Friday, November 21, 2008

Sample letter of audit enggagement

Google
 
To The Board of Directors
Client’s Name & Address

Dear Sirs,

You have requested that we audited the financial statements of CLIENT’S NAME as at 31 December 2007 and related statements of income and cash flows for the year ending.

We are please to confirm our acceptance and our understanding of this engagement by means of this letter. Our audit will be made with the objective of our expressing an opinion on the financial statements.

We will conduct our audit in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on the test basis, evidence supporting the amounts and disclosure in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation.

Audit

1. As laid in the Companies Act, 1965, you as directors, are responsible for maintenance of the company’s accounting records and the preparation of annual accounts. You are also responsible for making available to us, as and when required, all the company’s accounting records and all other records and related information, including minutes of all management and shareholders’ meetings.

2. Our duty as auditors is to examine, and report to shareholders on the accounts produced by the directors and give our opinion thereof. In forming our opinion on the financial statements, we will perform sufficient tests to obtain reasonable assurance as to whether the information contained in the underlying accounting records and other source data is reliable and sufficient as the basis for the preparation of the financial statements. We will also decide whether the information is properly communicated in the financial statements.

3. The responsibility for prevention and detection of fraud and error rest with management through the implementation and continued operation of adequate system of internal control. Because of the test nature and other inherent limitations of an audit, together with the inherent limitations of any system of internal control, there is an unavoidable risk that even some material misstatement may remain undiscovered.

4. In addition to our report on financial statement we expect to provide you with a separate letter concerning any material weaknesses in internal control, which come to our notice.

5. We look forward to full co-operation with your staff and we trust that they will make available to us whatever records; documentation and other information are requested in connection with our audit.

Fee

Our fees are based upon the degree of responsibility and skill involved and time necessarily occupied on the work and will be subject to review each year. Our out -of - pocket expenses will be additional to our fees.

Acknowledgement

We shall be grateful if you will acknowledge receipt of this letter, the terms of which will continue to apply until a subsequent letter varies them. If the contents are not in accordance with your understanding of our appointment, we shall be pleased to receive your observations and give you any further information you require.

Please sign and return the attached copy of this letter to indicate that it is in accordance with your understanding of the arrangements for our audit of the financial statements.

Sample quotation letter for audit services

Google
 
Our ref.:

22 November, 2005

The Directors,
Sample Sdn Bhd,
Kuala Lumpur
MAlaysia


Dear Sir,

QUOTATION FOR AUDIT SERVICES

The above matter is referred. We would firstly express our gratitude for giving us opportunity to serve your company.

The philosophy of our firm is to provide the maximum in client service and individual staff capabilities at the minimum cost, which can be achieved within the highest professional standards and competence levels.

Our fees are based on the standard minimum audit fee prescribed by the Malaysian Institute of Accountant (Appendix) and the degree of responsibility, skill involved and the time required to complete the audit work. The proposed fees exclude out-of pocket expenses and 5% government service tax.

Our fees are arrived at based on the following assumptions:

•The accounts and relevant source documents are made available to us in accordance with the timetable to be mutually agreed.
•We will obtain the necessary cooperation and assistance from the relevant staff and subsidiaries.
•Books and records are properly kept and updated at all time.

Should we anticipate that additional work would be required in relation to the investigative audit, we will inform and agree with you accordingly prior to incurring any additional costs. Out-of-pocket expenses will be billed on an incurred basis. Our fees have excluded the cost associated with the above.

If you should require further information, please do not hesitate to contact us.

Thank You.

Yours faithfully,

Auditor’s Report

Google
 
•Unmodified or ‘clean’ report -True and fair view in accordance with the financial reporting framework and whether it complies with statutory requirement.

•Modified report
-Matters that do not affect the auditors’ opinion –Emphasis of matters
-Matters that do effect the auditor’s opinion:
-qualified opinion (“except for”)
-disclaimer of opinion
-adverse opinion

Summary of qualifications

Auditor’s Opinion
•Limitation of scope > qualified/disclaimer
e.g.
-Unable to observe physical count
-Unable to carry out audit procedures
-Inadequate records

•Disagreement with management> qualified/adverse
e.g.
-Inappropriate accounting method
-Inadequate disclosure

Auditor’s Opinion
•“Except for” if not so material and pervasive
•“Disclaimer” when limitation of scope is so material and pervasive
•“Adverse” when disagreement with management is so material and pervasive

Samples of auditor’s opinion

-Limitation of scope –qualified opinion
“We did not observe the counting of inventories as of 31 December 2007, since that date was prior to the time we were initially engaged as auditors for the Company. Owing to the nature of the Company records, we were unable to satisfy ourselves as to inventory quantities by other audit procedures.In our opinion, except for the effects of such adjustments, if any,….the financial statements are properly drawn up…..(remaining same as ‘clean’ report)”


Samples of auditor’s opinion
-Limitation of scope –Disclaimer of opinion
“ We were not able to confirm accounts receivable due to limitations placed on the scope of our work by the company. Because of the significance of the matters discussed in the preceding paragraph, we do not express an opinion on the financial statements”

Samples of auditor’s opinion

-Disagreement on accounting policies(Inapproriate Accounting Method) -Qualified Opinion

