This article was first published in the October 2015 Malaysia edition of Accounting and Business magazine.

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Concerns about audit quality in the Malaysian external audit profession are nothing new and have been discussed, deliberated and debated over many years. However, regulators and practitioners alike were taken aback when the World Bank published the Malaysian variant of its Report on the Observance of Standards and Codes: Accounting and Auditing (ROSCAA) in February 2012.

According to the report, ‘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: ‘There are many practitioners who are struggling to comply with increasingly complex and prescriptive audit standards (including ISQC 1). 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 and professional compliances, especially on independence, consideration of non-conventional audit subject matters such as sustainability and environment, as well as changing stakeholders’ expectations from the auditors, are collectively putting pressure on 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 Ministry of Finance set up The Committee to Strengthen the Accountancy Profession (CSAP) to formulate and recommend strategies and measures to strengthen the profession and improve its contribution to the enhancement of the country’s competitiveness, in line with the government’s transformation agenda.

The CSAP’s Report on the Strengthening of the Accounting Profession in Malaysia, issued in December 2014, concurs with the ROSCAA 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;
  • review of accounting and auditing standards of private entities;
  • a holistic and independent review of the governance of the accountancy profession in Malaysia;
  • monitoring and review arrangements in improving the quality of the audit of private entities;
  • improvement in the education and training of accountants in Malaysia.

The report also states that while some of the issues noted above 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 reform of accountancy education and training – still need serious consideration.

IAASB framework

For an external audit to meet its objective, it is paramount that users of audited financial statements are confident that the auditor has worked to a suitable standard and that a 'quality audit' has been performed.

However, despite its frequent use in debates among stakeholders, in communications from regulators, standard setters, audit firms and others, and in research and policy setting, audit quality is a complex subject with no universal definition or analysis.

For this reason, the International Auditing and Assurance Standards Board (IAASB) developed a Framework for Audit Quality, which was issued in February 2014.

The primary objectives of the IAASB framework are:

  • raising awareness of the key elements of audit quality;
  • encouraging key stakeholders to explore ways to improve audit quality;
  • facilitating greater dialogue between key stakeholders on the topic.

The IAASB expects the framework to generate discussion and positive actions to achieve a continuous improvement in audit quality. It is important to note that the conduct and performance of audits is subject to compliance with International Standards on Auditing (ISAs), International Standards on Quality Control 1 (ISQC 1), and ethical and regulatory requirements. 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 is a reference to facilitate audit quality.

Framework in detail

The framework is made up of five interconnected elements.

Inputs: The framework underscores that quality audits will require auditors to exhibit appropriate values, ethics and attitudes; have sufficient knowledge, skill and experience; and be allocated sufficient time to perform the audit work. These inputs can then be applied at various levels, as follows:

  1. The audit engagement level – which mainly relates to ethical behaviour and competence of audit partners and professional staff;
  2. The level of an audit firm and therefore indirectly to all audits undertaken by that audit firm – mainly relates to firm structure and practices;
  3. 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, regulating the profession and standard setting.

Process: Achieving audit quality also entails auditors applying meticulous and careful audit and quality control procedures that comply with laws, regulations and applicable standards of auditing throughout the audit process. Such a disciplined and structured approach would encompass planning and risk assessment; audit performance and 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 resolution of differences in opinions.

The framework also notes 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 here.

Outputs: These include reports and information formally prepared and presented by the auditors to their clients, as well as outputs arising from the auditing process that are generally made available for public consumption. These may include, for example, management letters that highlight deficiencies in the entity’s financial reporting practices and internal controls over financial reporting, which may have come to the auditors' attention in 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 for some stakeholders to 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: Not only do the various stakeholders in the financial reporting supply chain play a crucial role in supporting and ensuring high-quality 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 for auditors to 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 in the 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 understand the entity's 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 (likely a major consideration), cultural issues and the talent crunch also contribute towards quality. It is therefore a challenging task that requires a concerted effort not only by practitioners but also by 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