N/NA
6. Have you:
(a) Obtained written representations from the
management on matters material to the
nancial statements? Y/N/NA
(b) Obtained written representations from the
entitys solicitors on liabilities contingent
or otherwise, which existed at balance
sheet date? Y/N/NA
7. Was any reliance placed on the work of another
auditor when reporting on the nancial
statements of the entity? If so, what procedures
were adopted to obtain reasonable assurance
that the work performed by the other auditor
was adequate for present purposes? Y/N/NA
Accounting systems and internal controls
8. Was a review performed on the entitys system of
internal controls. If so, please specify details. Y/N/NA
9. (a) Was reliance placed upon internal controls
identied? If so what compliance
procedures were conducted and did the
results indicate that internal controls were
operating satisfactorily? Y/N/NA
(b) Are the existing internal controls in place
considered adequate? If not, provide
details of follow-up action taken. (For
substantive testing, please provide details
of the sampling method, sample sizes used
and materiality level applied). Y/N/NA
10. (a) Have weaknesses in internal controls been
reported to management? Attach a copy of
the report and the clients response. Y/N/NA
COMMENTS
answered N or NA)
(b) Identify weaknesses in internal controls
which were of concern to you in relation to
your audit report. Y/N/NA
Reserves and provisions (other than income tax and
deduction from assets)
11. If the entity is a company, are any of the
movements in reserves not in accordance with
the companys memorandum and articles;
Companies Act 1965 and relevant approved
accounting standards? If so, provide details. Y/N/NA
12. Are movements in the reserve accounts properly
disclosed? Y/N/NA
13. (a) Provide a brief explanation, where
applicable, on what basis the long service
leave, annual leave and sick leave
provisions have been calculated. Y/N/NA
(b) Give details of all other provision accounts. Y/N/NA
14. Give a brief outline of the audit approach you
adopted in verifying the existence and value of:
(a) Provisions for long service leave, annual
leave and sick leave; Y/N/NA
(b) Other provisions. Y/N/NA
Long-term liabilities
15. Have all long-term liabilities, including accrued
interest, been conrmed? Y/N/NA
16. Is the company a borrowing corporation or
guarantor body? Y/N/NA
17. Provide particulars of each of the long-term
liabilities if not disclosed elsewhere, specically
with regard to:
(a) Amounts outstanding. Y/N/NA
(b) Repayment dates. Y/N/NA
(c) If a borrowing corporation or guarantor
body amounts due: Y/N/NA
(i) within two years; Y/N/NA
(ii) within two to ve years; and Y/N/NA
(iii) after ve years. Y/N/NA
COMMENTS
answered N or NA)
(d) Security. Y/N/NA
(e) Whether conditions of loan agreements
have been breached. Y/N/NA
Payables and accruals
18. Has the existence and value of payables and
accruals been veried and are you satised that
all known liabilities have been taken up at
balance sheet date? Y/N/NA
19. Have payables and accruals been properly
disclosed in the nancial statements? Y/N/NA
20. Is there a distinction in the nancial statements
between trade payables and accruals, and other
current liabilities? If not, give details. Y/N/NA
21. (a) Is there any liability for future instalments
under hire purchase agreements? If so, is it
disclosed separately in the nancial
statements? Y/N/NA
(b) Has interest (if any) been deferred? If so, on
what basis? Y/N/NA
Income tax
22. Does the entity provide for income tax in
accordance with applicable accounting standard
MFRS/FRS 112 (MASB 25): Income Taxes? If not,
give details. Y/N/NA
23. Has taxable income been materially affected by
items such as:
(a) Losses carried forward from previous
years; Y/N/NA
(b) Timing differences (provisions etc); Y/N/NA
(c) Permanent differences (special allowances
depreciation on buildings etc)? If so,
indicate extent. Y/N/NA
24. Are there any material matters in dispute
between the company and the Inland Revenue
Board (IRB)? If so, give details. Y/N/NA
25. Has all income tax assessed been paid? Y/N/NA
COMMENTS
answered N or NA)
26. Is the provision for income tax over-estimated or
under-estimated? If so, to what extent? Y/N/NA
27. Have any under/over provisions, from prior
years, been adequately dealt with? Y/N/NA
Transactions with entities within the economic entity
28. Are you aware of any material transactions with
any entity in the economic entity? If so, provide
details if these have not already been provided
elsewhere. Y/N/NA
29. Provide details of all dividends paid to other
entities in the economic entity for the period of
the audit. Y/N/NA
Contingent liabilities
30. Summarise the procedures adopted to ascertain
and conrm the existence and value of any
contingent liabilities. Y/N/NA
31. Where no provision has been made for
contingent liabilities, has adequate disclosure
been made elsewhere in the nancial statements,
ie notes to the accounts? If not, give details. Y/N/NA
Capital commitments
32. Are capital commitments at balance sheet date
adequately disclosed in the nancial statements?
If not, give details. Y/N/NA
Property, plant and equipment
33. Have all documents of title (both freehold land
and other assets) been identied, inspected or
conrmed? Y/N/NA
34. Are all assets shown at cost? If not, provide
details on the basis of valuation used, the name
of the person who carried out the valuation, the
date of valuation and the class of asset affected. Y/N/NA
35. (a) Does the entity maintain a register of
assets? Y/N/NA
(b) Indicate the audit approach used to
identify all additions and disposals of
assets during the period under audit. Y/N/NA
COMMENTS
answered N or NA)
36. Indicate the rate of depreciation and the basis of
calculation (eg straight-line, reducing balance)
for each of the following classes of assets:
Freehold buildings; Y/N/NA
Furniture, xtures and ttings; Y/N/NA
Leasehold properties (give details); Y/N/NA
Loose tools; Y/N/NA
Motor vehicles; Y/N/NA
Ofce equipment; Y/N/NA
Plant & machinery (subdivide if
necessary); Y/N/NA
other assets of importance (give details). Y/N/NA
37. Are the depreciation rates used appropriate to
write-down the book value of the asset over its
expected useful life to its estimated residual
value? If not, to what extent are they not
appropriate? Y/N/NA
38. Have any assets been purchased from or sold to
any entity in the economic entity? If so, give
details of original cost, accumulated depreciation
to date of transfer and sale price of the asset. Y/N/NA
39. Where material prots or losses on sales of xed
assets have arisen during the year, are these
correctly disclosed in the income statement? If
not, give details. Y/N/NA
Other non-current assets
40. What audit approach has been adopted to
identify the existence and valuation of intangible
assets? Y/N/NA
41. Is there any reason to believe that there is a non-
current asset shown in the books of the entity at
an amount which (having regard to its value to
the company as a going concern) exceeds the
assets recoverable amount (eg goodwill)? Y/N/NA
Investments
42. Have all documents of title been identied,
inspected or conrmed? Y/N/NA
COMMENTS
answered N or NA)
43. Provide details of all investments if such details
are not available from an examination of the
balance sheet. Y/N/NA
44. (a) Are investments shown at cost? If not,
describe the basis of valuation used, the
name of the person who carried out the
valuation and the class of asset affected. Y/N/NA
(b) Have any amounts been written off since
acquisition? If so, has this been disclosed? Y/N/NA
(c) Where investments are not quoted, has
reference been made to the accounts of
such entities to determine whether a
provision for diminution in value is
