AOB Annual Report 2013: Oversight focus on internal monitoring systems

Audit firms are reminded to perform the necessary audit procedures to evaluate whether the overall presentation of the financial statements is in accordance with the applicable financial reporting framework, according to the Audit Oversight Board (AOB) in releasing its fourth annual report.

The report highlighted that while the presentation and disclosure of financial statements is the management’s responsibility, there are specific ISA requirements that need to be adhered to by auditors.

The AOB Annual Report 2013 has captured its oversight focus in the past year on activities that reinforced the quality control system of audit firms in Malaysia and encouraged best practices which enhance the quality of their audit work.

The oversight board’s inspections activities stressed on key elements including the tone set by leadership of audit firms, consistency of performance of partners within an audit network and the effectiveness of their internal quality monitoring systems.

Audit firms’ internal monitoring processes were given added focus during inspections to allow AOB to have a better picture of their scope, implementation and effectiveness. In his Chairman’s statement, Nik Mohd Hasyudeen Yusoff, Executive Chairman of the AOB said, “Based on our findings, we believe audit firms need to enhance this component of their quality control procedures to ensure better effectiveness.”

AOB’s 2013 Annual Report also lists down potential root causes to audit deficiencies for major firms.

Lack of resources due to continuous high attrition rate, amount of involvement and insufficient supervision and direction by engagement partners, failure of the firms’ monitoring control mechanism to surface relevant issues and lack of application of professional scepticism in evaluating audit evidence continue to be top potential issues.

Meanwhile, the potential major root causes in other audit firms were weak messages on audit quality by their leadership, lack of understanding of the business of audit clients, inadequate technical competencies in both accounting and auditing, insufficient technical support to safeguard audit quality which includes consultation process and internal monitoring reviews, lack of application of professional scepticism in evaluating audit evidence; insufficient involvement, supervision and direction by engagement partners and ineffective Engagement Quality Control Reviewer (EQCR).

“More honest and holistic approaches in identifying root causes and devising appropriate remediation plans to address the actual drivers of the deficiencies would strengthened audit firms’
system of quality control, and position audit firms in better footings.,” Nik said.

In enforcing auditing standards the AOB took enforcement actions against 6 auditors in 2013, mainly for their failing to comply with the requirements of auditing standards in the performance of their audit.

“While the AOB has always been focusing on working with audit firms to enhance their performance, we would not hesitate to take enforcement actions against serious deficiencies and breach of ethical conducts which will affect confidence on the audited financial statements in Malaysia,” Nik said.

The report also found that audit fees charged by top 10 audit firms had increased by 6% and 9% in 2011 and 2013 to compensate for the increase in salary cost which rose 18% and 13%, respectively, in both years, and an increasing trend has been observed in audit fees since 2010.

The AOB was set up by the Securities Commission in 2010 to oversee the auditors of public-interest entities (PIEs), protect investors’ interest and promote confidence in the quality and reliability of audited financial statements of PIEs.

In 2013, the number of audit firms registered with the AOB went down to 53 in 2013 compared to 67 in 2012. However, the number of registered individual auditors has gone up from 293 compared to 302 in the previous year.

AUDIT OVERSIGHT BOARD

The AOB 2013 annual report can be downloaded here