During audit planning, the auditor examines documents that establish who owns and controls the company, what decisions it has authorised, and what rights and obligations it has. These documents help the auditor identify transactions, balances and disclosures that may need closer examination.
Three common sources are the company’s incorporation and constitutional documents, minutes of meetings, and significant contracts. Using Jengka Furniture Sdn. Bhd. as an example:
| Legal document or source | What the auditor looks for | Practical example |
|---|---|---|
| 1. Incorporation records and company constitution, if adopted | The company’s registered identity and any provisions affecting share rights or decision-making. | The company has issued two classes of shares. The auditor reads the terms attached to each class and checks whether the share capital note describes those rights correctly. |
| 2. Statutory registers and company secretarial records | Changes in directors, shareholders and shares issued during the year. | The register of members shows that the company issued new shares in June. The auditor agrees the issue to the relevant resolution, checks the proceeds against bank records and traces the amount to share capital. |
| 3. Minutes of directors’ and shareholders’ meetings | Decisions about borrowings, asset purchases, dividends, guarantees and legal disputes. | The board approved the purchase of a delivery lorry in December. To determine whether the lorry belongs in the year-end accounts, the auditor checks the purchase agreement, invoice and delivery date. The minutes provide evidence of approval. |
| 4. Significant contracts and agreements | Terms that affect when to record revenue, assets, liabilities or expenses. Examples include sales, purchase, lease and loan agreements. | A sales contract states that control of furniture passes to the customer on delivery. The company invoiced the customer on 29 December and delivered the furniture on 3 January. The auditor uses both documents to test sales cut-off. |
| 5. Title deeds and security documents | The company’s rights over assets and whether it has pledged any assets as security. | The factory title identifies the company as the registered owner. A bank agreement also shows that the factory secures a loan. The auditor checks both the company’s rights to the property and the disclosure of the security. |
| 6. Legal correspondence and claims | Existing or potential disputes that may require a provision or disclosure in the financial statements. | A customer claims RM150,000 for defective furniture. The auditor examines the claim, considers the lawyer’s assessment and evaluates whether management’s accounting treatment is appropriate. The amount claimed may differ from the amount the company expects to pay. |
Classroom application
The board minutes dated 20 December state that Jengka Furniture approved a RM500,000 bank loan. The bank released the funds on 5 January. The company’s year-end is 31 December.
Is the board resolution alone sufficient evidence to record RM500,000 as a year-end borrowing? No. The resolution establishes that the board authorised the borrowing. The auditor should inspect the signed loan agreement, bank confirmation and evidence of drawdown to determine when the obligation arose. If the facility was undrawn at 31 December and the principal became payable only upon drawdown, the company would record the RM500,000 borrowing in January.
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