required? Y/N/NA
(d) Are unquoted investments worth
substantially more than their book value?
If so, give details. Y/N/NA
45. Are you satised that all investment income has
been included in the nancial statements? Y/N/NA
46. Have any controlled entities been acquired or
disposed off during the period under audit? If
so: Y/N/NA
(a) What are the terms of acquisition or
disposal? Y/N/NA
(b) How have pre-acquisition prots or losses
been treated? Y/N/NA
Inventories and work in progress
47. Where practicable, supply a breakdown of the
value of inventories into the following headings,
or such other headings as may be appropriate to
the entitys trade:
(a) Raw materials; Y/N/NA
(b) Work-in-progress; Y/N/NA
(c) Finished goods. Y/N/NA
48. Are inventories physically veried by the
entity during the year? If so, how? If not,
what alternative procedures are adopted
by the entity? Y/N/NA
COMMENTS
answered N or NA)
49. What audit procedures have been adopted to
verify the physical existence and title to
inventories on hand at year end? Give
percentage of audit coverage. Y/N/NA
50. Detail the basis of valuation of inventories and
work in progress and the manner in which cost is
determined, eg:
(a) Actual cost by specic identication; Y/N/NA
(b) Actual cost based on principle of rst in,
rst out; Y/N/NA
(c) Average cost: Y/N/NA
(d) Standard cost. Y/N/NA
51. Is the basis of valuation consistent with the basis
used in the previous year? If not, provide details. Y/N/NA
52. Are overheads included in the valuation of
stock? If so, give details. Y/N/NA
53. How does the entity deal with slow-moving
excessive and obsolete stock? Y/N/NA
Receivables
54. Is there a distinction in the accounts between
trade and other receivables, and prepayments? Y/N/NA
55. (a) Were trade receivables positively or
negatively circularised? Detail approach. Y/N/NA
(b) Were the results of the circularisation
satisfactory? Provide details of the
circularisation carried out and responses
obtained. Y/N/NA
(c) What other audit procedures were carried
out to verify the existence and value of
trade receivables? Y/N/NA
56. What is the basis of calculating the provision for
doubtful debts? Is this provision adequate? Y/N/NA
Bank balances
57. Have all bank balances and accrued bank interest
been veried by written conrmation received
direct from the bank? Y/N/NA
COMMENTS
answered N or NA)
58. If overdrafts (where applicable) are secured, is
disclosure of this made in the nancial
statements? If not, give details. Y/N/NA
Deferred expenditure
59. (a) Give details of the nature of deferred
expenditure and the basis on which it is to
be written off in future years. Y/N/NA
(b) Give details of any amounts which have
been written off during the year, if not
disclosed in the nancial statements. Y/N/NA
(c) Has the basis of carrying forward
expenditure been consistently applied? Y/N/NA
Statutory records
60. If the entity is a company, have all statutory
records required to be kept under the Companies
Act 1965 been satisfactorily maintained? Y/N/NA
Analytical review
61. (a) Was nancial information compared to:
comparable information for a prior period
or periods?
Y/N/NA
anticipated results, such as budgets or
forecasts?
Y/N/NA
(b) Were satisfactory explanations obtained for
unusual uctuations? Y/N/NA
Post balance sheet date events
62. Give details of any signicant events which have
occurred after balance sheet date. Y/N/NA
Related party transactions
63. Have all necessary related party disclosures been
made in accordance with applicable accounting
standards? Y/N/NA
Conclusion
64. Are there any other matters which you wish to
bring to our attention? Y/N/NA
Using the work of an expert 107
USING THE WORK OF AN EXPERT
Introduction .....................................................................................14-500
Audit checklist..................................................................................14-800
14-500 Introduction
In the performance of auditing procedures, the auditor must obtain sufcient and appropriate audit
evidence upon which to base the audit opinion on the nancial statements.
In certain instances the materiality or nature of an item being part of, or affecting, the nancial
information may be outside the relevant expertise of the auditor and therefore require the assistance of an
expert.
International Standards on Auditing ISA 620: Using the Work of an Auditors Expert sets out the
mandatory basic principles and essential procedures required when the auditor is considering using the
work of an expert. In summary the auditor is required to:
(a) obtain sufcient appropriate audit evidence that the experts work is adequate for the purposes of the
audit;
(b) assess the professional competence of the expert;
(c) assess the objectivity of the expert;
(d) obtain sufcient appropriate audit evidence that the scope of the experts work is adequate for the
purposes of the audit;
(e) assess the appropriateness of the experts work as audit evidence regarding the nancial statements
assertion being considered; and
(f) resolve the matter where the results of the experts work do not provide sufcient appropriate audit
evidence, or if the results are not consistent with other audit evidence.
When issuing an unmodied audit report, the auditor should not refer to the work of an expert.
1. Decision to use the work of an expert
Determine whether there are any matters that are potentially material to the truth and fairness of the
nancial statements which require using the work of an expert eg:
(a) valuation of certain types of assets complex nancial instruments, restricted securities, works
of art, land and buildings, plant and machinery, intangible assets, antiques, precious stones,
special drugs, assets and liabilities assumed in business combinations and assets that may have
been impaired;
(b) determination of physical characteristics relating to quantity on hand or condition
underground mineral reserves, materials stored in stock piles and remaining life of plant and
machinery;
(c) determination of amounts using specialised techniques or methods actuarial valuation; and
(d) interpretation of technical requirements, regulations or agreements the potential signicance
of contracts, other legal documents, legal title to property, statutes and regulations.
(e) measurement of work completed and to be completed contract-in-progress.
2. Selecting an expert
(a) Determine whether the qualications and reputation of the expert are appropriate by
considering the following areas:
(i) the professional certication, license, or other recognition of the competence of the
expert in their eld;
(ii) the reputation and standing of the expert in the views of their peers and others familiar
with their capability or performance;
(iii) the relationship, if any, of the expert to the client.
(b) Determine and document the nature of work to be performed by the expert. The document
should cover the following:
(i) the objectives and scope of the experts work;
(ii) the experts representations as to their relationship to the client;
(iii) the methods or assumptions to be used;
(iv) a comparison of the methods or assumptions to be used with those used in the previous
period;
(v) the experts understanding of the auditors corroborative use of the experts ndings in
relation to the representations in the nancial statements;
(vi) the form and content of the experts report.
3. Using the ndings of the expert
(a) Determine whether the assumptions or methods used are appropriate and the ndings from the
work of the expert are suitable for corroborating the representations in the nancial statements.
(b) Determine whether the experts ndings support the related representations in the nancial
statements.
