Practitoner s Session 1 the Audit Oversight Board

© Securities Commission, Malaysia

Audit Supervision - The Audit Oversight Board, Malaysia


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About the Audit Oversight Board

• The Securities Commission Malaysia has been given the power by Parliament to undertake these functions:

• Promote and develop an effective and robust audit oversight framework in Malaysia:

• Promote confidence in the quality and reliability of audited financial statements in Malaysia: and

• Regulate auditors of Public Interest Entities (PIE)

• The AOB was established to assist SC in discharging the above functions



• Public Interest Entities (PIE) with the scope of the AOB consist of:

• Public listed companies• Licensed banking and financial institutions• Licensed insurance companies• Licensed Islamic banks• Registered Takaful operators• Development financial institutions• Holders of Capital Market Services License

carrying activities of dealing in securities, trading in futures contracts or fund management


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• AOB became operational on 1 April 2010

• The Board consists of:• An executive chairman• 6 non-executive members

• To maintain independence of the AOB, not more than 2 non-executive members of Board are members of MIA

• AOB charges registration fees (RM 5,000 per auditor) but significant amount of funding is provided by the SC



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The members of the Audit Oversight Board are:

• Nik Mohd Hasyudeen Yusoff, Executive Chairman• Dato’ Gumuri Hussain, Chairman of SME Bank• Datuk Nor Shamsiah Mohd Yunus, Deputy Governor

of the Central Bank of Malaysia,• Goh Ching Yin, Executive Director of the Securities

Commission Malaysia• En. Naim Daruwish, Chief Executive Officer of the

Companies Commission Malaysia• Cheong Kee Fong, Advocate and Solicitor of Cheong

Kee Fong & Co• Chok Kwee Bee, Managing Director of Teak Capital

Sdn Bhd


Domestic Commerci

al transactions / results

Directors and

management

Financial reporting function

Internal audit

function

External auditors

Financialstatement

s

Audit Oversight Board

Malaysian Institute of Accountan

ts

Companies

Commission

Securities Commissio

n

Bank Negara

Malaysia

Ministry of Finance

Other experts: Valuers,

Actuarists,Lawyers

Foreign Commerci

al transactions / results

Malaysian Accountin

g Standards

Board

Bursa Malaysia

Investors and

analysts

Educational

institutions

How AOB sees the Malaysian financial reporting eco-system


“Fostering high quality independent auditing to promote confidence in the quality and reliability of audited financial statements of public interest entities in Malaysia”

Outcomes

Strategic Themes

Services Areas

Confidence in audited financial

statements

High quality and reliable audited

financial statements

Independent and high quality audit

Resourceful and high quality audit

practices

High quality financial reporting practices by PIE

Standards setting and guidance

Registration

Inspection and Remediation

Enforcement of standards

Support adoption and implementation of standards

• Ensure no significant gaps with international standards

• Promote substance over form implementation• Monitor the effectiveness of the

implementation of standards by audit firms

Promote high quality audit practices• Enforce registration policy that promotes

quality and capacity• Drive quality audit practices through

inspection and remediation of audit firms• Set tone for quality through enforcement

actions

Influence financial reporting ecosystem• Collaborate with stakeholders in financial

reporting ecosystem• Promote research and discourse on audit

quality

Leverage on stakeholders support• Coordinate activities with other authorities in

Malaysia and abroad• Participate in international activities to gain

knowledge and experience and promote confidence in Malaysian audit quality

• Obtain higher financial support from stakeholders

Promotion of quality and

Collaboration with stakeholders


Key service areas of AOB

Standard setting

• Ensure auditing and ethical standards are in line with global best practices

• Support the implementation of standards

Registration

• Ensure audit firms and auditors auditing public interest entities are fit and proper

• Registration policy encourages capacity building of audit firms

• As at 31 December 2011, 75 audit firms individual and 298 auditors are registered with the AOB

Inspection and Remediation

• Assess the level of compliance of audit firms and auditors with auditing and ethical standards

• Issue inspection reports to audit firms and auditors

• Monitor how remediation plans of audit firms are implemented

Inquiry and Sanction

• Conduct inquiry when there is reason to believe that provisions of the Act, written notice or guidelines are breached, including non-compliance with auditing and ethical standards

• Impose sanctions proportionate to failures or breaches

Collaboration and Cooperation

• Cooperate with authorities in Malaysia and internationally in enhancing audit quality

• Collaborate with other stakeholders in enhancing quality of financial reporting in Malaysia


Compliance with auditing (including ISQC1) and ethical standards is an integral aspect in maintaining audit quality

As Malaysian Institute of Accountants (“MIA”) is responsible to set or adopt standards applicable to auditors in Malaysia

AOB has the power to direct MIA to establish, amend, modify or alter its prescribed standards, if needed

Currently auditing and ethical standards in Malaysia are on par with standards issued by IAASB and IESBA

Standard setting


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Form 1 (Individual

auditor) and Form 2 (Audit

Firm)

Registration Fees

(RM5000 per individual auditor)

+

Vetting Process

• SC adverse record system

• MIA adverse record

• Police check

• MACC check

Head of Registration Recommends to Approve with/without

additional conditions

Board approves

Recommendation

Executive Chairman executes

decision via ARASApplicant

notified via ARAS and written letter

Executed Through Auditor Registration Application System “ARAS”

Registration


Fit and proper criteria per s.31P SCA• Licensed auditor under s.8 CA 1965• Not convicted of any offence involving

fraud or dishonesty• Engaged in any practices which reflect

discredit on ability to meet professional auditing standards

• Undischarged bankrupt• Subject to sanction under s.31Z

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Registration


As at 31 December 2011• 75 audit firms and 298 individual auditors are registered

with AOB

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Profile / Partnership Structure

