HGD344 Degree - KP3A4

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KP3A14 - KIAR Diploma

Reasons for the growing demand on auditing

Why demand for auditing keeps rising:

1. Agency problems & information asymmetry

Separation of ownership–control (shareholders vs. management) → need independent assurance to trust reported results.

2. Regulatory and listing requirements

Laws, stock exchanges, lenders, and donors often mandate audits (e.g., for PLCs, financial institutions, charities, grant recipients).

3. Complexity of business & reporting

Group structures, fair values, financial instruments, revenue recognition, estimates (ECL, impairments) → users want expert validation.

4. Globalisation & cross-border capital

Foreign investors and M&A/IPO activity rely on credible, comparable audited information.

5. Fraud/high-profile failures

Scandals heighten stakeholder skepticism, driving demand for stronger audit and forensic work.

6. Technology & cyber risk

Heavy IT reliance, cloud/outsourcing, data integrity, cybersecurity incidents → assurance over IT controls and systems.

7. Internal control & governance expectations

Boards/Audit Committees want assurance on controls, risk management, compliance (e.g., SOX-style controls, internal audit coordination).

8. Access to finance & lower cost of capital

Audited statements improve credibility → better loan terms, investor confidence.

9. ESG/sustainability & non-financial reporting

Climate, sustainability, and other KPIs now influence value → demand for assurance beyond financials (limited/reasonable).

10. Public sector accountability & NGOs

Taxpayer and donor scrutiny → audits of use of funds, performance, compliance.

11. Digital assets & new business models

Fintech, e-commerce, crypto custody/payment flows → assurance on controls (SOC/ISAE 3402) and reporting.

12. Third-party reliance & supply chains

Customers and partners require independent reports on vendors’ controls (privacy, security, continuity).

In short

1. Each driver increases risk, complexity, or reliance on reported information. 
2. Therefore, raising the need for independent, evidence-based assurance to enhance trust and decision usefulness.

Step-by-step for a special notice to remove an auditor

the step-by-step for a special notice to remove an auditor under the Malaysian Companies Act 2016:

1. Member(s) serve special notice on the company

A resolution to remove an auditor requires special notice. Serve it at least 28 days before the meeting where it will be moved. SSM+1

2. Company must immediately notify the auditor and SSM

On receiving the special notice, the company must immediately send a copy to (i) the auditor proposed to be removed and (ii) the Registrar (SSM). (SSM provides a standard notification form.) SSM+2SSM+2

3. Issue notice of general meeting to all entitled persons

Give written notice of the meeting to every member, director and auditor; if it’s not practicable to circulate the special-notice resolution with the meeting notice, advertise it at least 14 days before the meeting as prescribed. SSM

4. Auditor’s representation rights

Within 7 days from receiving the special notice, the auditor may send a written representation and request circulation to members; if not circulated, the auditor can require it to be read at the meeting (unless a court disallows it for abuse/defamation). SSM

5. Members vote on the resolution

Removal is by ordinary resolution at a general meeting (you cannot remove an auditor by written resolution). SSM+1

6. Post-meeting filing

If passed, the company must notify the Registrar within 14 days that the auditor has been removed. SSM

Key sections to cite in exams

1. s.276 (removal by ordinary resolution), 
2. s.277 (special notice + auditor’s rights), 
3. s.278 (notify Registrar), 
4. s.321 (persons entitled to meeting notice), 
5. s.322 (28-day special notice mechanics). SSM

Motives of agents that causing information imbalance (agency problems)

 Motives of agents → information imbalance (agency problems)

• Bonus/stock-price incentives → earnings management, smoothing, selective disclosure.
• Job security/career concerns → hide losses, delay bad news, bias estimates (provisions, impairments).
• Perks & private benefits → perquisite consumption, related-party deals, tunnelling.
• Empire building → value-destroying acquisitions, overinvestment; optimistic projections.
• Short-termism → cut R&D/maintenance to “make the numbers”; misstate cut-off.
• Risk shifting (limited downside, upside to management) → off-balance-sheet exposure, inadequate risk disclosure.
• Debt/contract constraints → manipulate ratios to avoid covenant breach.
• Information monopoly → complex reporting, opacity, cherry-picked KPIs.

How the auditor restores trust between principal & agent

Core role: provide independent, reasonable assurance that the financial statements are free of material misstatement (fraud or error), reducing information asymmetry.

