CONTENT

NO.

PARTICULARS

PAGE

1.

Content

2.

Preparation before audit

2-3

3.

Planning

4-7

4.

Field audit

8-13

5.

Review

14-15

Preparation before Audit

YazitoBerhad is a public listed company, whose sales, for the year 2012 was over RM50
million. YazitoBerhad has been our client for the past 5 years. Auditing is the process of
examination and evaluation of financial statements of an organization by an independent
certified public accountant to enhance the credibility of the financial statement. Before the
auditor carry out the audit, auditor must perform preliminary engagement activity which is the
first phase of audit process.
Preliminary engagement activity helps the auditor to consider events or circumstances
that may affect the quality of auditing. Under Company Law, auditor should make sure that the
accounting firm and member of audit team is independent and no conflict among the
management to the audit client. Since the YazitoBerhad has been our firms client for the past 5
years, the auditor should document the performance of client acceptance and continue process in
a memo. Although YazitoBerhad is our old client, but we still need to evaluate the client

relationship annually to determine whether to continue with the audit engagement. This is
necessary to ensure acceptable audit risk is low and let the auditor have more knowledge about
the company operation and management integrity.
Before start to carry out the audit, the auditor and the audit client should both agree with
the terms of engagement, which including type, scope and timing of engagement. These terms of
engagement is document in engagement letter and sent to audit client to confirm the terms of
engagement. Engagement letter serve as contract, outlining the responsibilities of both parties
and preventing misunderstanding between both parties.
After understand the nature of the company, we are able to use profit and loss account to
establish materiality. Materiality is relative to size and particular circumstances of company,
therefore, materiality can be established by comparing the YazitoBerhad with the same industry.
This is to help audit to assess risk. Besides, A percentage is often applied to chosen benchmark as
a first point in determining materiality for the whole financial statement. For example, if
compare the percentage of profit before tax from continuing operations, circumstances that
giveto an expectedincrease/ decrease in profit the auditor can conclude that the financial
statement is free from material misstatement. The auditor should make sure that the financial
statement is complying with the applicable financial framework and free from error, including
clerical and arithmetical errors.
Before carry out the audit for YazitoBerhad we should set the budget, so that the auditing
fees is always sufficient to cover the cost incurred especially the disbursement and not over the
budget. The audit fees are based on the expectation that audited bodies are able to provide the
auditor with complete and materially accurate financial statement, with supporting working
papers, within agreed time frame.
Lastly, an auditor should also consider the deadline of Audit Report for YazitoBerhad.
Usually the timeframe provide to audit financial statement is short. Setting deadline is important
to ensures the auditor to plan the audit procedure that will be carrying out and complete it in
time.

The audit should be carrying out in the client company, so that is easy for audit team to find the
evidence and information that needed. The client also has to provide the information that auditor
needed, this is the responsibility for the client that agreed in engagement letter.

Planning
Before we enter into the audit process, the audit planning is foundations which serve as
guidelines for auditing process. In order to do the planning, we need to determine the objective
and goal which have to achieve in order to implement the strategies with the needs. The planning
stage of the audit is important because it will gain an understanding of the client, identifying risk
factors, developing an audit strategy, and assessing materiality. First, we will visit and meet the
client; afterwards it is the time to know the clients business and the controls of the company.
The International Standards on Auditing (ISA) 300 which is issued by the International
Federation of Accountants (IFAC) has required the auditors to plan their audit on the financial
statement to reduce the audit risk. Audit risk is happened when the auditors have issued a clean
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audit report but in fact there is a materially misstatement. The objectives to have an audit
planning is to obtain sufficient appropriate evidence of financial statement, keep audit costs at a
logical level and prevent misunderstandings with the client. In addition, the planning stage
involves determining the audit strategy as well as identifying the nature and the timing of the
procedures to be performed. The planning stage prepared will significantly improved the
efficiency and effectiveness when conducting an audit. Lastly, the proper planning can assist the
ways in supervising the engagement team members and review their works.

