AUDITING

BAC2664 (New), BAC2287(Old)

Topic 4
Audit Report

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 Audit Report
• Objective and format of audit report
• Requirement of statutory audit
• True and fair report
• Types of audit report under CA 1965
• Conditions requiring qualified report
• Materiality and its importance
• Requirement of 9th Schedule
• Audit of holding company and its group of companies
• Using other auditors’ work
• Other information in the audited financial statements

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What is an Audit Report, Objective
of an Audit Report (AR)
An AR is an expression of the auditor’s opinion
based on the conclusions drawn from the audit
evidence obtained.
In preparing the AR, the auditors have to comply
with S174(2) of CA 1965 and with the basic
principles and procedures of the International
Standard on Auditing 700 (AI 700), The Auditor’s
Report on Financial Statements.
According to paragraph 4, AI 700, the AR should
contain a clear written expression of opinion on
the financial statements as a whole.
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 Requirement of Statutory Audit
In forming his opinion, the auditor has to consider the following
matters:
2 The financial information has been prepared using acceptable
accounting policies, which have been consistently applied;
3 The financial information complies with relevant regulations and
statutory requirements;
4 The view presented by the financial information as a whole is
consistent with the auditor’s knowledge of the business of the
entity; and
5 There is adequate disclosure of all material matters relevant to
the proper presentation of the financial information.

An unqualified opinion indicates the auditor’s satisfaction in all material

respects with the matters dealt with paragraph 4.

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 Format/Contents of Auditor’s
Report
• Title – To the Members of Sdn. Bhd.,/Bhd.
• Addressee – Shareholders of the company
• Introduction Paragraph – Identify the FS being audited,
including date and period covered; with emphasis that
the preparation of FS is the responsibility of the company
directors; and responsibility of the auditor is to express
an opinion on the FS.
• Scope Paragraph – specify the terms of reference for
conducting an audit; assume responsibility for the audit
work; perform audit in compliance with established
standards adopted and issued by MIA.

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 Format/Contents of Auditor’s
Report
• Reporting Paragraph – opinion paragraph – represents
the auditor’s expression of opinion on the true and fair
presentation of the company’s FS; state whether the FS
are presented fairly in all material respect; implying he
does not provide absolute assurance but instead
reasonable assurance.
• Name and Signature of signing auditor – AR should be
signed (acknowledgement of responsibility) under the
name of the audit firm and in the personal name of the
auditor.
• Address – the auditor’s address which is usually the city
in which the auditor’s office is located
• Date – must be the same with the date of the Board of
Directors meeting approving the FS.
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 Reporting Paragraph
The phrase “true and fair” view is not defined in the CA 1965.

In reaching his opinion the auditor is required to exercise his

professional judgment and skills.

An opinion on true and fair view is given to the FS as a whole – on each

balance sheet assets and liabilities (they exist and are owned, owed,
included by the company), on the results or performance given by the
income statement, and that all necessary disclosures have been
complied with.

True – accounting information quantified and communicated in such a

way as to correspond to the economic events, activities and
transactions it is intended to describe.

Fair – accounting information has been measured and disclosed in a

manner, which is objective and without prejudice to any particular
sectional interests in the company.

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 Types of Opinion
• Unqualified Opinion
- unqualified opinion with an explanatory
paragraph

• Qualified Opinion
- Except for
- Adverse
- Disclaimer
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 Unqualified Opinion
An unqualified opinion is issued only when the basic principles of true
and fair have been met:

1 The financial information has been prepared using acceptable

accounting policies, which have been consistently applied;
2 The financial information complies with relevant regulations and
statutory requirements;
3 The view presented by the financial information as a whole is
consistent with the auditor’s knowledge of the business of the
entity; and
4 There is adequate disclosure of all material matters relevant to the
proper presentation of the financial information.

Paragraph 30, AI 700 states that an auditor may modify his opinion by
adding an emphasis of matter paragraph to highlight a matter
affecting the FS. This matter is discussed extensively in the notes
to the FS. The addition of such an emphasis of matter paragraph
does not affect the auditor’s opinion.

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 Qualified Opinion
The existence of any one or more of the following circumstances is
sufficient to require qualification of the opinion provided that the
materiality criteria can be met:

1 A limitation on the scope of the auditor’s work (unable to accumulate

sufficient appropriate evidence), because of the following factors:
(a) limitation is imposed by the client,
(b) limitation is caused by circumstances beyond either the client’s or
auditor’s control.

7 A disagreement with management regarding the FS, on:

(a) the appropriateness of accounting policies adopted by the
management,
(b) the method of applying accounting policies including the adequacy
of disclosures in the FS,
(c) the compliance of the FS with relevant regulations and statutory
requirements.