(c) Make appropriate tests of accounting data provided by the client to the expert.
(d) Consider the necessity of obtaining the opinion of another expert if the audit procedures
indicate that the ndings are unreasonable.
(e) If the expert is not independent of the client, consider performing additional procedures with
respect to some or all of the related experts assumptions, methods or ndings to determine that
the ndings are not unreasonable, or engage an outside expert for that purpose.
(f) When expressing an unqualied opinion, the report should not refer to the work or ndings of
the expert.
(g) If the auditors report is modied as a result of the experts report or ndings, reference to and
identication of the expert may be made in the auditors report. However, the experts
permission must be sought before making such a reference in the auditors report. If permission
is refused and the auditor believes a reference is necessary, the auditor may need to seek legal
advice.
Audit procedures 109
Audit objectives
When using the work of an expert or specialist it is necessary to be satised that the work performed
by those experts or specialists is adequate and the results of their work are consistent with the information
in the nancial statements.
Audit procedures
1. Consider the materiality and complexity of balances included in the nancial statements which may
require using the work of an expert. For example:
mineral stockpiles and reserves;
real estate valuations;
actuarial valuations;
legal opinions; and
intellectual property.
2. Consider the absence or nature of other sources of audit evidence available with respect to the item.
3. In selecting an expert and being satised with regard to the skill, competence and reputation of the
expert:
(a) inquire as to the professional certication, licence or membership in an appropriate professional
body;
(b) inquire as to the reputation and experience of the expert in the view of their peers and others
familiar with their ability and performance;
(c) inquire as to the relationship of the expert to the client.
4. In evaluating the work of an expert:
(a) read the experts report and document the signicant methods or assumptions used;
(b) Consider the source data used ensuring it to be relevant and sufcient for the experts
purposes;
(c) Consider conducting audit procedures on the source data to ensure its reliability; and
(d) If a similar experts report has been prepared for a prior period, compare it to the current report
for consistency of method and assumptions.
5. Consider the necessity of obtaining the opinion of another expert, or performing additional
audit procedures with respect to the experts assumptions if the expert is not independent of the
client.
14-800 Audit checklist
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
SUBJECT: Audit considerations relating to the use
of an auditors expert
INITIALS &
DATE
W/P REF
Audit objective
1. Inform the expert of the intended use of the work
including whether third parties would be informed of the
experts identity and extent of the work performed.
2. Discuss the audit requirements with the expert including:
materiality to ensure the materiality used by the
expert is appropriate
the understanding of how subsequent events are to
be treated
verication of data, so reasonable assurance is
obtained over the accuracy, completeness and
consistency of the data used
the timing of the work to be carried out and date of
the experts report, and
any questions relating to the experts work.
3. When planning to use the work of an expert, evaluate the
experts competence by reference to:
professional qualications
experience and reputation
4. Assess the objectivity of the expert.
5. If the expert is employed by the entity, consider the
existence of mitigating factors including:
adherence to professional standards and/or
regulatory requirements,
requirement to provide an opinion and detailed
report on the appropriateness of the experts
liabilities to regulatory authorities, and to provide
an opinion on the appropriateness,
formal appointment of the expert by those charged
with governance,
Audit checklist 111
Note if the audit report is unmodied, no reference to the work of the expert should be made. In the case of
a modication arising from the work of an expert, it may be appropriate to explain that the modication
refers to the work of the expert after obtaining the experts permission.
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
SUBJECT: Audit considerations relating to the use
of an auditors expert
INITIALS &
DATE
W/P REF
legislation requiring regulatory authorities to be
informed of the experts appointment and any
change to the appointment by those charged with
governance,
consideration of the results of an external peer
review or similar review, and
basis of remuneration.
6. Consider whether the scope of the experts report is
adequate for the purposes of the audit and provides
sufcient appropriate audit evidence:
obtain an understanding of the assumptions and
methods used by the actuary,
consider reasonableness of assumptions and methods
used, and
consider the reasonableness of any input by those
charged with governance.
7. Evaluate the appropriateness of the experts work as audit
evidence and whether the substance of the experts
ndings are properly reected in the nancial report and
supports the audit assertions considering:
source of data used; assumptions and methods used
and their consistency with prior periods,
results of the experts work in light of the overall
knowledge of the business and the results of other
procedures, and
any discussions with the expert on any aspect of the
experts work.
COMPUTER AUDIT
Introduction .....................................................................................15-000
Knowledge of information technology............................................15-100
Auditors skill and competence .......................................................15-200
Internal control structure review.....................................................15-300
Risk assessment ...............................................................................15-400
15-000 Introduction
The increasing use of computers means the auditor must pay particular attention to the clients
information technology (IT).
At the planning stage of an audit the auditor needs to assess the effect of the IT on the internal control
structure of the client. The IT will have an effect on the processing, storage and communication of
information. The auditor also needs to assess the availability of data for use, as in many cases information
is available only in machine readable form. Thus, it may be necessary to use computer assisted audit
techniques (CAATs).
15-100 Knowledge of information technology
At the planning stage it is important the auditor gains sufcient knowledge of the IT to assess the
potential impact of events, transactions and practices which may have a signicant impact on the nancial
report or the audit report. Matters the auditor would consider include:
(a) the clients use of and attitude towards information technology and its effect on the computer
information system adopted;
(b) use of computer information systems by the entity compared to the industry in general; and
(c) any proposed and/or recent changes to the entitys IT and the IT environment.
Details of the clients IT should be recorded and updated as part of the planning and review process
each year.
15-200 Auditors skill and competence
Assessment of the clients IT should be undertaken by an auditor with sufcient knowledge of
computer information systems. It may be necessary to utilise an expert to carry out this function. (See
14-500 Using the work of an expert.)
The auditor needs sufcient knowledge to be able to plan, direct, supervise and review work
