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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

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Governing Quality of Audit Firms in Malaysia

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  1. 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

  2. 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

  3. 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)

  4. 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

  5. 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.

  6. Elements of the Quality Control in ISQC 1

  7. Elements of the Quality Control in ISQC 1

  8. 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)

  9. Objective 1: Effectiveness of ISQC 1 in Governing Quality of Audit Firms • Likert Scale: 1 – Strongly disagree • 7 – Strongly agree

  10. Documentation Monitoring Leadership ISQC 1 Dimensions Engagement Performance Ethical Requirement Human Resources Client Relationships Objective 2: Development of the ISQC 1 Self-Assessment Checklist

  11. Organization of ISQC 1 Self-Assessment Checklist

  12. 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

  13. Score Assessment

  14. Score Assessment

  15. 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

  16. Governing Quality of Audit Firms in Malaysia Faculty of Accountancy and Accounting Research Institute Universiti Teknologi MARA Appreciate any comment for improvement & THANK YOU

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