REMEDIATION IS KEY TO IMPROVING OVERALL QUALITY OF AUDIT WORK IN MALAYSIA
The Audit Oversight Board (AOB) today released its Annual Report 2011 which noted that audit firms are responding to the findings of inspections by implementing remediation plans to improve the overall quality of their audit work.
"While the auditing framework remains strong and all international standards are adopted, the findings from the AOB oversight activities suggest that more efforts are required to enhance audit quality" noted Nik Hasyudeen Yusoff, Executive Chairman of the Audit Oversight Board (AOB).
In 2011, the AOB, which was established by the Securities Commission Malaysia (SC) to oversee the auditors of PIEs, conducted inspections on 17 audit firms, which audit over 98% of the market capitalisation of public-listed companies (PIEs) or 86% of the total number of PIEs. During the year, the AOB also commenced the review of remediation plans proposed by the audit firms that were inspected.
By the end of 2011, 16 final regular inspection reports had been issued, six were pending finalisation and 13 remediation plans were approved. The 13 remediation plans, which focus on the strengthening of governance structure, improvement of methodology and the rebalancing of partners' portfolio and workload, are currently at various stages of implementation.
While the AOB will continue to inspect audit firms through its annual audit inspection programme, a critical component of the AOB's task is to monitor audit firms' remediation progress to close the gaps identified, in order to improve the overall quality and ensure the effectiveness of audit work performed.
"The principle behind remediation is that any improvement across the board would enhance the overall audit performance of the audit firms, hence improving the reliability of the opinion of auditors," emphasised Nik. "An effective remediation should be reflected by enhanced effectiveness of audit work performed. This is where audit firms need to go beyond completing agreed remediation efforts on a piecemeal basis. Clear key performance indicators on the effectiveness of remediation are expected" added Nik.
Influencing the financial reporting ecosystem
High quality financial reporting can only be achieved if all the key components in the financial reporting ecosystem are effective in playing their respective roles. Recognising this, the AOB continued to focus its efforts in 2011, on shaping the quality of financial reporting practices and the reliability of audited financial statements by engaging the accounting profession, audit firms, regulators, directors and academicians to share insights and promote good audit practices.
A key development in global audit oversight in 2011, was the approval of the International Forum of Independent Audit Regulators' (IFIAR) Core Principles which cover the structure of audit oversight, operations of audit regulators and principles for audit inspection processes. The AOB's continued participation in IFIAR activities has afforded the AOB valuable insights on areas of concern and the opportunity to learn from and build working relationships with other audit regulators.
The AOB also supported an initiative for the audit regulators in ASEAN to co-operate on enhancing audit quality in the region in support of efforts to integrate the capital markets in the region.
Priorities for 2012
The focus of the AOB's audit inspection in 2012 will continue to be on audit work of high-risk areas, which include, amongst others, fair value, the evaluation of going concern, revenue recognition, segmental reporting and compliance with ethical standards. Emphasis will be placed on key areas of judgment and the application of professional skepticism. Where coverage in 2011 had focused on the audit of companies with complex businesses and group structures, the focus in 2012 will be expanded to cover other industries and more emphasis will be placed on remediation of audit firms.
Effective 2012, Malaysia officially joins over 100 countries in adopting the International Financial Reporting Standards (IFRS) as the reporting standards for PIEs. This change affects both the audit community as well as the PIEs which will need the capacity to prepare IFRS-compliant financial statements before being audited. While most firms appear to be ready, directors of PIEs are encouraged to assess the state of preparedness of their financial reporting functions to comply with the IFRS without the assistance of auditors, as an important aspect of their governance responsibilities and to ensure the change does not erode confidence in financial reporting.
The AOB will also participate in the IAASB's post-implementation review of the Clarified ISAs to support the enhanced implementation of the Clarified ISAs.
An electronic copy of the AOB Annual Report 2011 is available here.
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