Question

The external auditing plays a critical role in the business environment whereby modern industrial economies are based on the ideal of capitalism, a system of economy designed to allocate resources using market mechanisms (Watts & Zimmerman, 1983). To ensure an efficient allocation of resources in a capitalist economy, credible information about the company operations should always be made available for decision making process. Such information is available in the financial statement of companies. The quality and the credibility of the information in the financial statement will be enhanced by having the statement externally audited.

With reference to the above statements, explain what are the mechanisms that had been in place to ensure the quality of auditing function is maintained. You are required to give some suggestions on top of the present mechanisms to further enhance the quality of audit in Malaysia.

Answer 1

Answer:

Audited Financial Statements are considered to be Credible Financial Statements for the information users. Users of accounting information are wide-spread in the country and through all corners of market. They are the one who are interested to invest and bring capital in the corporation.

Capitalistic system is mainly dependent upon the market behaviour and external environment. External stakeholders are quite dependent upon the audited statements and not just internally prepared annual financial statements. Auditing makes it very clear and External Auditor is given freehand to check and verify the truth and fairness of the financial statements. Not all stakeholders have knowledge and time to verifty the information that they get from the corporations. Hence they are dependent upon the external auditor.

Audit quality is the key to infromed users in the market. Markets can be in one country or globally spread.

Mechanisms to ensure quality of Auditing Function:

• Professional Sckepticism: Auditors are required to give honest reports by employing all the ethical standards while audit function.
• Auditors must conduct effective quality reviews of audits
• Remediate findings by obtaining the audit evidence necessary to form an opinion on the financial report
• Identify root causes of findings from their own quality reviews and our audit inspections
• Develop and implement action plans to address those findings, and monitoring and revising these action plans to ensure that they are effective
• Review their staff structure to ensure they are appropriately resourced to undertake increasingly complex audits into the future.

Other Important Mechanisms:

• Suitability of reviewers: Auditor's experience, qualifications and knowledge about the subject.
• Review coverage: Scope of Audit
• Review and reporting: Reporting Standards
• Remedial action: Auditor's key responsibilities towards communication of errors.

International Harmonisation of Standards on Auditing mainly to assure the international capital markets that the audit process has been consistent across companies.

1. The responsibility for developing international auditing standards rests with the International Federation of Accountants (IFAC).
2. As a condition of membership, IFAC member bodies support the auditing standards and other statements developed by the IFAC through its International Auditing and Assurance Standards Board (IAASB).
3. In December 2004, the IAASB issued a revised ISA 700 aiming at enhancing the transparency and comparability of auditors’ reports across international borders.
4. Auditors are expected to comply with IFAC’s Code of Ethics for Professional Accountants.
5. In accordance with IAS 1, the International Auditing Practices Committee (IAPC) specifies that financial statements should not be described as complying with IFRSs unless they comply with all the requirements of each applicable standard and each applicable interpretation of the IFRIC.
6. The International Organization of Securities Commission (IOSCO) supports IFAC’s standards on auditing.

Suggestions on top of the present mechanisms to further enhance the quality of audit in Malaysia:

• Amend related legislation to improve quality of audit work.
• Increase the freedom of auditor
• Director's repsonsibility to be enhanced towards quality of financial statements.
• Strong and dynamic Audit Committee.
• Transperancy of Audit Committee
• Effective Communitcation
• Review on understaffing of qualified members in Audit Committee in public sector.
• Work on Auditor's training and skill development.
• Higher moral and ethical standards in Auditors is necessary.

Please comment below if more explanations is needed.

All the best !!