AUDIT OVERSIGHT BOARD

AND ITS RESPONSIBILITIES

IN ENHANCING AUDIT
QUALITY
NAME
RAZALI

: MUHAMAD FARID BIN

STUDENT ID : 2013479474
GROUP

: AC220 8A9

INTRODUCTION

The integrity of financial reporting highly depends on financial reporting

ecosystem comprising external auditors, directors and management. External
auditors play an important role in gaining the investors confidence on the integrity
of the financial information reported and disclosed in the audited financial
statements. It is the auditors primary responsibility to express independent opinion
on the truth and fairness of financial information presented in the financial
statements. Auditors act as the agent for the shareholders in determining the
information presented by the management is true and reflective of the real state of
affairs of the business. Nevertheless, shareholders may at times loss their
confidence on auditors credibility. This is evident from the previous experiences of
corporate failure and accounting scandals such as Enron, WorldCom and Parmalat in
2000. The incidences implicate that auditors have not met the public expectation
which has given rise to the questioning of the quality of audit work performed by
the auditors. As a consequence, the shareholders in particular and the public in
general are losing confidence in auditors and putting the blame on auditors for not
carrying the custodian responsibility to protect the interests of the shareholders.
The establishment of Audit Oversight Board is in line with global trends. Many
countries such as United States, Singapore, Australia and United Kingdom has long
established this oversight committee mainly to control and oversee the professions
and the auditing standards among firms providing auditing services. In Malaysia, the
establishment of the committee is to foster high quality independent auditing to
promote confidence in the quality and reliability of audited financial statements of
public interest entities in Malaysia.
International Federation of Accountants (IFAC) has issued International
Standards on Quality Control 1 (ISQC 1) quality control for firms that perform
audits and reviews of historical financial information, and other assurance and
related services engagements. Although accounting body in Malaysia 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. The aim of ISQC 1 is to:

Consolidate smaller size firms to meet the numbers for rotation

Enhance expertise in highly specialized audit (i.e. banking industry)

The chronology of the establishments of the committee is from September to

October 2007 in Budget 2008 announcement by YAB PM Government will
establish a Public Companies Accounting Oversight Board under the auspices of the
SC. Many consultations held with industry groups and regulators to get their
feedbacks on this. From January to April 2008 SC (securities commission)

establishes High Level Task Force that met 6 times to deliberate on appropriate
audit oversight framework for Malaysia and on December 2009 Securities
Commission (Amendment) Bill 2009 which contains the establishment and functions
of the AOB passed in both Houses of Parliament. Finally on 1 April 2010 the Part IIIA
Securities Commission (Amendment) Act 2010 came into force.
Among others the Functions of the Securities Commissions relating to audit
oversight under Section 31B SCA is:

To promote and develop and effective and robust audit oversight framework
in Malaysia
To promote confidence in the quality and reliability of audited financial
statements in Malaysia
To regulate auditors of public interest entities

Overview of Audit Oversight Function in Malaysia

In the era of post-Enron, the auditing profession has been closely monitored
by the regulators as part of the external mechanisms of corporate governance of
the firms. All over the world, auditors are bounded with the movement from the
International Federation of Accountants (IFAC) to improve the quality of audit
services provided to the clients. The assessment on audit quality has been extended
to cover both the audit firm level and audit engagement level. The International
Standards on Quality Control 1 (ISQC 1) deals with the firm wide quality control. It
contains requirements in line with the professional standards and regulatory and
legal requirements that must be complied with by audit firms and its personnel in
order to provide a reasonable assurance that audit services performed by the firm
or engagement partners and the reports issued are appropriate in the
circumstances. On the other hand, International Standards on Quality Control for
Audits of Historical Financial Information (ISA 220) sets out the quality control
standards that are applicable to the individual audit engagement level. Figure 1
summarizes the elements for both the ISQC 1 and ISA 220.
Despite having these standards in place, audit firms sometime failed to see
the association between the audit quality and the benefits to be derived from the
application of the standards which may come in the form of improved reputation
and market share and reduction in audit liability. A study by Esch, Negash, Firer,
Oosthuizen, Abdool-Samad, Padia, Patron & Sanders (2005) in South Africa show
some concerns in the implementation of the standards. Some of the issues
identified in the study include the increase in compliance costs, lack of guidance,
attitude of audit partners, evaluation of quality control reviews, consultation and
documentation, scope of the standards and diversity and structure of audit market
(Esch 2005). Similarly, in Malaysia, evidence showed that the implementation of
ISQC 1 among the small and medium audit firms is v very limited (Omar & Johari
2007). Small and medium audit firms tend to operate based on non-standard