performed on the IT. The auditor needs to design, perform and evaluate tests of controls and substantive
procedures in relation to the IT. Part of this process will involve performing an internal control structure
review and making an assessment of inherent and control risk.
15-300 Internal control structure review
The internal control structure review will depend on the following:
(a) the extent to which the IT is used to process transactions; and
(b) the type and signicance of the transactions processed. The internal control structure is also
dependent on the IT.
Computer audit 113
Personal computer environment (PCs)
Typically a personal computer environment is less structured than a centralised environment. Since
PCs are geared towards the end users, the internal controls adopted will determine the degree of accuracy
and reliability of any nancial information produced and hence the degree of reliance which can be placed
on the system. Factors to consider in a personal computer environment include:
(a) possible lack of segregation of duties;
(b) the extent of any transaction logs/batch balancing;
(c) the extent of any direct supervision; and
(d) the extent of reconciliation of cash balances and record counts.
On-line processing
An on-line processing system consists of the following:
(a) on-line entry and validation of data;
(b) on-line access to computer system;
(c) possible lack of an audit trail; and
(d) possible programme access by the user.
Internal controls particularly relevant to on-line computer systems include the authorisation,
completeness and accuracy of transactions. The use of CAATs may be of particular benet with on-line
systems due to the possible lack of a visible audit trail.
Database systems
Database systems consist of the following:
(a) Data sharing
Individual application programmes share data in a database for different purposes.
(b) Data independence
Data is recorded once by the database management system (DBMS), for use in application
programmes. Data can change without altering the application programmes and vice versa.
(c) Data dictionary
This software facility keeps track of the location of data in the database.
(d) Data administration
The centralised coordination of the use and denition of data and the maintenance of the integrity,
security, accuracy and completeness of the database.
Internal controls in relation to database systems need to be looked at in terms of the database, the
DBMS, and the applications used in the database. Conceptually there is the opportunity for greater
reliability of the control structure in the database system than for non-database systems. This is due to:
(a) improved consistency of data due to the fact that data is recorded and updated only once, unlike in
non-database systems where the same data may be stored in several different les and updated at
several different times; and
(b) improved integrity of data due to the effective use of various facilities included in the DBMS.
15-400 Risk assessment
As part of the planning process, it is necessary for the auditor to assess both inherent and control risk
in relation to the IT. As a guide to assessing inherent and control risk, the auditor should take into account
the following:
(a) Programme development
(i) Whether programmes are developed in house or purchased externally
The auditor needs to assess the reliability of any in-house programmes, as well as the
reputation of external programmes and suppliers.
(ii) Developments within the industry
Changes to the computer system as a result of industry changes need to be assessed, for
example, upgrades to EDI or transactions via modem.
(iii) Paperless environment
The risk of error in an increasingly paperless environment needs to be assessed.
(b) Programme maintenance
(i) documentation of IT; and
(ii) degree of staff competence and training.
(c) Programme security
Factors to consider in relation to programme security are:
(i) extent of logical access controls;
(ii) any ability of users to manipulate and/or change data; and
(iii) the reliability of any implementation of new technology.
The identication of the nature and operation of internal controls in relation to the IT and its effect on
audit risk will inuence the nature, timing and extent of audit procedures. The degree of reliance placed on
the internal controls of the IT will impact on the extent of substantive testing to be performed.
ELECTRONIC COMMERCE
Introduction .....................................................................................15-600
Audit considerations........................................................................15-610
15-600 Introduction
The widespread use of electronic commerce (e-commerce or sometimes referred to as e-business) by
business entities in recent years requires the auditor to consider the effects of such activities on the audit of
nancial statements. Such activities are invariably carried out by means of connected computers over a
public network such as the Internet.
15-610 Audit considerations
The use of a public network introduces special risks to an entity which engages in e-commerce
activities. The auditor would need to address the following:
Electronic commerce 115
(a) the skills and knowledge required to understand the effect on the audit and the need to use the work
of an expert;
(b) the identication of business risks related to those events, transactions and practices arising from the
entitys e-commerce activities;
(c) the legal and regulatory issues resulting from the borderless nature of e-commerce and the
complications that may arise from different jurisdictions;
(d) the internal control and security considerations; and
(e) the effect of electronic records on audit evidence as well as the lack of an adequate audit trail in either
paper or electronic form.
Risk identication
Some of the risks relating to e-commerce includes:
Loss of transaction integrity;
Security risks including virus attacks and potential fraud by customers, employees and others
through unauthorised access;
Improper accounting policies, misunderstanding of complex contractual arrangements, title transfer
risks, translation of foreign currencies, allowances for warranties or returns and revenue recognition
issues;
Compliance with taxation and other legal and regulatory requirements especially for cross-border
transactions;
Failure to ensure that contracts evidenced only by electronic means are binding;
Over reliance on e-commerce transactions on the Internet; and
Systems and infrastructure failures.
The auditor should possess sufcient knowledge of the business in order to identify the risks which,
in the auditors judgement, may result in a material misstatement of the nancial statements or have a
signicant effect on the auditors procedures or the auditors report.
Legal and regulatory issues
As it stands, a standard international legal framework has yet to be established to support e-
commerce transactions in areas such as electronic signatures, document registries, dispute settlement
mechanisms and consumer protection. Other areas include the enforceability of contracts, legality of
certain activities, eg Internet gambling, money laundering, and violation of intellectual property rights.
Business entities may also need to consider their tax liabilities especially where their activities involve
various jurisdictions, eg where the entity is registered, physical location of its operations, location of its
web server, where their goods and services are supplied from and where these goods and services are
delivered to.
International Standards on Auditing ISA 250: Consideration of Laws and Regulations in an Audit of
