(continuted from yesterday)
By Tin Shein (CEO, MICPA)
Thus, management is responsible not only for preparing the financial statements in accordance with the MFRS, and the provisions of the Myanmar Companies Act, but also for:
(a) the institution of a sound and effective internal control system, including the internal audit and internal check, to prevent misappropriation of funds, assets, misstatement of facts, accounting errors, etc.;
(b) Proper maintenance of accounts in accordance with the Myanmar
Accounting Standards as well as the provisions of the Myanmar
(c) adequate disclosure of accounting and other related information in the financial statements;
(d) adoption of appropriate accounting policies and practices;
(e) risk assessment to protect its financial interests by eliminating or minimizing such risks identified in the process;
(f) safeguarding of the entity’s assets and inventories from misuse.
Of course, it is clear that the management of corporate bodies need to take these measures to make the financial statements free from material errors and show a true and fair position of the business enterprise’s financial affairs as of the fiscal year-end.
Moreover, it also has the responsibility to make available all the books of account, records, documents and related financial information, which have been maintained, and must certify that no other accounts, records and documents than those already provided for audit have been maintained.
While on this subject, it won’t be out of place to say something about the external auditor’s responsibility. He is to audit the financial statements in accordance with the Myanmar Standards on Auditing, which are applied to ensure that:
(a) the financial statements are prepared in compliance with the applicable Myanmar Accounting Standards (MAS) and Myanmar Financial Reporting Standards (MFRS) that have been prescribed by the MAC and Income-tax and other applicable laws of Myanmar;
(b) the adopted accounting policies and practices are consistently applied;
(c) the financial statements are free from material errors and misstatements, complete with transparency and accountability for its business operations ;
(d) the financial statements are properly drawn up in accordance with the MFRS, and the provisions of the Myanmar Companies Act, so as to fairly reflect the status of the financial affairs of the entity as of the fiscal year-end and the financial results for that year.
An auditor shall carry out the audit in accordance with the Myanmar Standards on Auditing (MSA) prescribed by MAC. The standard audit procedure that an auditor employs includes:-
(a) the initial survey of organizational structure/set-up and operations of the organization to be audited;
(b) review and test-check of the internal control system, including internal audit and internal check;
(c) audit program showing months selected for audit checks to be done as well as the time to be taken and audit staff to be deployed;
(d) analytical review of the accounting system and the financial statements;
(e) compliance with MAS and MFRS (the same as IAS and IFRS), provisions of the Myanmar Companies Law and MAC Law;
(f) engagement letter;
(g) management representations letter;
(h) management letter
(i) Adequacy of disclosures of accounting, and other related information in the financial statements;
(j) Future prospects as a going concern;
(k) Conflict of interests between the audit staff and auditee;
(l) Observance of professional ethics in business dealings;
(m) Proper maintenance of accounting records and books;
(n) risk assessment.
Therefore, an audit involves examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. It needs judgment about the number of transactions to be examined and the areas to be tested, depending on sound and effective system of internal control, internal check and internal audit in place at the auditee. The auditor has to plan and perform the audit to obtain reasonable rather than absolute assurance about whether the financial statements are free of material misstatement, errors, fraudulent financial reporting by using accounting gimmicks to distort the true financial status, misappropriation of assets, or violations of applicable laws or regulations by management or employees acting on behalf of the entity. The audit procedures will include tests designed to gather adequate documentary evidence supporting the transactions recorded in the accounts, and may also consist tests of the physical existence of inventories, and direct confirmation of receivables and certain other assets and liabilities by correspondence with selected individuals, funding sources, creditors, and financial institutions.
At the conclusion of our audit, we will require certain written representations from you about the financial statements and related matters.
Here it may be pointed out that it is not for the auditor to provide assurance that the financial statements as totally correct and free from all sorts of errors and misstatements. If he were to do so, his audit would have to cover the whole spectrum of transactions in all aspects and nothing should have been left unaudited. However, it would be impracticable, if not impossible, for the auditor to do so, not only because of the enormous amount of time such coverage would have involved, but also because the audit fees would have become too much of a financial burden for the auditee. Audit fees are usually charged by the period of time that the audit team members spend on their audit work during the course of audit, the rates of fees varying with rank, qualifications and experience of the audit staff deployed. Thus, the more time is spent on audit, the more audit fees will have to be paid.
The implication of all this is that the audit can’t bear the blame for any fraud, misappropriation, etc. as long as he has adopted the standard audit procedures and exercise due diligent care in doing the audit in accordance with MSA as mentioned above.
What is more, in these days of computerized accounting, accounting transactions are processed in no time through the computer by the use of advanced accounting software, without leaving almost little or no paper trail for the auditor. The modern accounting software is crafted in such a way that even when wrong accounting entries are made, they will easily pass through the system without showing any error, because the system ensures that every debit entry will have a corresponding credit entry, thereby balancing the accounts automatically in the end.
In such a case, the auditor will conduct the audit only on a selected check basis to gather adequate audit evidence to back up his audit opinion, as 100% detailed checking will not be justified in terms of the time employed or of the amount of audit fees the auditee has to pay. He will, of course, have to rely on the internal control procedures and practices that have been put in place by management to test the soundness and reliability of the accounting data processed by the EDP system. He will then determine the extent of audit checks to be done in the light of the results of the internal control and internal audit being reviewed.
Moreover, since an audit is designed to provide reasonable, but not absolute assurance, it will not perform a detailed examination of all transactions. So there is a risk that material misstatements or noncompliance may exist and not be detected by us. However, if during the course of audit the auditor becomes aware of such errors, fraud, or illegal acts, he will bring them to the attention of management.
His responsibility, as an auditor, is limited to the period covered by audit as agreed in the engagement letter and does not extend to any later periods for which he is not engaged as an auditor.