Risk Assessment
An entitys risk assessment process is its process of identifying, evaluating and
responding to the identified business risks. It includes the process that how the management
indentifies the risk relevant to the preparation of financial statements, estimates their
significance, assesses the likelihood of their occurrence and decides upon actions to manage
them. At this stage, the audit senior should know the performance of the client company as well.
When first meeting with the client, the auditors should get the information about the company
performance for the year. Then, we need to discuss about the profitability whether increase or
decrease, do company has any new products launched, any important staff that left the company
during the year and others. This all information is documented in the Business Understanding
Document and the auditor can identify it to know more about the company.
First, the auditors need to understand the nature of the client business that will affecting
the business risk and create the misstatement in the financial statement. Auditors can determine
the appropriate amount of audit evidence with their knowledge of these risks. When auditors are
failure to understand clearly about the nature transaction of the client business, they may expose
and face many problems in their auditing process. Furthermore, the client companys external
environment should also considered by the auditors, such as economic conditions, impact of
competition, reporting obligations, legal and regulatory requirements through the industry trade
publications and regulatory requirements.
The second step of carrying the risk assessment is to identify the threats that associated
with the business. In order to identify the threats faced by the business activities, auditors should
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make inquiries of management, review the prior year working papers, and inspect legal
documents, minutes of meetings and also the significant contracts of business. During the
process of identify and evaluate the risks related to the company, the auditors can identify the
treats that facing by the company and having the control in order to avoid and reduce the threat.
As we know that, the benefit of carry out the risk assessment is that the auditors can easily spot
the problems and directly come out the solution to avoid it. The areas of checking by the auditors
are minimized and the process will become more efficient.
In addition, the auditors may gain some knowledge of business strategy in order to
determining the client business risk. It is important for the auditors to understand the risk because
it is an obstacle for carrying their audit duty and achieve the audit goals. So, the auditors should
give aware and more effort on the misstatement of the financial statement which will lead client
business risk. Lastly, all the risk assessment which done by the auditors should be documented in
the working paper to shows as the evidence of audit duty is carried on.

Test of control
Test of control is an audit procedure designed to evaluate the operating effectiveness of
control in preventing material misstatement. The auditors should perform the test of control
procedure to gather sufficient appropriate evidence when there is the material misstatement of
the auditors risk assessment in the assertion level or the substantive procedure cannot provide
sufficient audit evidence in the assertion level. In the normal situation, the test of controls of
company will be carried out by the audit assistant to ensure that the internal control of the
company is effectively. Test of control will be performed on business processes such as revenue
cycle, expenditure cycle, purchasing cycle, sales cycle, inventory management and personal
protective equipment (PPE) management.
Each process flow will go through by the auditors by interview with personnel involved
in order to ensure they are following and practicing the correct controls. Documents such as
payment vouchers, purchase orders, good received notes, delivery orders, and sales invoices,
which is involved in each process will be vouched to ascertain there are evidences of controls.
The test of control normally done on the sample basis and it will be documented in the Process
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Analysis Document. Furthermore, if any suggestions come out by related parties, it can be
communicated to the client in order to improve the effectiveness of internal control processes of
clients company.
When the internal controls of the company are highly effective, there are less extensive
substantive procedures will need to be performed. The auditor uses this understanding of internal
control to determine the types of potential misstatements, consider factors that affect the risk of
material misstatement, and design the nature, timing and extent of further audit procedures. For
all internal controls used to reduce the initial assessment of control risk to lower level,
appropriate tests of controls are developed by the auditors. In such situations the auditor will
make an assumption about the results of tests of controls.
If the testing of controls indicates that internal control is worse than expected, substantive
testing of transactions will have to be modified accordingly. Substantive testing often requires a
large deal of recalculating, confirming, and vouching.

For an example, when an auditor

substantively tests an inventory balance, the auditor will go to the on-site location of the
inventory, run reports that list the amount of inventory stored on the premises, and physically
count each inventory item on a sample basis.
Once the planning process is completed, the file will be submitted to the audit manager
for review. The audit manager will review the file and raise any queries if there is necessary. If
the queries are raised, the senior auditor will obtain the answer to the queries by contacting the
client and updating any information which was left out. Once the manager is approved the
planning, then the audit team will get ready and prepared to proceed and carry out the field audit.

Field Audit
Field audit is normally the longest period in an audit process. At the stage of audit
fieldwork, auditors gather and analyze evidences obtaining from entity management. They use
the evaluation of those evidences to measure the reliability of financial statement as to whether it
gives a true and fair view. Substantive procedure is performed during this process and before
procedure; auditors should understand the substantive strategy first.
When using substantive strategy, auditor first has to obtains an understanding of internal
control so that sufficient to plan a substantive audit approach where is required by auditing
standards to have an understanding of internal control. A substantive audit approach means that
the auditor has decided not to rely on the entitys internal controls and to directly audit the
related financial items. The auditor may decide to follow a substantive strategy and set control
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risk at the maximum for some of the assertions of some of the factors such as the controls do not
pertain to an assertion, the controls are assessed as ineffective or testing the effectiveness of
controls is inefficient. The auditor next documents the understanding of internal control, sets
control risk at maximum and documents the control risk assessment. Then, substantive
procedures are designed and performed based on the assessment of a maximum level of control
risk.
Substantive procedures are based on the assessed risk of material misstatement; the
auditor performs substantive procedures to detect material misstatement at the assertion level.
Substantive procedures include tests of details of transactions, account balances and disclosures
and substantive analytical procedures.
First category of substantive procedures is tests of details of transactions account
balances and disclosures. This is for testing whether contains errors or fraud in individual
transactions. This test is focus on the items that are contained in the account balances and
disclosures in the financial statement to establish whether any material misstatements are
included. This test is for auditor to congregate evidence as to the validity, accuracy and
completeness of account balances and primary classes of transactions.
Audit work will be delegated to staff to complete the work within the duration. The work
should be delegated to staff appropriately based on auditors experience and skill because it
needs to ensure that auditor can afford the work in this stage.
Task of Audit Assistants
The task given to audit assistants is checking the cash and banks reconciliation. An audit
assistant must review a companys bank accounts so that the financial statement items amount is
agree with the balances against ledger amount. Audit assistant will receives a companys back
statements at end of the month, then audit assistants must confirms every bank item with the
accounting entry in ledger and search the items that do not match with the statement. Audit
assistants need to sight the fixed assets such as audit the property, plant and equipment. Audit
assistants need to record the sales and purchases of fixed asset and make a proper journal entry.
Generally accepted accounting principle (GAAP) and international reporting standards (FRS)