Financial Statements provides guidance in planning and performing audit procedures. It requires the
auditor to recognise that non-compliance with laws and regulations may materially affect the nancial
statements and whilst an audit cannot be expected to detect non-compliance with all laws and regulations,
the auditor is required to perform procedures to help identify such non-compliances.
STATUTORY RECORDS
Opinion ............................................................................................16-000
Statutory records checklist...............................................................16-200
Share capital.....................................................................................16-300
Register of members........................................................................16-400
Register of transfers.........................................................................16-500
Register of options ...........................................................................16-600
Register of charges...........................................................................16-700
Register of debentures.....................................................................16-800
Register of directors, managers and secretaries .............................16-900
Summary of minutes .......................................................................17-000
Conrmation of minutes .................................................................17-100
Rotation of directors ........................................................................17-200
Directors benets and interests......................................................17-300
16-000 Opinion
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
SUBJECT: STATUTORY RECORDS
OPINION
Subject to:
* (1) The attached Clearance Notes (for auditor responsible for Section)
* (2) The Notes for Manager of Signicant Issues (for auditor in charge)
I am satised that we have obtained sufcient evidence that the records and the statutory registers
which are required by the Companies Act 1965 to be kept by the Company have been properly kept in
accordance with the provisions of the Act. The schedules and working papers on this section support
that opinion.
Auditor responsible for section: Signature: Date:
Auditor in charge: Signature: Date:
Statutory records 117
* Delete if not applicable
16-200 Statutory records checklist
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
SUBJECT: STATUTORY RECORDS
DETAILED REVIEW
(Subject to the Notes for Partner/Principal of Signicant Issues,) I am satised based on the Detailed
Review that we have obtained sufcient evidence that the records and the statutory registers which are
required by the Companies Act 1965 to be kept by the Company have been properly kept in accordance
with the provisions of the Act. The schedules and working papers on this section support that opinion.
Engagement Manager: Signature: Date:
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
SUBJECT: Audit of Statutory Records
Statutory Records Checklist
INITIALS &
DATE
W/P REF / COMMENTS
1. STATUS
(a) Ascertain whether Company is:
Public (Quoted/Unquoted)
Private (Exempt/Non Exempt)
(b) If there has been change in status during
the year under review, note that the
Company complied with the relevant
provisions of the Companies Act 1965.
2. MINUTE BOOK
(a) Is a Minute Book kept? (s 156(1)).
(b) Is the Minute Book kept at the
Registered Ofce? (s 157(1)).
(c) Conrm from Secretary that all minutes
are up to date.
(d) What is the quorum?
(e) Was a quorum present?
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
INITIALS &
DATE
W/P REF / COMMENTS
(f) Has any special resolution been passed
during year?
(g) If so, check whether special resolution
has been passed at Extraordinary
General Meeting of which not less than
21 days notice has been given and 3/4
majority passed the special resolution.
(s 152(1))
(h) Check whether printed copy of special
resolution is led within one month.
(s 154(1)) (Form 11)
(h) Check whether printed copy of special
resolution is led within one month.
(s 154(1)) (Form 11)
(i) Have all minutes been signed by the
Chairman? (s 156(1))
(j) Extract relevant minutes for permanent
audit le and cross reference to working
papers/accounts.
3. REGISTER OF MEMBERS
(a) Is a Register of Members kept at the
Registered Ofce? (s 159(1)).
(b) If not, has notice of the place where the
Register is kept, being lodged with the
Registrar within 14 days after the date
where it is rst kept OR within 14 days
after any change of place? (s 159(2))
(Form 53)
(c) Where the number of members exceed
50 (unless the Register constitutes an
index in its own), is an index of the
members kept? (s 158(5))
(d) Verify all share allotments during the
year:
(i) Check resolutions for allotments
of shares.
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
INITIALS &
DATE
W/P REF / COMMENTS
(ii) Check return of allotments are
led within one month. (s 54(1))
(Form 24)
(iii) Check return is led for
allotment of shares otherwise
than in cash. (s 54(5)) (Form 25)
(v) Check Register of Members with
share certicates acknowledged.
(vi) Check share certicates
acknowledged.
(e) If the authorised share capital has been
increased, check that notice of increase is
led within 14 days after the passing of
the resolution authorising the increase.
(s 62(4)) (Form 28)
(f) Verify all share transfers during the year:
(i) Check resolution with share
transfer form (Form 32A) and
cancelled share certicates.
(ii) Check transfers to Register of
Transfers.
(iii) Check from Register of Transfer
to Register of Members.
(iv) Check from Register of Transfers
to share certicate book.
(v) Check share certicates
acknowledged.
(g) Cast Register of Members balances to agree
with issued and paid-up share capital per
accounts. Complete 16-300 Share Capital.
In the case of public listed companies,
obtain certicates from Registrar.
(h) Make out a list of members for
permanent audit le in the case of
private company.
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
INITIALS &
DATE
W/P REF / COMMENTS
4. SHARE CERTIFICATE BOOK
(a) Is a share certicate book kept?
(b) Have share certicates been issued
within two months after allotment or
one month after transfer? (s 107)
(c) Ascertain that all cancelled certicates
have been invalidated.
5. REGISTER OF OPTIONS
(a) Is a Register of Options granted to
persons to take up unissued shares in
the Company kept? (s 68A)
(b) Is the Register of Options kept at the
Registered Ofce?
(c) If not, has notice of the place where the
Register is kept, being lodged with the
Registrar within 14 days after the date
where it is rst kept OR within 14 days
after any change of place? (s 159(2))
(Form 53)
(d) Are the following details entered into
the register within 14 days after the
grant of the option?
(i) Name, address, I/C No and
nationality of option holder.
(ii) Date on which the option was
granted.
(iii) Number and description of
shares in respect of which the
option was granted.
(iv) Exercise period of option.
(v) Consideration, if any, for the
grant of the option.
(vi) Consideration, if any, for the
exercise of the option.
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
INITIALS &
DATE
W/P REF / COMMENTS
(e) Is a copy of the instrument by which the
option to take up unissued shares is
granted kept at the place where its
register is kept?
Section 68A of Companies Act 1965 provides for the
register of options to be treated as if the register was a
Register of Members. The provisions under s 159
relating to the place where the register is kept shall
therefore apply. Therefore, Form 53 can be appropriately
amended for use to le a notice of place or change of place
of the Register.
6. REGISTER OF SUBSTANTIAL
SHAREHOLDERS
