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Governing Quality of Audit Firms in Malaysia. Authors/Researchers: Zuraidah Mohd Sanusi, Aida Hazlin Ismail, Yusarina Mat Isa, Roszana Tapsir, Syazliana Kasim, Kamaruzzaman Muhammad, Nor’Azam Mastuki and Normah Omar. 2008 International Conference on Governance, Jakarta, Indonesia

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governing quality of audit firms in malaysia

Governing Quality of Audit Firms in Malaysia

Authors/Researchers:

Zuraidah Mohd Sanusi, Aida Hazlin Ismail, Yusarina Mat Isa, Roszana Tapsir, Syazliana Kasim, Kamaruzzaman Muhammad, Nor’Azam Mastuki and Normah Omar

2008 International Conference on Governance, Jakarta, Indonesia

12 – 14 November 2008

presentation outline
Presentation Outline
  • Overview of Audit Quality
  • Background
  • Elements of Quality Control in ISQC 1
  • Methodology
  • Objective 1: Effectiveness of ISQC 1 in Governing Quality of Audit Firms
  • Objective 2: Development of ISQC 1 Self Assessment Checklist
  • Score Assessment
  • Next Action
overview of audit quality
Overview of Audit Quality
  • Audit quality is viewed as one of the important factors that affect the credibility of financial statements (Arrunada, 2004)
  • Larger audit firms provide higher-quality audit because larger firms have fewer incentives to compromise their standards to ensure retention of clients in comparison with smaller firms (DeAngelo, 1981)
  • Audit quality has been further extended to cover firm level rather than engagement only: quality control system, quality assurance and institutional management such as managing human resource, institutional risk and external relations (Mazur et. al., 2005)
background
Background
  • IFAC has issued International Standards on Quality Control 1 (ISQC 1) for the purpose of quality control for firms that perform audits and reviews of historical financial information, and other assurance and related services engagements
    • Adoption of ISQC 1 in Malaysia by Malaysian Institute of Accountants (MIA) as part of approved auditing standards w.e.f July 2006.
  • Purpose of ISQC 1:
    • To establish a system of quality control (policies and procedures);
    • To provide firm with reasonable assurance that the firm and members of the firm comply with professional standards and regulatory and legal requirements; and
    • To ensure that reports issued by the firm is appropriate in the circumstances
  • Adoption of this standards is expected to govern the quality of audit, thus enhancing the credibility of financial statements
background5
Background
  • Although accounting bodies in countries, such as Malaysia, Australia and Pakistan, have supplemented ISQC 1 with audit manual and guidelines, it is difficult to ascertain to what extent the compliance with ISQC 1 has been achieved.
  • Objectives of this study:
    • To ascertain the effectiveness of ISQC 1 to govern quality of audit firms
    • To develop ISQC 1 Self-Assessment Checklist to assist audit firms in complying with ISQC 1
      • By adopting the framework of ISQC 1 questionnaires which have been developed by the accounting bodies in Australia and Pakistan, this study has further extended the questionnaires into ISQC 1 Self-Assessment Checklist to cover two parts i.e. Policies & Procedures and Practices as well as the score assessment.
methodology
Methodology
  • Preliminary study on the ISQC 1 implementation issues - Questionnaires sent to audit firms
  • Brainstorming session among the researchers to form common themes of ISQC 1 Self-Assessment Checklist based on several sources: ISQC 1, MIA Quality Control Manual etc.
  • Review of ISQC 1 Self-Assessment Checklist with two representatives from MIA and ten audit practitioners from medium and small size firms (similar methodology applied by Sutton, 1993)
objective 1 effectiveness of isqc 1 in governing quality of audit firms
Objective 1: Effectiveness of ISQC 1 in Governing Quality of Audit Firms
  • Likert Scale: 1 – Strongly disagree
  • 7 – Strongly agree
objective 2 development of the isqc 1 self assessment checklist

Documentation

Monitoring

Leadership

ISQC 1

Dimensions

Engagement Performance

Ethical Requirement

Human

Resources

Client Relationships

Objective 2: Development of the ISQC 1 Self-Assessment Checklist
a glance at the checklist
A Glance at the Checklist

1. LEADERSHIP RESPONSIBILITIES FOR QUALITY WITHIN THE FIRM

(ED) ISQC 1.19: “The firm shall establish policies and procedures designed to promote an internal culture based on the recognition that quality is essential in performing engagements. Such policies and procedures shall require the firm’s chief executive officer (or equivalent) or, if appropriate, the firm’s managing board of partners (or equivalent), to assume ultimate responsibility for the firm’s system of quality control.”

Definitions of Indicators

Not evident : No evidence that such practice exists/action taken

Emerging : Evidence indicates early or preliminary stages of implementation of practices

Operational : Evidence indicates active implementation of practices

Highly functional : Evidence indicates effective and consistent implementation of practices

next action
Next Action
  • One day seminar: launch and introduce the checklist to the auditors
  • Negotiate with MIA to leverage the checklist for annual license renewal for audit firms – green light from MIA
slide16

Governing Quality of Audit Firms in Malaysia

Faculty of Accountancy

and

Accounting Research Institute

Universiti Teknologi MARA

Appreciate any comment for improvement

&

THANK YOU