operating procedures, which essentially do not reflect the total compliance with
ISQC 1.
Previous studies support the notion that the existence of standards (i.e., ISQC
1 and ISA 220) alone are not sufficient to maintain and improve audit quality (Esch
et al. 2005; Omar & Johari 2007). The various accounting scandals that dragged
auditors into the picture have given a signal on the need for another mechanism
that can provide the enforcement of the standards. Oversights by the external and
independent party in the structure shall be able to provide a more stringent
enforcement that is being perceived as more fair and justified.
The establishment of AOB marked a very important milestone in the
development of audit oversight framework in this country. AOB is expected to regain
the public confidence on the auditors work in providing opinion on a true and fair
view of financial reporting as well as to monitor the auditors work and their ethical
behavior (Yin 2010). AOB is led by a powerful team comprising of one executive
chairman and six non-executive members representing a mix of different sectors
including regulators, accounting profession, legal fraternities and investment
communities. Three main objectives of AOB are promoting and developing effective
and robust audit oversight framework, strengthening the investors confidence on
the reliability and quality of audited financial statements, and providing regulation
of work to the Public Interest Entities (PIE) auditors.
AOB has adopted a strategic framework which links the service areas and
activities of AOB to the desired outcome which manifest the attainment of its
mission. As shown in Figure 3, the strategic framework has four strategic themes
that connect the outcomes and the service areas. The four strategic themes are
support adoption and implementation of standards, promotion of high quality audit
practices, influences on the financial reporting ecosystem and leverage on
stakeholders support. These strategic themes correlate with the main thrust of
enhancing quality of the audited financial statements.

Audit Oversight Board strategic framework

In meeting the objectives, AOB undertakes various functions that cover

registration, inspection, inquiry, sanction and standard setting relating to audit.
Individual auditors and audit firms that conduct the audit of PIEs to register with
AOB. The registration encompasses individual auditors and audit firms of PIEs to
ensure that every party involve in the audit of PIEs is fit and proper. Being new, AOB
is embracing the learning pathways progressively.
The AOB is responsible for the registration of auditors of public interest
entities or schedule funds under Part IIIA of the Securities Commission Malaysia Act
1993 (SCMA). The public interest entities and schedule funds are defined in
Schedule 1 of the SCMA. The registration of auditors of public interest entities or
schedule funds would ensure that only fit and proper auditors are involved in
auditing the financial statements of public interest entities or schedule funds. This is
in line with one the AOB strategic themes under the strategic framework which is to
promote high quality audit practices. As such, audit firms and individual auditors
who are seeking registration with the AOB are required to make a declaration in the
Registration Form 1 and Form 2 of the Auditor Registration Application System
(ARAS) relating to their fit and proper status. Apart from that, the audit firms are
required to submit information on their compliance with the International Standard
on Quality Control (ISQC) 1 and Clarified ISAs. ARAS can be accessed at
https://esubmissions.seccom.com.my/aras. An AOB registration is valid until and
unless it is revoked or suspended by the AOB, or withdrawn. As long as the
registration remains valid, the audit firm must ensure that the firm and the
individual auditor(s) registered with AOB remain fit and proper at all times as
required by the SCMA. The audit firm is also responsible to ensure timely update of
information in ARAS, and is required to submit the Annual Declaration form via ARAS
to AOB within seven (7) working days after 30 June of each calendar year.