Applicable to public companies or bodies declared by the
Minister to be companies under Division 3A of Part IV
of the Act.
(a) Is the Register kept at the Registered
Ofce? (s 69L(2))
(b) Does the Register in respect of each
substantial shareholder (as dened in s
69D) whom notice under s 69E, 69F and
69O has been received by the Company,
record the following details?
(i) Names (in alphabetical order)
(ii) Nationality
(iii) Address
(iv) Full particulars of the voting
shares or interest therein
(including the name of the
person who is registered as a
holder) and the circumstances of
the interest arising.
(v) Full particulars of the change or
cessation of the interest.
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
INITIALS &
DATE
W/P REF / COMMENTS
7. REGISTER OF DIRECTORS, MANAGERS
& SECRETARIES
(a) Is a Register of Directors, Managers and
Secretaries kept at the Registered Ofce?
(s 141(1))
(b) Does the Company has at least two
directors? (s 122)
(c) Are at least two directors natural
persons whose principal places of
residence are within Malaysia? (s 122(1))
(d) Is the Secretary a natural person whose
principal place of residence is in
Malaysia? (s 139(1))
(e) Check whether particulars of Directors,
Managers and Secretaries or changes are
recorded in Register.
(f) If Company is newly incorporated,
check if particulars required to be
specied in the register is led within
one month. (s 141(6)(a)) (Form 49)
(g) Check whether changes in directorate
during the year are recorded by
resolution.
(h) Check whether return of changes in
directorate is led within one month.
(s 141(6)(b)) (Form 49)
(i) Check whether appointment or
retirement of Secretary and Manager
during the year is recorded by
resolution.
(j) Check whether notice of appointment/
retirement of Secretary/Manager is led
within one month. (s 141(6)(c) and (d))
(Form 49)
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
INITIALS &
DATE
W/P REF / COMMENTS
(k) Check whether any change in the name,
residential address and other prescribed
particulars of Directors, Managers and
Secretaries is led within one month. (s
141(6)(e)) (Form 49)
(l) Make out a list of Directors, Managers
and Secretaries for permanent audit le.
8. REGISTER OF DIRECTORS
SHAREHOLDINGS
A company need not show in its register with
respect to any director particulars of shares in a
related corporation, that is the wholly-owned
subsidiary of the company or of another
corporation. (s 134(2)).
A company that is a wholly-owned subsidiary of
another company shall be deemed to have complied
with s 134(1) in relation to any common directors
if the particulars required to be shown in the
register are shown in the register of the holding
company. (s 134(3))
An alternate director is treated as a director under
this section.
(a) Is a Register of Directors Shareholdings
kept at the Registered Ofce?
(b) Has the Register been updated within
three days after receipt of notice under s
135(1)(a) and (b)? (s 134(5))
(c) Does the Register record the Directors
interest in shares, debentures of or
participatory interests, rights and
options in the Company? (s 134(1)(a))
(d) Extract the relevant details referred to
above in respect of the Company and its
related corporations.
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
INITIALS &
DATE
W/P REF / COMMENTS
(e) Is there any qualication shareholdings
for directors? (refer to Articles of
Association and note in permanent
audit le).
(f) If so, check whether all directors have
acquired qualication shares within
prescribed period.
9. REGISTER OF CHARGES
(a) Is a Register of Charges kept at the
Registered Ofce? (s 115(2))
(b) Verify from Secretary (and from bank
conrmation) whether any property or
asset of Company has been charged to
bank or other party.
(c) Verify charge has been authorised by
resolution.
(d) Verify particulars of charge registered
within 30 days after the creation of the
charge. (s 108(1))
(e) Is a copy of Memorandum of Charge
kept at the registered ofce? (s 115(1))
(f) Examine:
(i) Certicate of Registration of
Charge. (Form 40).
(ii) Memorandum of Satisfaction of
Registered Charge. (Form 41)
(iii) Memorandum where property or
undertaking is released from
Registered Charge or has ceased
to form part of Companys
property or undertaking. (Form
42)
(iv) Statutory Declaration Verifying
Memorandum. (Form 43)
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
INITIALS &
DATE
W/P REF / COMMENTS
(v) Evidence of Satisfaction of
Charge/release of property from
charge (Form 42B) and extract for
permanent audit le.
10. REGISTER OF DEBENTURE HOLDERS
(a) Is a Register of Debenture Holders kept
at the Registered Ofce? (s 70(1))
(b) If not, has notice been given of the place
where the Register is kept within 7
days? (s 70(2))
(c) Verify debenture has been authorised by
resolution.
(d) Examine the instrument creating the
debenture and extract for permanent
audit le.
11. ANNUAL GENERAL MEETING
(a) What is the date of AGM held during
the year?
(b) What is the quorum?
(c) Was a quorum present?
(d) Is it held within 15 months after the last
AGM? (s 143(1))
(e) Has a meeting been held in each
calendar year? (s 143(1))
(f) If not, has extension of time been given
by Registrar of Companies? (s 143(2))
(g) Were audited accounts made up to a
period within six months of the meeting
adopted at the AGM? (s 169(1))
(h) If not, has extension of time been given
by Registrar of Companies? (s 169(2))
(i) What was the dividend approved and
when is the date of closure of the
Register of Members?
NOTE: ANY SIGNIFICANT EXCEPTIONS NOTED SHOULD BE INCLUDED IN THE NOTES FOR
MANAGER OF SIGNIFICANT ISSUES (AS REFERRED TO UNDER 16-000) AND
PROPERLY CROSS-REFERENCED IN THE COMMENTS COLUMN ABOVE. OTHER
EXCEPTIONS SHOULD BE EXPLAINED IN THE COMMENTS COLUMN.
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
INITIALS &
DATE
W/P REF / COMMENTS
(j) What is the payment date?
(k) Were [name of audit rm] appointed as
auditors?
(l) Was the Directors Report tabled at
AGM?
(m) What was the date of which the Annual
Return was made up to?
(n) What was the date of lodgement of
Annual Return with the Registrar of
Companies? Was it led within one
month of the AGM?
(o) Inspect ling receipt of Annual Return.
12. REGISTERED OFFICE
(a) Is the name of the Company and the
words Pejabat Yang didaftarkan
displayed prominently outside the
Registered Ofce? (s 121(3))
(b) Has there been a change of Registered
Ofce during the year? (Check with
minutes for resolution).
(c) If so, check whether the change of
Registered Ofce is led within one
month. (s 120(1)) (Form 44)
13. AUDITORS REPORT
(a) Are you satised that the above records and
statutory registers have been properly kept?
Please note down your opinion in 16-000
Opinion.
(b) List negative replies to questions above,
where necessary.
16-300 Share capital
NOTE: THE ISSUED AND PAID-UP SHARE CAPITAL SHOULD AGREE WITH THE TOTAL
BALANCE OF THE SHARES HELD BY MEMBERS AS RECORDED IN THE REGISTERS OF
MEMBERS.
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
SUBJECT: Audit of Statutory Records Share
Capital
SHARE CAPITAL
Comparative
Figures /
Details 20
Comments
RM
AUTHORISED CAPITAL
Ordinary Shares of RM ________ each RM
ISSUED CAPITAL
fully paid/paid-up to RM
Add Issued during the year
fully paid/paid-up to RM
RM
16-400 Register of members
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
SUBJECT: Audit of Statutory Records Register of
Members
REGISTER OF MEMBERS
Comparative
Figures /
Details 20___
(Note: Where there are too many members, obtain a latest detailed
list of members balances prepared by the client and verify
the balances with the register)
Comments
RM Name of Member Units RM
Does the register contain the following information?
16-500 Register of transfers