“As discussed in Note X to the financial statements, no depreciation has been provided in the financial statements which practice, in our opinion, is not in accordance with accounting standards……..In our opinion, except for the effect on the financial statements of the matters referred to in the preceding paragraph, the financial statement the financial statements are properly drawn up…..(remaining same as ‘clean’ report)”


Samples of auditor’s opinion
•Disagreeement on Accounting Policies (Inadequate Disclosure) –Qualified opinion

“……….In our opinion, except for the omission of the information included in the preceding paragraph, the financial statements are properly drawn up…..(remaining same as ‘clean’ report)”

Samples of auditor’s opinion
•Disagreement on Accounting Policies (Inadequate disclosure) –Adverse Opinion

“ ……..In our opinion, because of the effects of the matters discussed in the preceding paragraph, the financial statements do not give a true and fair view of the financial position of the Company as of 31 December, 2007, and of the result of operations and its cash flows for the year then ended.

Audit planning,procedures and evidence

Google
 
Audit engagements
•The engagement letter documents and confirms the auditor’s acceptance of the appointment, the objective and scope of the audit, the extent of the auditor’s responsibilities to the client and the form of any report.

Terms of audit engagements
•Principal contents
-Objective of the audit
-Management’s responsibility for the financial statements
-Scope of audit
-Form of report
-The fact that because of the test nature, and other inherent limitation of any accounting and internal control system, there is an unavoidable risk that even some material misstatement may remain undiscovered.
-Unrestricted access to whatever records

Audit Objective
•Is to enable the auditors to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.
Financial Reporting Framework
•The financial statements need to be prepared in accordance with one, or a combination of:

- International Accounting Standards;
-National Accounting Standards; and
-Another authoritative and comprehensive financial reporting framework which has been designed for use in financial reporting and is identified in the financial statements.

General Principles
•Code of Ethics –Independence, integrity, objectivity, professional competence and due care, confidentiality, professional behavior, technical standards
•An audit in accordance with ISAs
•Attitude of professional skepticism, recognising that circumstance may exist that cause the financial statements to be materially misstated.

Essential Audit Objectives
•Completeness-no unrecorded assets, liabilities, transactions or events, or undisclosed items.

•Occurence- a transaction or event took place which pertains to the entity during the period.

•Existence-an asset or liability exists at a given date

•Cut-off-recorded at the proper amount and proper period.

•Valuation-recorded at an appropriate carrying value

•Right and obligations-represents asset or liability to the entity

•Presentation and disclosure-disclosed, classified and described in accordance with applicable financial reporting framework.

Audit Procedures

-Test of control
-Substantive test
-Test of details of transactions and balance; and
-analytical procedures
- Method:
-Inspection-e.g vouching
-Observation-e.g stock take
-Inquiry and confirmation
-Computation
-Analytical review –significant variant/ratio

Audit EVIDENCE

•Definition
-is the information obtained by the auditor in arriving at the conclusions on which the audit opinion is based. So, it should be properly documented.

•Obtaining evidence
The auditor should use professional judgment to assess audit risk and design audit procedures to ensure the risk is reduced to an acceptably low level.

Framework for Auditing & Related Services Statutory Audit

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•In Malaysia, the companies Act 1965, section 169 stipulates that every company incorporated under the Act shall have its profit & loss and balance sheet audited before presentation at the AGM annually. This is the statutory audit.

AUDITOR
•Section 8 defines who is approved company auditor
•Section 9 requires that an audit must be performed by an approved company auditors.
•Section 174 specifies the powers and duties of an auditor.
-is a qualified accountant, who is an expert in determining the proper audit procedures, the number and types of items to be tested, and evaluate the results thereof.

AN OVERVIEW
•Auditing Vs Accounting
Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between information and established criteria. E.g approved accounting standards in statutory audit.

Accounting is the recording, classifying and summarising of economic events for the purpose of providing financial information for decision making.

•Assurance
auditor’s satisfaction as to the reliability of an assertion being made by one party for use by other party.
Reasonable assurance
•An audit in accordance with ISAs is designed to provide reasonable assurance that the financial statements taken as a whole are free from material misstatement.

•However there are inherent limitations in an audit that effect the auditor’s ability to detect material misstatements. The factors such as:
-The use of testing
-The inherent limitation of accounting & IC system (e.g human error, mgt overight, collusion)
-The fact that most audit evidence is persuasive rather than conclusive.
-Judgement e.g depreciation, provision


Audit risk & Materiality
•The concept of reasonable assurance acknowledges that there is a risk that the audit opinion is inappropriate. i.e might have error.

•The auditor should plan (e.g QC) and perform the audit to reduce audit risk to an acceptably low level that is consistent with the objective of an audit.


Audit Planning
•Why?
-engagement will be performed in an effective manner
•Preplan-client acceptance, engagement, staffing
•Obtain background information-industry
•Client’s legal obligations-M&A, Minutes,contract
•Perform Analytical Procedures-Ind. Ratio,trend analysis
•Compute materiality levelProcedures-1-2% of sales;5-10% of PBT
•Prepare APM-test of IC, substantive test
•Develop overall Audit Plan & Audit Programme
•Perform test of control & substantive test
•Review of contingent liabilities
•Review of subsequent events
•Accumulate final evidence
•Evaluate result
•Issue audit report
•Communicate with management.