Audit Supervision - The Audit Oversight Board, Malaysia

Securities Commission, Malaysia

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

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About the Audit Oversight Board

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

Securities Commission, Malaysia

About the Audit Oversight Board

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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About the Audit Oversight Board

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

Securities Commission, Malaysia

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How AOB sees the Malaysian financial reporting eco-system

Securities Commission
Domestic Commercial transaction s / results

Companies Commission

Bank Negara Malaysia

Ministry of Finance

Investors and analysts

Directors and management

Financial reporting function

Internal audit function

Financial statements

External auditors

Audit Oversight Board

Foreign Commercial transaction s / results

Other experts: Valuers, Actuarists, Lawyers

Malaysian Institute of Accountants

Bursa Malaysia

Malaysian Accounting Standards Board

Educational institutions

Securities Commission, Malaysia

Foste ring high qua lity independe nt auditing to promote c onfide nce in the quality and re lia bility of audited fina ncia l stateme nts of public interest e ntitie s in Malaysia Stra tegic The mes Support adoption a nd impleme nta tion of sta nda rds 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 a udit practice s 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

Outcomes

Se rvices Are as

Confidence in audited financial statements

Standards setting and guidance

High quality and reliable audited financial statements

Registration

Independent and high quality audit

Influence fina ncial reporting e cosystem Collaborate with stakeholders in financial reporting ecosystem Promote research and discourse on audit quality

Inspection and Remediation

Resourceful and high quality audit practices

High quality financial reporting practices by PIE

Levera ge 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

Enforcement of standards

Promotion of quality and Collaboration with stakeholders

Securities Commission, Malaysia

Key service areas of AOB

Standard setting

Registration

Inspection and Remediation

Inquiry and Sanction

Collaboration and Cooperation

Ensure auditing and ethical standards are in line with global best practices Support the implementation of standards

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

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

Conduct inquiry when there is reason to believe that provisions of the Act, written notice or guidelines are breached, including noncompliance with auditing and ethical standards Impose sanctions proportionate to failures or breaches

Cooperate with authorities in Malaysia and internationally in enhancing audit quality Collaborate with other stakeholders in enhancing quality of financial reporting in Malaysia

Securities Commission, Malaysia

Standard setting

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

Securities Commission, Malaysia

Registration
Executed Through Auditor Registration Application System ARAS

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 Recommendat ion

Applicant notified via ARAS and written letter

Executive Chairman executes decision via ARAS

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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
Profile / Partnership Structure Sole Proprietors 2 4 partners 5 10 partners > 10 partners TOTAL No of Audit Firms No of Individual Auditors

13 48 8 6 75

13 110 36 139 298

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AOBs progress
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

Securities Commission, Malaysia

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AOBs 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 cooperation

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AOBs 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 Malaysias Experience in Setting up and Independent Oversight Function ASEAN Regulators Meeting Bangkok, Thailand

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Inspection process

Firm review (ISQC1 and MIA bylaws)

Leadership

Engagement review (ISA)

Planning

Ethical requirements Client acceptance and continuance Human resource Engagement performance Monitoring

Risk assessment and response Audit evidence Documentation Compliance with regulation Communication

Reliable Audited Financial Statement s

Securities Commission, Malaysia

Inspection process

Inspection Process Regular Planning On-site Inspection Inspection

Risk assessment Entrance M eeting

Post Inspection Draft Inspection Report Send to Firm

Selection of Firm

Firm level

* Exit Meeting (Consolidation of matters)

Firms response

Selection of engagements

Engagement level *
Validation of Matters Arising

Final Inspection Report

Notification of inspection
Securities Commission, Malaysia

Matters Arising (Exception Reporting)

(With engagement team)

Remediation plan

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Inspection process

Inspection Process Type of Deficiencies

Cash payments

Significant Deficiencies

M ay 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

Deficiencies

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

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Inspection process

Inspection Process Communication

Basis of Inspection

Risk Based Approach

Should not be taken to provide assurance

Quality control of financial statements are free from any deficiencies not uncovered

Compliance in substance
Engagement files and relevant documents Interview key engagement team members

Documentati on

Certain aspects of firms quality control or audit engagement

Verbal representation considered No documentation = No evidence = No work done

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Inspection process How do we exercise due process oversight

Inspection

Inspection Report

Inquiry
Right to be heard & Appeal to SC

May publish if deficiencies not remediated

Securities Commission, Malaysia

Proportionate Sanction *

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Remediation framework
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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Inspection observation

Inspection Scope

Commenced in August 2010

Year No. of audit firms No. of individual inspected auditors No. of audit engagements reviewed 22 52

August December 2010 January - December 2011

6 17

32 48

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Inspection observation

In sp e c t i o n A c t i vi t i e s b y S e c t o r

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Inquiry and Sanction

Final Inspection Report 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.

Notification of Inquiry

Inquiry at AOB Office 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 Boards approval Right to appeal to SC within 30 days

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Inquiry and Sanction 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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Securities Commission, Malaysia

AOBs perspective of audit quality

AOBs perspective of audit quality An Engagement Review
Input Reporting Output Cash payments

Audit Process and Procedures

Audit Quality

Plan Execute Conclusion Reporting

Impact Robustness of responses to identified risks

Basis of Audit Opinion

Audit Evidence

Documentation workload Performance Monitoring Securities Commission, Malaysia Risk Appetite

General Factors Audit Opinion Based on Sufficient Human Specific Factors Resource and Appropriate Audit Evidence Engagement Partners

Financia l stateme nts

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