(a) Names, addresses, I/C No and nationality of shareholders. Yes/No )
(b) Shares held by the member distinguishing number of shares
held and share certicate number.
Yes/No ) If no,
) advise
(c) Amount paid or considered to be paid on each share. Yes/No ) client
(d) Date of entry in the register as member. Yes/No ) to
(e) Date ceased to be member. Yes/No ) comply
(f) Date of allotment and number of shares of each allotment. Yes/No )
PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
Transfers
REGISTER OF TRANSFERS
(Note: Where there are too many transfers, obtain a latest detailed list of the
transfers prepared by the client and verify them with the register)
Comments
Transferred from Transferred to Units Amount
RM
(Note: Where there are too many transfers, obtain a latest detailed list of the
transfers prepared by the client and verify them with the register)
Comments
Transferred from Transferred to Units Amount
RM
Statutory records

131


16-600

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132

Chapter 3

Planning

16-700

2012 CCH Asia Pte Limited

16-700 Register of charges

PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
Charges
REGISTER OF CHARGES

Date of
Creation of
Charge
Date of
Registration
of Charge
Particulars of Property
or Assets Charge
Amount of
Charge
In favour of Comments

Statutory records

133


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134

Chapter 3

Planning

16-900


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Statutory records

135


17-000

17-000 Summary of minutes

PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
SUBJECT: Audit of Statutory Records Summary of
Minutes
SUMMARY OF MINUTES

Date Ref Description Comments

136

Chapter 3

Planning

17-100


17-100 Conrmation of minutes

Name of Audit Firm
Address
Dear Sir(s),
1.