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 Qualified Opinion continued

1 An inherent uncertainty or a significant

uncertainty affecting the FS that cannot
be reasonably estimated at the date of
the AR (unresolved or unpredictable
lawsuits against the company, questions
about the likelihood of the company
being able to sell its products because of
impending changes in legislation).

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 Qualified Opinion continued

Except for – opinion given when the auditor is satisfied with the overall
view given by the FS “except for” the effects of the matters to which
the qualification refers to is not material and not pervasive
(disagreement with management).

Adverse – opinion given when the auditor believes the overall FS are so
materially misstated or misleading (material and pervasive) that they
do not present fairly the state of affairs, or results of operations of the
company (disagreement with management, particularly with respect to
the appropriateness of accounting policies or disclosures).

Disclaimer – opinion given when the auditor is unable to determine

whether the overall FS are fairly presented (severe limitation on the
scope (material and pervasive) of the audit examination, or the
existence of uncertainties concerning the amount of an item or the
outcome of a matter so materially affecting (material and fundamental)
the financial position).

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 Materiality
Auditors are reluctant to qualify their audit reports and usually will not do so on
trivial matters, except on material matters.
Materiality is a particularly difficult matter in practice but, is of great importance.
Great care should be taken before coming to a conclusion on matters of
materiality.

The following considerations may be helpful in deciding matters of materiality:

• The Companies Act – 9th schedule and disclosure requirements,
• The Accounting Standards - aggregating, classifying, presenting of financial
information and statements,
• Transaction or event is large enough to require or warrant a separate
disclosure (bad debts, change in formula for contracts).

Materiality should be assessed based on:

10 Magnitude of the item with the overall view presented by the FS,
11 Magnitude of the item with the magnitude of the same item in previous years,
12 Magnitude of the item with the total of which it forms a part,
13 Presentation and context of the item – does it effect the true and fair view?
14 Any statutory considerations.

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 Audit on Holding Company and its
Group of Companies
The audit of the FS of a holding company follows the same
lines as any company audit. However, special
consideration must be given to the dealings with and
presentation of the investments in subsidiary companies.
The verification of the investments in subsidiary companies
will include the following work:
1 audit schedule,
2 verification of existence and ownership of investments
in subsidiaries,
3 verification of current and loan accounts with
subsidiaries,
4 verification of value.
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 Audit on Holding Company and its
Group of Companies
The auditors duties are somewhat onerous. He is required to express an opinion
on the truth and fairness and compliance with the CA 1965 of the consolidated
FS.

This involves two stages:

1 forming an opinion on the truth, fairness, and compliance with statute of FS of
each material company in the group.
2 forming an opinion on the truth, fairness, and compliance with statute of the
consolidated FS as a whole which are, of course, prepared from the FS of the
individual companies.

The work required in considering consolidated FS is as follows:

8 Current audit file data
9 Accounting policies
10 Consolidated adjustments
11 CA requirements
12 See all material subsidiaries have been audited
13 Investigate for ‘window dressing’
14 Consider foreign subsidiaries
15 Evaluate inherent risks.
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 Using Other Auditor’s Work
• The auditor (the principal auditor) of the Holding Company - HC has
to give an opinion on the Consolidated Financial Statements (CFS)
which may incorporate the FS of material subsidiaries audited by
other firms (the other auditors or secondary auditors).

• The Directors of the HC have a duty to produce CFS which show a

true and fair view and comply with statute. The principal auditor has
a duty to express an opinion on the CFS as a whole even though he
has not carried out an audit on some of the figures that are included
in them.

• The principal auditor, then, is responsible for FS which he did not

audit. He must make sufficient enquiries to satisfy himself that all
the figures are reliable.

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Using Other Auditor’s Work continued
The work that the principal auditor must do to
satisfy himself of the reliability of the FS audited
by a secondary auditor is:
1 accounting policies
2 availability of information
3 scope of the work of the other auditors
4 materiality

In all material cases it will be necessary for the

primary auditor to consult with the other auditors.
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 Other Information in the Audited
Financial Statements ???
• The Chairman’s Report
• The Directors’ Report
• Group Financial Statements
• Cash Flow Statements
• Notes to the FS
• Comparative Figures
• Statistical Summaries
• List of Subsidiaries and Associated Companies
• Accounting Policies
• Any other information or statements in the Annual Report

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 References
• Lecture Notes
• Tutorial Questions
• Past Exam Questions
• Margaret Boh Text:
• Chapter 2 – Exhibit 2-1, Standard Auditor’s Report, page 54
• Chapter 18 – Exhibit 18-1, Standard Unqualified Auditor’s report,
page 527, Exhibit 18-2, 18-3,
• Emphasis of Matter: Exhibit 18-4, 18-5,
• Qualified Audit Reports: Exhibit 18-6, 18-7, 18-8, 18-9, 18-10
• Overview of Audit Reporting, Chapter 18 – Figure18-1, page 534

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