require the audit assistants to debit an asset and credit the liability and equity on the date of the
asset is purchased.
Other task of audit assistants also comprise of other payables (search for unrecorded
liabilities) and other receivables (to vouch material invoices for deposits and prepayment). Audit
assistant also provide financial, administrative and clerical services. Audit assistants should
balance the account payable daily to reconcile payments to recorded entries. Audit assistants are
responsible for collecting the outstanding amounts owed by customers and they need to be able
to indentify customers who have financial issues.
Task of Audit Senior
At this stage, audit senior will perform the more important areas which comprise of
inventory section (valuation stock), trader receivables (debtors circularization, analyzing the
aging), trade payables (aging and sending confirmation to creditors to confirm balances) and tax.
The audit senior will apply substantive procedure to test the related accounts in order to detect
material misstatements.
In auditing the inventory section, an audit senior is required to attend the Yazito Berhads
physical inventory counting. Purpose of inventory attendance is crucial to enable an audit senior
to obtain the audit evidence. Inventory status will be print out. The quality of the inventory has
been observed. Obsolesce stocks will be recorded. During stock observation, the auditor will
inspect the condition of the stock. An auditor should make sure that the count teams compliance
with the managements counting procedures. An audit senior should inquire management
concerning excess or slow-moving inventory. Moreover, audit senior also need to trace test
counts and tag control information to the inventory compilation. Audit senior should obtain a
copy of inventory compilation from Yazito Berhad that shows the quantities and price of the
inventory. A sample of transaction is re-computed to ensure there are free from mathematical
error. An audit senior also needs to review inventory compilation for proper classification among
raw material, work in progress and finish goods.
The senior auditor can apply substantive procedures to the Yazito Berhad to detect
material misstatements in trade receivable. Senior auditor should concerning the completeness
whether all of the account receivables are included in the trade debtors subsidiary ledger and
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general ledger of the account receivable account. An audit senior should obtain a copy of aged
trial balance of debtors account receivable from Yazito Berhad and comparing the total balance
with the general ledger account receivable account balance. An aged trial balance is used in order
to facilitate the auditor to examine the allowance for doubtful debts. An audit senior has the
duties to make sure that the details making up the aging trial balance is accurate and free of
misstatement. The accuracy of the aging trial balance can be achieved through two methods. The
first approach is footing and cross-footing which means each column of the trial balance is added
and the column totals are added to guarantee that they are support and agree with the total
balance for the account. Then, a sample of customers accounts that included in the aging-trial
balance are chosen for verification. After that, for each chosen customers account, the auditor
traces the customers balance back to the subsidiary ledger details and verifies the total amount
and total amount included in each column for proper aging. The second approach is adopting the
computer assisted audit techniques. The auditor can use generalized audit software to examine
the accuracy of the aging trial balance. An audit senior also need determine whether any
receivables have been pledged or discounted. Lastly, the audit senior will judge and evaluate the
results of the confirmation of selected account receivables with Yazito Berhad.
For auditing in the trade payable, an audit senior will obtain a listing of account payable
from Yazito Berhad. The amount of the accounts payable subsidiary ledger should agree with the
general ledger control account. The items that include in the listing of account payable are
unpaid individual vouchers or the balance in the supplier subsidiary accounts. Audit senior will
only focuses on existence of approve invoices and other supporting documents. Besides, an audit
senior will obtain the selected suppliers statements and reconcile to supplier accounts. He or she
will search unrecorded liabilities by questioning of management and investigate of the postbalance sheet transactions. Lastly, an audit senior will ensure that only approve invoices are
recorded properly and accurately.
Audit senior still supposed to prepare a basic tax computation and deferred tax
verification although the file has been sent to for tax vetting. Audit senior will observe specific
items which are tax return and business record in Yazito Berhad which comprise of the revenue,
expenses and deduction and loan and interest. For the income, audit senior reconcile the bank
statement with the deposit income that the company reported. For expenses and deduction, audit
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senior will check and compare the cancelled checks, bank statements and credit card statements.
For loan and interest, audit senior will check out the money borrowed by Yazito Berhad that is
only used to cover business expenses.

