Audit Quality Conundrum

By Ramesh Ruben Louis, MBA (UK), CA(M), FCCA, CPA(M), CMIIA


The concerns on audit quality in the Malaysian external audit profession is not something new and have been discussed, deliberated and debated over the years. However, regulators and practitioners alike were really taken aback and perhaps not too presumptuous as to say even got a “wake-up call”, when the World Bank in its February 2012 Report on the Observance and Codes in Accounting and Auditing (ROSCAA) stated that the audit quality in Malaysia may be well below acceptable standards for non-public interest entity audits as suggested by evidence collected by the Malaysian Institute of Accountants (MIA) with respect to non-public interest entity auditors’ compliance with auditing standards, the relatively high concentration of skilled professionals in the six largest accounting firms, and the relatively low value of audit fees charged. The report further asserts that there are many practitioners who are struggling to comply with increasingly complex and prescriptive audit standards (including ISQC1). The status quo of a two-tiered quality standard cannot be allowed to continue, as this will potentially damage the reputation of the audit profession as a whole.

The external audit profession faces contemporary challenges not only in terms of the subject matter being audited; which is the financial statements, but also in terms of the appropriateness, effectiveness and efficiency of the approach or methodologies used to carry out their audit. With increasing complexity and subjectivity of financial reporting and auditing standards, onerous regulatory & professional compliances especially on independence, consideration of non-conventional audit subject matters such as sustainability and environment, as well as changing stakeholders’ expectation from the auditors are collectively putting pressure for auditors to maintain, if not to increase the quality of their audit.

In this feature, we take a closer look at the building blocks of audit quality.

Thoughts from CSAP
In response to the ROSCAA report, The Committee to Strengthen the Accountancy Profession (CSAP) was set up to formulate and recommend strategies and measures to strengthen the accountancy profession and to improve the contribution of the profession in enhancing the competitiveness of the country in line with the Malaysian government’s transformation agenda. The CSAP’s Report on Strengthening of the Accounting Profession in Malaysia issued in December 2014 concurs with the ROSCAA’s finding that there are valid concerns on the need for:

a.  Review of the statutory and professional framework relating to the practice of audit of financial statements;

b.  Review of accounting and auditing standards of private entities;

c.  A holistic and independent review of the governance of the accountancy profession in Malaysia;

d.  Monitoring and review arrangements in improving the quality of the audit of private entities;


e.  Improvement in the education and training of accountants in Malaysia

The report further asserts that while some of the abovementioned have been or will be addressed through ongoing statutory reforms such as the amendments to the Malaysian Companies Act, 1965, more substantive matters such as the review of the MIA’s governance structure and the reform in the accountancy education and training needs to be seriously looked into.


The IAASB’s Framework on Audit Quality
For an external audit to meet its objective, it is paramount that the users of audited financial statements are confident that the auditor has worked to a suitable standard and that “a quality audit” has been performed. Despite frequently used in debates among stakeholders, in communications of regulators, standard setters, audit firms and others, and in research and policy setting, audit quality is a complex subject that has no universal definition or analysis. For this reason, the International Auditing and Assurance Standards Board (IAASB) has developed and issued a Framework for Audit Quality (the Framework) in February 2014.

The primary objectives of the Framework for Audit Quality are:

         • Raising awareness of the key elements of audit quality;

         • Encouraging key stakeholders to explore ways to improve audit quality; and

         • Facilitating greater dialogue between key stakeholders on the topic


The IAASB expects that the Framework will generate discussion and positive actions to achieve a continuous improvement to audit quality. It is important to note that the conduct and performance of audits are subject to compliance with International Standards on Auditing (ISAs), International Standards on Quality Control 1 (ISQC 1), ethical and regulatory requirements. As such, the Framework is not a substitute for those standards, nor does it establish additional standards or provide requirements for the performance of audit engagements, instead it’s a reference to facilitate audit quality.

The Constructs of the Framework
The framework is made up of five interconnected elements that encompass the following:

The framework underscores that quality audits will require auditors exhibiting appropriate values, ethics and attitudes; and being sufficiently knowledgeable, skilled, and experienced and having sufficient time allocated to them to perform the audit work. These inputs can then be applied at various levels as follows:-

       i.  The audit engagement level – mainly relates to audit partners and professional staff ethical behavior and competence;

     ii.  The level of an audit firm, and therefore indirectly to all audits undertaken by that audit firm – mainly relates to firm structure              and practices; and

    iii.  The national (or jurisdictional) level and therefore indirectly to all audit firms operating in that country and the audits they                      undertake – mainly relates to policies and regulating the profession and standard setting


Achieving audit quality also entails auditors applying meticulous and careful audit procedures and quality control procedures that comply with laws, regulations and applicable standards of auditing throughout the audit process; from start to finish. Such a disciplined and structured approach would encompass planning & risk assessment, audit performance & reviews methodologies/approach such as sampling and materiality determination, steps undertaken in expressing an opinion as well as other audit related matters such as consultation and resolve of differences in opinions.

The framework also denotes that process factors not only involve the engagement and firm levels, but also national level whereby activities undertaken by national audit regulatory bodies such as the MIA and AOB also impact the audit process. Practice reviews would be an example of such activities.

Outputs include reports and information that are formally prepared and presented by the auditor to their clients, as well as outputs that arise from the auditing process that are generally made available for public consumption. For example, these may include management letters that highlight deficiencies in the entity’s financial reporting practices and internal controls over financial reporting, that may have come to the auditors attention during the course of the audit. These outputs from the audit are usually set out by the context in which the audit is performed, including regulatory requirements such as the Companies Act, 1965. Even though it is possible that some stakeholders can influence the nature of the outputs, most do not. For shareholders, the auditor’s report is the primary output. Stakeholders are likely to assess the value, usefulness and timeliness of reports issued by auditors as a proxy for audit quality.

Key Interactions within the Financial Reporting Supply Chain
Not only do the various stakeholders in the financial reporting supply chain play a crucial role in supporting and ensuring high-quality of financial reporting, but the manner and extent to which they interact with each other can have a particular impact on audit quality. For example, discussions between the auditor and the audit committee of a listed company during the planning stage may result in the use of specialist skills (input) and the form and content of the auditor’s report to the board of directors and the audit committee (output). In the case of private entities, it is common that auditors have a close professional relationship and interaction with the owners of businesses, and though their interaction is usually informal, it can influence audit quality.

Contextual Factors
Various factors within the business or operating environment in which entities operate, such as laws and regulations, principles and codes, can affect the nature and quality of financial reporting and consequently audit quality. It is imperative that when auditors perform an audit, they need to understand the entities environment (or the context) in order to determine how best to obtain sufficient appropriate audit evidence.


It is clear that the achievement of audit quality is multi-faceted and involves various factors which auditors have to take into consideration. Besides “technical” or “hard” factors discussed above, audit practitioners will also agree that other commercial factors such as audit fees (which is likely a major consideration!), cultural issues and the talent crunch, especially competent talent, also contribute towards achieving quality. It is therefore a challenging task that requires a concerted effort not only by practitioners but also other stakeholders to address in our noble attempt to reach the ultimate destination of the profession.

Ramesh Ruben Louis is a professional trainer and consultant in audit & assurance, risk management & corporate governance, corporate finance and public practice advisory.