How do Accounting Standards interact with the work of an Auditor?

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Accounting standards, such as the International Financial Reporting Standards (IFRS), Malaysian Financial Reporting Standards (MFRS) and Malaysian Private Entities Reporting Standard (MPERS), are among the most important components of a set of financial statements.


As a result of its role in prescribing how the accounting treatment of material items should be handled within the financial statements, accounting standards are often regarded as the most important component of an audit of historical information.


The auditor must give an opinion on whether the financial statements “provide a True and Fair View” or “present fairly in all material aspects.”

This is the objective of the auditing process.

Because of this, it is within the scope of the auditor’s responsibility to report on whether or not the financial statements have been prepared in accordance with the relevant financial reporting framework (hence the question, “have the financial statements been prepared in accordance with the relevant financial reporting standards?”).

This is because the technical correctness of the financial statements is implicit in an unmodified audit opinion.

审计师必须对财务报表是否 “提供了真实和公平的观点 “或 “公平地反映了所有重大方面 “发表意见。


正因为如此,报告财务报表是否按照相关的财务报告框架编制属于审计师的责任范围(因此,问题是 “财务报表是否按照相关的财务报告标准编制?)



The TC Mattress Company, often known as TC, prepares its financial statements using MFRS and announces its results up to 2022.

TC allowed each of its employees to purchase company shares on January 1, 2022, in what is seen as a significant business event.

These employees’ share options will become exercisable in four years (vest in four years’ time).

TC has not included any accounting inputs or disclosures in the financial statements because there was no cash flow in the year that ended on December 31, 2022, and the options will not vest until 2025.

As a result, management is proposing to include the monetary amounts in the financial statements for the year that ended on December 31, 2025, rather than including them in the financial statements for the year that ended on December 31, 2022.

Currently, the auditors are doing an audit on the financial statements for the financial year that concluded on December 31st, 2022. In accordance with MFRS 2 Share-Based Payment provision, an entity is required to record an expense if it provides employees (or management) with the opportunity to purchase shares in the company (share options).

This is because the employees are benefiting from a form of remuneration, but the entity also benefits from the services.

In accordance with MFRS 2, an expense must be computed considering the fair value of the share options as of the date they were granted (1 January 2022).

Suppose TC does not include the expense (and the corresponding increase in equity) in the financial statements that cover the period ending 31 December 2022.

In that case, the auditors will be required to issue a qualified opinion on the basis that the financial statements do not comply with the requirements outlined in MFRS 2.

This is because the transaction in question is regarded as being material.

Typically, shares, share options or other equity instruments are granted to employees as part of their remuneration package, in addition to a cash salary and other employment benefits.

As can be seen from the above illustration, if the auditors were unaware of the provisions in MFRS 2, there would be a far greater possibility for them to provide an inaccurate audit opinion (which would be reckless).


从上面的例子可以看出,如果审计师不知道 MFRS 2 中的规定,他们提供不准确的审计意见的可能性就会大得多(这将是鲁莽的)。

Accounting standards outline the definitions, recognition criteria, measurement rules and disclosure requirements that reporting entities must comply with in their financial statements; hence their importance cannot be over-emphasised.

During the audit engagement, auditors will perform their duties per auditing standards, such as the International Standards on Auditing (ISAs).

The ISAs will make it possible to conduct an effective and efficient audit.




However, auditors must also ensure that their technical knowledge of accounting standards is up to scratch because otherwise, they will not be able to conclude whether or not material items within the entity’s financial statements that they are auditing are correct.

At various phases of the audit, the auditor will additionally take into consideration the following issues pertaining to financial reporting:




Financial statement risk is the risk that the financial statements contain material misstatements.

This may result from an incorrect interpretation of accounting standards, inaccurate recording of transactions or disclosure.

Financial statement risk might lead to an overstatement or understatement of the value of an account balance, or it could result in an item being recognised within the financial statements when it should not be recognised (or vice versa).

In addition, the Financial statement Risk may result in an item or items in the financial statements being improperly stated (or not being disclosed), respectively.

The auditor will, during the planning stage, take into consideration the accounting provisions that are relevant to the audit client. This will enable the auditor to consider the risk posed by the financial statements during the planning stage.






During the Audit

The auditor will compile evidence to back up the numbers stated in the financial statements.

Then they will examine whether or not this evidence shows a risk of misstatement due to the improper application of accounting rules.

A portion of the auditor’s report will consist of a report on whether or not the financial statements have been prepared in compliance with the applicable financial reporting framework.

For the auditor to report on whether or not the financial statements have been prepared in compliance with the applicable financial reporting framework, the auditor will need to know the applicable accounting standards included in the applicable financial reporting framework.

Some auditing criteria for the accounting industry are inherently challenging (for example, MFRS 124 Related Party Disclosures).

When it has been recognised that accounting standards are inherently difficult to audit, a specific direction has been provided in the form of an auditing standard.

For instance, the International Standards on Auditing (ISA) 550, Related Parties, which provides direction for the auditor on the issues surrounding the audit of related parties, is one such example.





一些会计行业的审计标准本身就具有挑战性(例如,MFRS 124 关联方披露)。


例如,《国际审计准则》(ISA)550 “关联方 “就是这样一个例子,它为审计师提供了有关关联方审计问题的指导。

Pre-completion stage of the Audit

At the end of the audit, the auditor will decide whether or not the financial statements generated by management comply with the applicable financial reporting framework.

These decisions (i.e. compliance with accounting standards) will be made at the conclusion stage of the audit.

Suppose the auditor determines that the company does not comply.

In that case, the company will evaluate the implications of the non-compliance for the auditor’s report (which, if the non-compliance is not remedied, will result in a modified opinion due to dis- agreement).

In circumstances where the auditor has discovered a material breach of an accounting standard.

In that case, they are obligated to address the situation with those charged with governance to emphasise how serious the matter is.

The auditor should try to convince management and, if applicable, those charged with governance to fix the problem that led to the disagreement. A qualified (modified) audit opinion should always be a last resort.






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