Tasks of Statutory Audit

Statutory audit will be conducted during the audit. Statutory audit can be defined as a
legally required review and evaluation of the accuracy of a companys or government financial
records. The purpose of a statutory audit is to determine and investigate whether a company
providing a fair and true representation of its financial position by checking the information such
as bank balances, bookkeeping records and financial transactions. After investigation, auditors
will suggest improvement on strategies.
Statutory audit is conducted in order to review the minutes book, register of shareholders,
directors, secretaries and annual return. The statutory books will be kept by the company
secretarial office instead of kept in the clients office.
Problems Encountered during Audit
Most of the auditors will face problems when carry out an audit. The problems usually
faced by most of the auditors are client unable to give the requested information. Some of the
clients will tend to give vague information. Some of the clients will respond according to their
own opinion or direct the auditors to others who also do not know much. Without a complete set
of information, audit process cannot be performed effectively. Audit evidences therefore cannot
be obtained and thus will delay the time consuming in searching the audit evidences.
Next problems faced are waiting times. Times are priceless. Most of the clients keep on
delaying documents that are requested by the auditors. This is because they are unable to search
the documents or the documents are missing. Audit process will definitely be affected.
During the audit, clients often give us their own reasoning for any queries requested by
the auditors. Client representation is not sufficient for an audit. Some of the clients
representations are vague, bias and not reliable. Thus, an auditor should rely on supporting
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document such as receipts, bank slips, invoice and others in examining the financial records of a
company.
When performing audit, some of the clients reluctant to co-operate. They are unwilling to
take their time in giving the supporting documents and explaining to the auditors as they always
give excuses such as too busy and their schedule is interrupted. Every member in the company
is required to respond to the auditors.

Ways to Cope the Problems Encountered during Audit

In order to recover the problems encountered during audit, training program that stress on
the communication skills is given to the auditors. Auditor should posses an effective
communication with the clients. Auditors should request patiently and nicely when asking
questions or request supporting documents. Auditors can explain the advantages about
responding to the auditors.
Apart from this, auditors are advised not to waste too much time in waiting the
supporting documents or waiting the clients to respond to us. Thus an outstanding matters list
will be prepared by senior audit which stating clearly all the information or documents pending
from the client. This list will be filed in audit filed and a copy will be sent to the clients.
At the end of the audit filed, draft accounts will be prepared by auditors and sent to the
typing room for alterations and amendments. After that, all the working paper will be combined
and be tidied up and will be sent to the audit manager.

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Review
After all the audit process above had complete and perform, the audit file will then
combine all together and ready to submit to the audit manager of the firm, Grace. If the audit
manager detect there is doubts or error in the file, the audit manager may raise question to the
audit senior. This audit review process is to controlling the quality of audit work and reduces the
risk that make in audit process. It is an essential element of accounting firms quality control
programs and is mandated by authoritative standards. Quality Control for an Audit of Financial
Statements and serves to ensure that sufficient appropriate audit evidence has been obtained in
respect of transactions and balances included in the financial statements.
A review consists of examining supporting documentation and understanding the internal
control structure of an organization. During a review there is no confirmation of balances. A
review is performed through inquiry and analytical procedures that provide the accountant with a
reasonable basis for expressing limited assurance that there are no material modifications that

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should be made to the statements in order for them to be in conformity with Generally Accepted
Accounting Principles (GAAP).
The audit manager informs the audit senior who prepared the work any significant
changes to be made, and ensures they understand the corrections needed and reasons for the
corrections. Issues should be discussed with senior team members as appropriate as soon as they
are identified. This allows issues to be appropriately addressed and documented at an early stage
of the process. Audit manager should provide notes to auditors to identify questions, desired
follow-up actions, and documentation concerns. The audit manager is responsible for
subsequently following up to determine that open review notes have been satisfactorily
addressed.
The preparer is responsible for promptly and thoroughly responding to these review notes:

performing additional procedures where needed and updating the documentation as

appropriate;

Communicating audit findings, including adjustments identified and potential

modifications to the audit plan, to more senior members of the engagement team; and

Notifying the reviewer when the review notes have been addressed.

Audit working papers should stand alone as a record of work done in an audit. Matters that have
been raised during review and coaching should be addressed and documented in the working
papers. Audit manager will sign on the audit report only when he or she is satisfied that the
review comments raised have been appropriately addressed by the audit senior and the team.
Then finally the audit report is ready to deliver to the audit client.

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