No of Audit Firms No of Individual Auditors

Sole Proprietors 13 13

2 – 4 partners 48 110

5 – 10 partners 8 36

> 10 partners 6 139

TOTAL 75 298

Registration


Milestones• Established 1 April 2010• Registered Firms and Auditors as at 30 September 2011

76 audit firms and 305 individual auditors• Standard setting and implementation of standards

Comments on Exposure Drafts Observer in MIA Auditing and Assurance Standards

Board “AASB” Working Groups• Inspection activities

23 regular inspections and one special inspection to-date

Monitoring of the firms’ remediation plans

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*

AOB’s progress


Milestones (cont.)• Communication and collaborations

Member of International Forum of Independent Audit Regulators “IFIAR”

Observer in Standards Coordination Working Group for IFIAR

Project manager for World Bank Accounting and Auditing Reports on the Observance of Standards and Codes (“ROSC”)

Joint AOB-MIA forums PCAOB Conference in Washington DC, US IFIAR Inspection Workshop in Washington DC, US ASEAN regulators meeting, common training and

cooperation14

AOB’s progress


Milestones (cont.)• Engaging the stakeholders - AOB Executive Chairman

Participation in various local events relating to financial reporting and audit quality

Panelist on the role of audit and trends in auditing at Hong Kong ICPA

Singapore 2011 Public Accountants Conference on “Malaysia’s Experience in Setting up and Independent Oversight Function”

ASEAN Regulators Meeting – Bangkok, Thailand

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AOB’s progress


Inspection process

Firm review (ISQC1 and MIA by-laws)

Leadership

Ethical requirements

Client acceptanceand continuance

Human resource

Engagement performance

Monitoring

Engagement review (ISA)

Planning

Risk assessmentand response

Audit evidence

Documentation

Compliance with regulation

Communication

ReliableAuditedFinancial

Statements


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Inspection Process – Regular Inspection

Notification of

inspection

Selection of Firm

Selection of engagements

Planning

Risk assessmen

t

+

On-site Inspection

Entrance Meeting

Firm level

Engagement level

+

Matters Arising

(Exception Reporting)

Validation of Matters Arising (With

engagement team)

Exit Meeting (Consolidation of matters)

Post Inspection

Draft Inspection Report

Send to Firm

Firm’s response

Final Inspection

Report

Remediation plan

*

*

Inspection process


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Cash payments

Inspection Process – Type of Deficiencies

SignificantDeficiencies

Deficiencies

May impact the basis of audit opinion – e.g. sufficiency and

appropriateness of evidence or the appropriateness of judgment areas

Pervasive issue where the impact cannot be easily quantified

Other than significant deficiencies, if viewed ‘collectively’ may impact the basis of audit

opinion

Inspection process


Inspection Process – Communication

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Basis of Inspection

Risk Based Approach

Should not be taken to provide

assurance

Compliance in substance

Certain aspects of firm’s quality control or audit

engagement

Quality control of financial statements

are free from any deficiencies not

uncovered

Engagement files and relevant documents

Interview key engagement team

members

Documentation

Verbal representation

considered No documentation

= No evidence = No work done

Inspection process


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Inspection

Inspection Report

May publish if deficiencies

not remediated

Inquiry

Proportionate Sanction

Right to be

heard&

Appeal to SC

How do we exercise due process oversight

*

Inspection process


• Firm Structure, Policy and Procedures• Audit Methodology*• Training*• Human Resources• Effectiveness of EQCR role• Communication• Monitoring Quality*• Engagement Review Deficiencies #• Performance Measures for Remediation (focus on

outcome)

* To incorporate emphasis on professional skepticism # To identify root cause of the deficiencies

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Remediation framework


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Inspection Scope • Commenced in August 2010

Year No. of audit firms

inspected

No. of individual auditors

No. of audit engagements

reviewed

August – December 2010

6 32 22

January - December 2011

17 48 52

Inspection observation


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Manufacturing33%

Properties & Construction

18%

Shipping, Utilities and Oil & Gas

10%

Financial Services (Banks, CMSLs)

16%

Trading & Services11%

Conglomerate7%

Plantation5%

Inspection Activities by Sector

Inspection observation


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Final Inspection

Report

Notification of Inquiry

Inquiry at AOB Office

Contravention of any provisions of Part IIIA of the SCA or breached or failed to comply with any condition of registration or any written notice/guidelines issued by the SC.

Conducted by Inquiry Officers.

Show cause letter

Where basis for action is established, an opportunity to be heard would be given to the firm or auditor in concern to respond and justify why action should not be taken on the firm or the auditor

Proportionate Sanctions

• List of sanctions provided under S31Z

• Meted out based on severity of the deficiencies

• Requires AOB Board’s approval

• Right to appeal to SC within 30 days



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• Options for sanction available to AOB:– Direct the person to comply with conditions

imposed– Reprimand– Require the person to take steps to remedy the

breach– Require the person to undertake relevant CPE– Assign a reviewer to oversee audit undertaken– Prohibition from accepting the audit of PIE for a

period not exceeding 12 months– Prohibition from auditing PIE for a period not

exceeding 12 months or permanently– Penalty not exceeding RM 500,000



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Cash payments

Audit Quality

Impact - Robustnes

s of

responses to

identified risks

Basis of

Audit Opinio

n

Reporting

Audit Processand

Procedures

Plan Execute

Conclusion Reporting

Audit Evidence Financial

statements

AOB’s perspective of audit quality – An Engagement Review

Documentation

Output

General Factors Human Resource Partners workload

Risk Appetite

Specific Factors Engagement

Performance Monitoring

Input

Audit Opinion Based on Sufficient and Appropriate Audit Evidence

AOB’s perspective of audit quality