KULLIYYAH OF ECONOMICS AND

MANAGEMENT SCIENCES

ASSIGNMENT 1: QUESTIONS & ANSWERS

PREPARED FOR:
Dr. Hamdino Bin Hamdan
ISF 3207 Auditing and Governance for Islamic Financial Institutions Section 2

(Course Instructor)

PREPARED BY:

DATE OF SUBMISSION:
October 4, 2016
Question 1

You were recently requested to give a presentation to a group of people who are attending a
start their own business course run by the Local Islamic Financial Institution. The course
organiser has requested you to address the issue of accounting and auditing requirements of
companies. He has asked you to set out for the attendees what is involved in a statutory audit and
in particular to address in your presentation:

a What is an audit?
b Who can be appointed as auditor?
c Who is responsible for the appointment of the auditor?
d What is / are the duty / duties of the auditor?
e Who decides on the amount of audit work the auditor must undertake?
f Who will the auditor report to?
g What are the outputs of an audit?
h Why do some companies not require an audit?

Question 2

You are shariah auditor to Insaniah Securities Bhd. At a recent meeting with the Board of
Directors, the vulnerability of the company to fraud was discussed in detail. Many of the board
members appeared to be of the opinion that the external auditors principal role was to detect
instances of fraud. You are concerned that the Board members have a mistaken opinion as to the
role of the auditor in detecting fraud and you have decided to write to the Board to set out the
actual role of the auditor in relation to fraud.

You are required to address the following matters:

1. Duty of the directors and auditors in relation to the prevention and detection of fraud.
2. The approach the auditor should take in discharging his responsibility in relation to fraud.
ANSWER 1

a. What is an audit?

Audit is an official inspection of a person or companys accounts which is done by typically

an independent body. The inspection covers books, accounts, statutory records, documents and
vouchers of an organization to make sure that the records are a fair representation of the
transaction they claim to represent.

b. Who can be appointed as auditor?

You can appoint any person as the auditor except an officer or the employee of the company, a
partner, or a partnership of which such a person is a partner.

An auditor can be appointed by three alternative procedures:

1 By directors resolution at the director meeting.

2 By members- passing an ordinary resolution in a general meeting.
3 By members- passing an ordinary resolution as a written resolution.

c. Who is responsible for the appointment of auditor?

The company who needs auditors service .

d. What is / are the duty / duties of the auditor?

These are the duties of the auditor:

1. inform the statutory body of the audited entity on subject-matter and purpose of the audit
and present written authorisation to carry out the audit,

2. report audit findings in a true, complete and justifiable manner,

3. draw up an audit report, and also an interim report if necessary, as well as their eventual
amendments. These documents must contain, in particular, a description of the audit
findings and where an infringement of legal regulations has been identified, they must
also include a reference to respective provisions that were infringed. Any identified
weaknesses and shortcomings specified in the interim report must also be documented in
the audit report with reference to the interim report,

4. submit the audit report (interim report) and amendment thereto, if any, to the statutory
body of the audited entity to get acquainted with its content,
 5. enable the statutory body of the audited entity after becoming familiar with the audit
report (interim report), to present, within a specified time period, written objections
against the truthfulness, completeness and provability of the audit findings,

6. verify the justification of the objections and inform the statutory body of the audited
entity of the result in writing; such notification shall form an integral part of the audit
report (interim report). If verification of the objections reveals that they are completely or
partially justified, or if additional facts having a significant impact on the contents of the
audit report (interim report) are identified, an amendment to the audit report (amendment
to interim report) shall be drawn up;

7. discuss the content of the report and its amendment, if any, with the statutory body of the
audited entity and draw up minutes of their discussion in which the Office shall impose
the statutory body of the audited entity an obligation to submit, within a specified time
period, a written statement of measures taken to remedy weaknesses and shortcomings
identified by the audit and a written follow-up report,

8. draw up a record of audit results and communicate its content to the statutory body of the
audited entity in cases where no weaknesses or shortcomings have been detected,

9. draw up an on-the-spot audit report on the examination of the situation directly on the
spot in cases where the audit findings cannot be supported by written documents; such
report must be signed by all persons directly participating in the examination of the
situation,

10. submit to the statutory body of the audited entity one copy of the audit report (interim
report, on-the-spot audit report, a record of audit results) and amendment thereto, if any,
and the minutes on audit closure meeting,

11. respect the rights of the audited entities, their employees and third parties concerned.

e. Who decides on the amount of audit work the auditor must undertake?