Section 31E (1)(d) of the Securities Commission Act, 1993 (SCA) provides
that one of the key responsibilities of the AOB is to conduct inspections and
monitoring programs on auditors to assess the degree of compliance with auditing
and ethical standards. In discharging the above responsibilities, the AOB may
inspect an audit firm of PIEs under a regular inspection program or a special
inspection program. Under either program, an AOB inspection may be carried out at
the firm level or engagement level or both. A firm review focuses on the review of
an audit firms quality control systems and practices and the degree of compliance
with the requirements of the International Standards of Quality Control 1 (ISQC 1).
An engagement review aims to assess the degree of compliance with auditing and
ethical standards of an audit engagement conducted by an auditor. The AOB adopts
a risk based approach and conducts regular inspections annually on audit firms
which have more than 10 partners and audit more than 40 PIEs (collectively referred
to as the Major Audit Firms). On the other hand, regular inspections on mid-tier
audit firms and sole proprietors (the Other Audit Firms) are completed within a predetermined inspection cycle.
The principle of proportionality, efficiency and achieving the desired outcome
continue to be essential to the strategic enforcement approach adopted by AOB. In
determining the type of sanction that is imposed on any contravention or breach,
AOB takes into account the nature and seriousness of the offences, previous
regulatory record and other aggravating and mitigating factors. Among the matters
considered by AOB is the impact of the contravention on the integrity of the
profession, the capital market as a whole and the impact of the breach on the
confidence and reliability of audited financial statements of the PIE in question. The
focus of AOB enforcement is whether the auditors comply with the recognized
auditing and ethical standards. Such action from the AOB may not necessary imply
the audited financial statement does not give a true and fair view.
The other functions of AOB is Inquiry. Audit inspections would be conducted
at the firm level and the engagement level. At the firm level, compliance with ISQC1
will be reviewed such as leadership and responsibilities within firm, ethical
requirements, acceptance and continuance of audit clients, human resources and
engagement performance monitoring. The inquiry conducted when there is reason
to believe that the provisions of the Act, written notice or guidelines are breached
AOB inquiry officers will be conducting AOB inquiries. Inquiry officers will be
appointed and will have necessary powers to conduct their duties.
In standard setting, the main objectives is to ensure that auditors comply
with established auditing standards in their statutory audits is a critical aspect in
maintaining reliability of the companys audited financial statement. Compliance
with established auditing and ethical standards benchmark against international
best practices is an integral aspect in ensuring audit quality. The AOB expects the
accountancy profession to adopt all IFAC standards. The power to direct MIA to
establish, amend, modify or alter its prescribed standards will only be exercised if
there is a gap in the scope and timing of the adoption

CONCLUSIONS

The existence of audit oversight function is undeniably important in

regulating the work of external auditors, particularly concerning audit quality.
Although auditors are bound to adhere to the auditing standards in conducting audit
works, evidence suggests that this may not be sufficient for the auditors. External
evaluation by independent body is seen as providing greater values in improving
audit quality, as such, the audit oversight function is seen a indispensable
mechanism in auditing the auditors. With regards to the Malaysia scenario, the
establishment of AOB fits the financial reporting ecosystem, but considering its twoyear performance, its roles and functions in restoring public confidence over the
auditing profession is too early to tell. Nevertheless, based on this study, it is
suggested that AOB emulates several of the peers practices in making its roles
more visible. These practices, however, shall be reviewed and tailor-made to suit
Malaysia environment due to limitation of this study to only based on theoretical
assumptions and is bound by content analysis.
The first suggestion is in terms of increasing the membership registration. As
the membership registration for 2011 has decreased as compared to 2010, AOB
could have taken a stricter action on those individual auditors and audit firms that
have failed to register with AOB prior to accepting engagement with PIE. Issuance of
warning letter may be seen as just an administration act without any serious
implication. The second suggestion is to increase the transparency in reporting on
those individual auditors and audit firms that have been taken action against.
PCAOB in the United State, for example, has been very transparent in disclosing
detailed report on the sanction taken against the auditors.

REFERENCES

http://www.sc.com.my/general_section/audit-oversight-board/

https://en.wikipedia.org/wiki/Public_Company_Accounting_Oversight_Board
http://pcaobus.org/Pages/default.aspx
http://www.mia.org.my/new/downloads/professional/audit/knowledge/2010/04/08/Pr
esentation_slides_by_the_AOB_Executive_Chairman.pdf
http://www.irssh.com/yahoo_site_admin/assets/docs/14_IRSSH-656V6N1.329192438.pdf