Mechanisms

• Independence & ethics: follow professional code (independence in mind/appearance), rotation, safeguards.
• Risk-based audit: assess business, control environment, fraud risks (ISA 240), design focused procedures.
• Evidence gathering: tests of controls & substantive tests; external confirmations, recalculation, inspection, analytical procedures, cut-off/valuation tests.
• Judgement challenge: scrutinise management estimates (impairment, fair value, ECL), going concern (ISA 570), related-party transactions.
• Internal control insights: evaluate controls; communicate deficiencies to Those Charged with Governance (TCWG) via management letters.
• Transparent reporting: clear audit opinion (unmodified/modified), KAMs (ISA 701) explaining significant auditor judgements, EM/OM paragraphs where relevant.
• Quality management: firm-level ISQM/ISA compliance, engagement quality reviews.

Outputs that rebuild confidence

• Credible audit report → increases reliability of numbers used by shareholders, lenders, regulators.
• Governance dialogue with the board/Audit Committee → disciplines management behaviour.
• Deterrence effect → higher chance of detection reduces opportunism.

Quick map (memorize)

• Motive: bonus/price pressure → Risk: earnings management → Audit: analytics, cut-off, journal-entry testing, estimate challenge, KAM.
• Motive: related-party benefits → Risk: undisclosed RPTs → Audit: inquiries, minutes review, confirmations, disclosure checks.
• Motive: covenant pressure → Risk: classification/liquidity misstatements → Audit: debt confirmations, subsequent-events review, reclassification testing.
• Motive: going-concern avoidance → Risk: conceal distress → Audit: cash-flow forecasts scrutiny, sensitivities, GC conclusion & emphasis/modified opinion.

Limitations (state in exams)

• Reasonable, not absolute assurance; materiality; collusion/override may evade detection; time/cost constraints.

One-liner conclusion

Agents may bias or conceal information to serve self-interest; an independent auditor, via a risk-based, evidence-driven audit and transparent reporting to shareholders and TCWG, reduces information asymmetry and rebuilds trust.

Sec 261: Auditor’s Statement

(1) What is an Auditor’s Statement?

Under Companies Act 2016 s.261, if a company is not required to lodge its financial statements with the Registrar, it must instead lodge an auditor’s statement signed by the company’s auditor. The statement must say:

(a) whether proper accounting records/books were kept;
(b) whether the financial statements were audited in accordance with the Act;
(c) whether the auditor’s report had any qualification/opinion under applicable auditing standards or any comment under s.266(3), with particulars; and
(d) whether, at balance-sheet date, the company appeared able to meet its liabilities as and when due. Breach attracts fines. SSM+1

(2) Who is an Approved Company Auditor?

An approved company auditor is a person approved under s.263 to act as auditor for the purposes of the Act (the term appears in the Act’s interpretation and throughout Part III). Approval is granted by the Minister charged with finance (delegated in practice to the Accountant General/MOF) if satisfied the applicant is of good character and competent, and upon payment of the prescribed fee. Approvals run for two years unless revoked or made subject to conditions; applicants must be chartered accountants (Accountants Act 1967). It is an offence to act as auditor or prepare reports required by the Act without such approval. SSM

Key cites to remember:

• s.261 Auditor’s statements (content + penalty). SSM+1
• s.263 Approval of company auditors (who approves, criteria, duration, delegation). SSM

Short notes for exam

Auditor’s Statement (CA 2016 s.261) — Short Notes

When required: Company not lodging full FS must lodge an auditor’s statement with Registrar.
Signed by: The company’s external auditor.

Must state (4 essentials):

1. Proper records kept;
2. FS audited in accordance with the Act;
3. Whether the auditor’s report had a qualification/other comments (give particulars);
4. Whether, at year-end, the company appeared able to meet liabilities when due.

Why it exists: Gives a minimum assurance signal to users/regulator when full audited FS aren’t lodged.
Exam cue words: “Records kept • Audited as required • Any qualification • Solvency indication”.

Common exam pitfalls (1-liners)
Don’t confuse auditor’s statement with the auditor’s report on FS.
“Approved company auditor” ≠ any MIA member; needs MOF approval/licence.

Auditor’s roles when auditing a company’s financial statements

Auditor’s roles when auditing a company’s financial statements:

1) Purpose & scope

• Provide independent, reasonable assurance that the financial statements are free from material misstatement (due to error or fraud) and prepared under the applicable framework (e.g., MFRS/MPERS) and law (e.g., Companies Act 2016).
• Act in the public interest with integrity, objectivity, and professional scepticism.