The auditors' work may affect the nature, timing, and extent of the audit,
including

Procedures the auditor performs when obtaining an understanding of

the entity's internal control.
Procedures the auditor performs when assessing risk.
 Substantive procedures the auditor perform.

When the work of the auditors is expected to affect the audit, the
guidance should be followed for considering the extent of the effect,
coordinating audit work with auditors, and evaluating and testing the
effectiveness of internal auditors' work.

This decision of the amount of audit work the auditor must undertake is
taken by the senior auditor in the company.

f. Who will the auditor report to?

The External auditors normally address their reports to the

shareholders of a corporation. Whereas the internal auditors address the
report to the company owners, or the main board.

g. What are the outputs of an audit?

There are 3 main audit outputs which audit sponsors can expect to receive:

The Opening Statement;

The Draft Report; and
The Final Report.

1 Opening statement:
The Opening Statement issued after an opening meeting between the
audit team (AASG) and the audit sponsor (Council). It highlights both the
coverage and timing of the audit and is split into 5 sections:

1- Introduction
This explains that the completion of the audit contributes to the level
of assurance that can be provided to the Council in the Director of
Internal Audit's Annual Report to the Accounting Officer (Chief
Executive) in accordance with Government regulations.

2- Background
Highlights the background of the audit and why it is being completed.
 3- Business Objectives and Key Risks
Cover the main business objectives and key risks which the audit will
be addressing.

4- Audit Objectives and Scope

This section highlight the specific objectives and scope of the audit
work performed.

5- Planning, Timetabling and Reporting

This section should provide information on:
Who will be leading the audit fieldwork;
The timing of the audit;
Who the audit sponsor is.

2- The Draft Report.

Draft Report will be issued setting out the findings, conclusions and any
actions which AASG feel need to be taken to address any weaknesses. The
draft report will contain 3 main sections:

Executive Summary
i Audit Opinion
ii Summary of Action Plan.

Detailed Audit Findings.

Action Plan.

3- The Final Report.

Once the Draft Report has been returned to AASG with the Management
Response, the process of issuing the Final Report can begin.

h. Why do some companies not require an audit?

Auditing system provide companies a way of testing the level of the control internally
and also it is a process that companies can detect any fraud or misappropriation of the asset and
to correct the annual report. But the question is why some companies don't do the auditing?
 There are several factors such as "lack of time and resource to apply the auditing system"
because auditing system needs to be given time or else hire a new person for the sake of the
auditing system which is very difficult for the small companies to do so.

Also the term Audit mostly associated with the big companies that have a full-time staff
whose job is to conduct auditing only. For the small companies, they can't afford a full-time
person whose is job is only auditing, therefore they don't perform auditing. But they do some
other way to check their level of internal control.

Lastly, audits performed by the outside agencies are very expensive and it doesn't match
mostly the real situation of the companies as it was done by the outsiders of the companies.

ANSWER 2

1. Duty of the directors and auditors in relation to the prevention and detection of fraud.

The directors of Insaniah Securities Bhd have the primary responsibility

for the prevention and detection of fraud. This should be conducted by
implementing an effective system of internal control with which they should
be able to reduce the possibility of undetected fraud occurring to a minimum
(preferably null). The directors should be well aware of the potential for fraud
and errors and this should feature as an element of their risk assessment and
corporate governance procedures. The audit committee should review these
procedures to ensure that they are in place and working effectively.

2. The approach the auditor should take in discharging his responsibility in relation to fraud.
If the auditor identifies a fraud they should communicate the matter on
a timely basis to the appropriate level of management (i.e. those with the
primary responsibility for prevention and detection of fraud). If the suspected
fraud involves management the auditor shall communicate such matters to
those charged with governance. If the auditor has doubts about the integrity
of those charged with governance they should seek legal advice regarding an
appropriate course of action.