Conrmation of minutes

In connection with your examination of the nancial statements of ________________________ (name of
client) as at _________________________________ (balance sheet date) and for the nancial year then
ended, we have submitted to your representatives, minutes of meetings (including circular resolutions) of
the Shareholders, the Board of Directors, the Executive Committee of the Board of Directors and the Audit
Committee of the Company held on the dates stated below. These minutes (including circular resolutions)
constitute a full and complete record of all meetings of the Shareholders, the Board of Directors and the
Executive Audit Committee held during the period since the beginning of the nancial year up to the date
of this letter.

PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
Conrmation of Minutes
Date of Meeting or Circular Resolution

Meeting/Circular Resolution of Shareholders
(AGM, EGM), Directors, Audit and Executive
Committee

Statutory records

137


17-200

2.

Retirement of directors

The directors who are required to retire at the next annual general meeting of the Company in accordance
with the Articles of Association of the Company are as follows:

17-200 Rotation of directors

Article Description of Article Name of Director(s)

i)
ii)
iii)
Yours faithfully,
Company Secretary
Date: .........................................
Company stamp: ....................

PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
SUBJECT: Audit of Statutory Records Rotation of
Directors
ROTATION CHECKLIST
Full Name of Directors Appointed
Financial Year Ended
Date
Resigned

20__ 20__ 20__ 20__ 20__ 20__ 20__

1.
2.

138

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17-200


Full Name of Directors Appointed
Financial Year Ended
Date
Resigned

20__ 20__ 20__ 20__ 20__ 20__ 20__

3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.

Remarks
Instructions

Indicate by means of the following ticks:

= To retire at the next Annual General Meeting (AGM) following the audited accounts of
the year.
* = Not required to retire at the next Annual General Meeting (AGM) following the
audited accounts of the year.

Statutory records

139


17-300

17-300 Directors benets and interests

NAME OF COMPANY: ............................................................................
NAME OF DIRECTOR: ............................................................................
A.

Remuneration

For the purposes of disclosure in the accounts of the Company for the year ended . in
accordance with Clause 1(o) and 1(p) of the Ninth Sch to the

Companies Act 1965

, I conrm that the
total remuneration received or receivable by me in respect of my services to the Company and its
subsidiary companies were as follows:

PERIOD ENDING:
PREPARED
BY
DATE
PREPARED
W/P NO
SUBJECT: Audit of Statutory Records Directors
Benets and Interests
Receivable from
the Company
RM
Receivable from
subsidiary
companies
RM

1. FEES
2. OTHER EMOLUMENTS
Percentage
Salary
Bonus
Commission
Compensation for loss of ofce
Companys contribution to provident fund,
pension fund or other retirement benet scheme
Expense allowance chargeable to income tax
Others
3. FEES FOR PROFESSIONAL SERVICES
Fees receivable by me or by a rm of which I am
a member for professional services

140

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Planning

17-300


B.

Contracts

Since the end of the previous nancial period, I have not received or become entitled to receive any
benet (other than a benet included in part A above) by reason of a contract made by the Company
or a related corporation (with me or with a company) in which I have a substantial nancial interest /
*other than the following:
(give brief description of general nature of benet)
C.

Arrangements

Neither during nor at the end of the nancial year was there any arrangements to which the
Company was a party which had the object to enable me to acquire benets through the acquisition
of shares in, or debentures of the Company or any other body corporate / *other than the following:
(give description of such arrangements)
D.

Interests in Shares and Debentures

For the purposes of disclosure in the Directors Report on the Companys accounts for the year ended
. in accordance with s 169(6)(g) of the

Companies Act 1965

. I conrm that my
interests in shares and debentures of the Company and its related corporations, during the year, as
recorded in the register kept by the Company for the purpose of s 134 were as follows:

Receivable from
the Company
RM
Receivable from
subsidiary
companies
RM

4. BENEFITS IN KIND
Money value of benets in kind chargeable to
income tax
5. PAYMENTS TO THIRD PARTIES
Amounts paid to or receivable by any third
parties in respect of services rendered by me
(other than as disclosed in item 3 above)

The Company As at Addition Disposal As at

a) **Shares/Debentures registered:
(i) in my name
(ii) in the name of my nominees

Statutory records

141


17-300

Related Corporation
The Company As at Addition Disposal As at

b) **Shares/Debentures held by
corporation which is accustomed
to act in accordance with my
directions, instructions or wishes
or
in which I have a controlling
interest or
in which I and my associates
hold more than 15% of the
voting shares
1. Name of corporation: ____________________________________

As at Addition Disposal As at

a) **Shares/Debentures registered:
(i) in my name
(ii) in the name of nominees
b) **Shares/Debentures held by
corporation which is accustomed to
act in accordance with my
directions, instructions or wishes or
in which I have a controlling
interest or
in which I and my associates hold
more than 15% of the voting shares
Date: .................................................. Signature of Director: ........................................

142

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17-300


Notes:

* Delete if not applicable
** Please indicate accordingly if your interests arise from the following:
(i) participatory interests
(ii) rights options in respect of the acquisition or disposal of shares, debentures and participatory
interest
(iii) contracts to which the director is a party or under which he is entitled to benet, being contracts
under which the director has a right to call for or to make delivery of the shares, debentures or
participatory interest.
Please use a separate sheet if spaces provided are insufcient.

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i 2012 CCH Asia Pte Limited

Malaysia Audit Manual

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