2) Planning the audit

• Engagement acceptance: confirm independence, ethics, and competence; agree terms in an engagement letter.
• Materiality: set overall and performance materiality to focus work.
• Understand the entity & environment: industry, strategy, processes, and internal control.
• Risk assessment: identify and assess risks of material misstatement, including fraud risks.

3) Responding to risks & obtaining evidence

• Design audit procedures proportional to risk (tests of controls and/or substantive procedures).
• Use analytical procedures, sampling, inspection/observation, recalculation/reperformance, and confirmations.
• Evaluate accounting policies, significant estimates (bias/management override), and fair values.
• Consider IT controls, related parties, revenue recognition, inventory, credit losses, etc., as relevant.
• For group audits, direct, perform, or evaluate component auditor work.
• Engage experts where needed (e.g., valuations, actuaries).

4) Specific evaluations

• Going concern: assess the company’s ability to continue for at least 12 months; evaluate management’s plans and disclosures.
• Subsequent events: perform procedures up to the auditor’s report date.
• Compliance & NOCLAR: consider non-compliance with laws/regulations and respond appropriately.
• Other information (e.g., annual report): read and consider consistency with the audited financials.

5) Communication

• With those charged with governance (TCWG): discuss scope, significant risks, planned approach, uncorrected misstatements, deficiencies in internal control, and qualitative aspects of accounting practices.
• With management: request written representations and discuss findings, adjustments, and control issues.

6) Forming the opinion & reporting

• Conclude whether the financial statements are presented fairly, in all material respects.

• Issue the auditor’s report:

  • Unmodified (clean) opinion if appropriate.
  • Modified opinions when needed: qualified, adverse, or disclaimer.
  • Include Key Audit Matters (KAMs) for listed entities.
  • Add Emphasis/Other Matter paragraphs where relevant.

• Address any statutory or regulatory reporting responsibilities (e.g., on records kept, dividends legality, etc., where required).

7) Quality, ethics, and documentation

• Maintain independence and comply with ethical requirements (MIA By-Laws).
• Apply quality management at firm (ISQM 1/2) and engagement level (ISA 220).
• Document procedures, evidence, and conclusions sufficiently for an experienced auditor to understand what was done and why.

8) What auditors do not do

• They do not prepare the financial statements—management does.
• They do not provide absolute assurance or guarantee future viability/performance.
• They are not responsible for preventing fraud, but must design procedures to detect material misstatements, including those from fraud.

Short notes for exam

Key exam bullets

• Reasonable assurance ≠ absolute assurance: high but not guaranteed; inherent limitations (sampling, judgment, time/cost, fraud concealment).
• Material misstatement: misstatements that could influence users’ economic decisions; consider size + nature + circumstances.
• Fraud vs error: intent distinguishes fraud; auditor designs procedures to address fraud risk (management override, revenue recognition).
• Applicable framework: criteria against which the FS are evaluated (MFRS/MPERS + Companies Act 2016).
• Auditor’s opinion: unmodified, qualified, adverse, or disclaimer—based on evidence sufficiency/appropriateness and effects of misstatements.
• Public interest / shareholders: audit improves credibility, reduces information asymmetry, and supports governance & stewardship.

Mini-mnemonic (write at the top of your answer)
R-M-O-F → Reasonable assurance • Material misstatement (fraud/error) • Opinion • Framework

3-sentence model answer

“The main objective of a financial statement audit is to obtain reasonable assurance that the financial statements as a whole are free from material misstatement, whether due to fraud or error. On this basis, the auditor expresses an opinion on whether the statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. By enhancing the credibility of the financial information, the audit safeguards shareholders’ interests and supports sound decision-making.”

Standard issued by MIA that helps members executing their duties and responsibilities

Malaysia Approved Standard of Auditing (MASA) 

• To regulate the accounting profession in Malaysia 
• To review accounting and related Practices for Malaysian Accountant 
• To issue guidelines for accountants
• To conduct research on the accounting professions

Additional notes
The main Malaysian authorities that govern (or directly shape) the accountancy profession, plus why each exists:

• Malaysian Institute of Accountants (MIA) — the statutory regulator created by the Accountants Act 1967 to register and regulate accountants, set by-laws/ethics, and develop the profession (e.g., education/CPD). MIA+1

• Malaysian Accounting Standards Board (MASB) — the sole national standard-setter established by the Financial Reporting Act 1997 to issue Malaysian Financial Reporting Standards (MFRS) and promote high-quality, internationally aligned standards. masb.org.my+2masb.org.my+2

• Securities Commission Malaysia (SC) – Audit Oversight Board (AOB) — the AOB, created under the Securities Commission Malaysia Act 1993, oversees and inspects auditors of public-interest entities to enhance audit quality and confidence in audited financial statements. Securities Commission Malaysia+2Securities Commission Malaysia+2

• Ministry of Finance (MOF) / Accountant General’s Department — issues/approves audit licences for “approved company auditors” under Companies Act 2016 s.263 (delegated by MOF to the Accountant General), ensuring only qualified practitioners may audit companies. MIA+1

• Companies Commission of Malaysia (SSM) — administers and enforces the Companies Act 2016, including provisions on the appointment, duties and reporting of auditors for companies registered in Malaysia. SSM+1

In short: MIA regulates members and ethics; MASB sets accounting standards (MFRS); SC/AOB polices audit quality for listed/PIE audits; MOF/AGD licenses company auditors; and SSM enforces company-law requirements around audits and financial reporting. SSM+4MIA+4masb.org.my+4

The authority that govern the accountancy profession in Malaysia

The main Malaysian authorities that govern (or directly shape) the accountancy profession, plus why each exists:

• Malaysian Institute of Accountants (MIA) — the statutory regulator created by the Accountants Act 1967 to register and regulate accountants, set by-laws/ethics, and develop the profession (e.g., education/CPD). MIA+1

• Malaysian Accounting Standards Board (MASB) — the sole national standard-setter established by the Financial Reporting Act 1997 to issue Malaysian Financial Reporting Standards (MFRS) and promote high-quality, internationally aligned standards. masb.org.my+2masb.org.my+2

• Securities Commission Malaysia (SC) – Audit Oversight Board (AOB) — the AOB, created under the Securities Commission Malaysia Act 1993, oversees and inspects auditors of public-interest entities to enhance audit quality and confidence in audited financial statements. Securities Commission Malaysia+2Securities Commission Malaysia+2

• Ministry of Finance (MOF) / Accountant General’s Department — issues/approves audit licences for “approved company auditors” under Companies Act 2016 s.263 (delegated by MOF to the Accountant General), ensuring only qualified practitioners may audit companies. MIA+1

• Companies Commission of Malaysia (SSM) — administers and enforces the Companies Act 2016, including provisions on the appointment, duties and reporting of auditors for companies registered in Malaysia. SSM+1

In short: MIA regulates members and ethics; MASB sets accounting standards (MFRS); SC/AOB polices audit quality for listed/PIE audits; MOF/AGD licenses company auditors; and SSM enforces company-law requirements around audits and financial reporting. SSM+4MIA+4masb.org.my+4

Short notes 

1. CA 2016
2. MFRS
3. BANK NEGARA GUIDELINES
4. FSA 2013

FSA 2013 (Financial Services Act 2013, Malaysia) is the country’s main law for regulating and supervising conventional (non-Islamic) financial institutions, payment systems and related activities, empowering Bank Negara Malaysia (BNM) to promote financial stability. It commenced 30 June 2013 (with some later-commencing provisions). Bank Negara Malaysia+1

What it does (in a nutshell):

• Creates BNM’s modern mandate & powers (clear regulatory objectives; supervision, standards, directions, enforcement). Bank Negara Malaysia
• Licensing & ongoing regulation of banks/insurers/operators of payment systems & instruments; oversight of money and FX markets; regulation of financial holding companies. Bank Negara Malaysia+1
• Prudential & conduct rules (capital/liquidity, risk management, governance, disclosures, consumer protection). Rahmat Lim & Partners
• Payments & e-money oversight to keep systems safe and efficient. Bank Negara Malaysia
• Strong intervention/enforcement tools (administrative penalties, directives, licence actions). legalbusinessonline.com

What it replaced: a set of older laws, including BAFIA 1989, Insurance Act 1996, Payment Systems Act 2003, Exchange Control Act 1953, consolidating them into one “omnibus” statute. Malaysian Bar+1

Side-by-side law: Islamic institutions are governed by the IFSA 2013 (parallel framework for Shariah-compliant finance). Bank Negara Malaysia

Why it matters (example): BNM uses FSA powers to penalise banks for service disruptions and protect consumers/system reliability. Reuters

Done

Mesyuarat Akademik Sesi 20254

‘True and fair view’ in the scope of financial statement audit

“True and fair view” means the financial statements:

• are prepared in accordance with the applicable accounting standards and laws,

• are free from material misstatement (no major errors or fraud that would mislead users),

• and faithfully present the company’s actual financial position and performance, not hiding or distorting important facts.

Qualities that a professional accountant should possess

i. Competence
Competence means the accountant has the necessary knowledge, skills, and experience to do the work properly, keeps those skills up to date, and performs the job carefully and professionally.

ii. Independent person
Independence means the accountant is objective and free from bias, influence, or personal interest; they give honest professional judgement without being pressured by clients, employers, or friends.

Benefits of auditing to the employees of an audited company

Benefits of auditing to employees

1. Job security / business survival

   • If the audit helps detect fraud, wastage, or financial weakness early, the company can fix problems before it collapses.

   • A healthier company means lower risk of layoffs, unpaid salaries, or company shutdown.

   • In other words: audit protects the company, and protecting the company protects your job.

2. Trust in management

   • Employees often worry: “Are the bosses honest? Are they hiding losses?”

   • An independent auditor reviews the financial statements and challenges management if something looks wrong.

   • That reduces manipulation and gives employees more confidence that the company is being run properly, not secretly going bankrupt.

3. Basis for fair bonuses, commissions, and performance pay

   • Many companies pay staff based on profit, revenue, cost savings, KPIs, etc.

   • If those numbers are audited, employees can argue for fair bonus/commission using verified figures — not numbers that management can simply “adjust down.”

   • So audit protects employees from unfair under-reporting of results.

4. Stronger internal controls = safer working environment

   • Auditors review systems like payroll control, purchasing approval, asset safeguarding.

   • When internal control is strong:

     • Less chance of salary being misposted,

     • Less chance someone steals company assets and then tries to blame an innocent staff,

     • Clearer procedures (who approves what).

   • This protects honest employees and reduces the fear of being accused.

5. Better reputation and stability of the company

   • Working in an audited company (especially one with clean audit opinions) looks more professional and credible to outsiders like banks, investors, government.

   • A stable, reputable employer is good for employees’ CV/resume and career progression.

   • “I worked at a company with audited financial statements” signals proper governance.

6. Improved chances of salary being paid on time

   • Audited accounts make it easier for the company to get financing (banks normally ask for audited financial statements before giving loans).

   • Easier financing = better cash flow = less risk of late payroll.

7. Clarity of responsibilities

   • During audit, processes are documented: who does what, who approves what.

   • This reduces unrealistic expectations like “You should have done this, why didn’t you?” when actually that task is not in your role.

   • Clear roles protect employees from being scapegoated.

8. Ethical culture and protection for whistleblowers

   • When staff know the company is audited every year, it’s harder for “office politics corruption” to survive quietly.

   • Employees who want to work honestly feel safer, because:

     • People who cheat procurement / claim false OT / manipulate claims are more likely to get caught.

     • It’s harder for toxic seniors to abuse systems for personal gain.

9. Training and improvement

   • External auditors often highlight weaknesses and recommend better procedures.

   • Staff involved in finance, procurement, inventory, etc. get to learn “best practice” and improve professionally.

   • This upskills employees — valuable for career development.

10. Less personal legal risk for employees handling finance

• In many companies, accounts clerks / finance execs are the ones preparing reports but not the final decision makers.

• Audit ensures that the financial statements are not just “your fault” if something is misstated.

• You can show: “This was reviewed, we followed documented procedures.”

• That helps protect lower-level staff from being blamed alone for management decisions.

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Short summary

Audit doesn’t only help shareholders. It also protects employees’ jobs, salaries, bonuses, professional reputation, and even their personal integrity by creating a transparent, well-controlled environment where cheating and mismanagement are harder to hide.

Exam style (bullet points):

Benefits of auditing to employees:

1. Audit helps keep the company financially healthy → better job security.
2. Audited figures are reliable → fair bonus/commission based on true results.
3. Easier for company to get financing → salaries more likely paid on time.
4. Clear controls and documentation → staff protected from being unfairly blamed.
5. Company image improves → good for employees’ CV and career.