KUALA LUMPUR (Aug 21): Securities Commission Malaysia’s (SC) Audit Oversight Board (AOB) has urged audit firms to strengthen their audit quality by embedding professional scepticism in their conduct of financial statements audits, and enhancing their internal monitoring processes.
The AOB said auditors need to challenge management’s assumptions more rigorously, particularly in high-risk areas such as impairment assessments, revenue recognition, and asset valuations.
“Auditors need to consistently apply an appropriate degree of professional scepticism in the conduct of financial statements audits,” AOB said in its Annual Inspection Report 2024 published on Thursday. The commission also noted that reliance on management explanations without sufficient corroboration remains a concern.
AOB also highlighted that major audit firms — those with more than 50 public-interest entities (PIEs) audit clients and a total market capitalisation of above RM15 billion — are reminded to give due consideration to the inherent complexities of client entities, to mitigate lapses in professional judgement when evaluating accounting estimates and assumptions.
Other audit firms, meanwhile, were reminded of the “fundamental need to strengthen technical competencies and enhance the execution of basic audit procedures”.
The Annual Inspection Report 2024 inspected 40 audit engagements and 40 partners across nine major audit firms and four other audit firms.
Firm-level inspection
At the firm level, the AOB said in the report that some audit firms still fall short of the International Standard on Quality Management (ISQM 1). It noted that in several cases, firms did not maintain sufficient documentation to evidence monitoring activities performed, including the nature, timing, and extent of such procedures.
"This raises concerns over the robustness of the monitoring process of these firms in assessing the effectiveness of their system of quality management,” the regulator said.
The AOB stressed that firms must evaluate whether the design of planned audit procedures is adequate in obtaining sufficient appropriate evidence to conclude on the operating effectiveness of identified controls. It further emphasised that audit firms must strengthen their commitment to audit quality as a core value, rather than prioritising commercial considerations.
During inspections, the AOB also identified cases where firms failed to comply with relevant ethical requirements, including the Malaysian Institute of Accountants (MIA) By-Laws (on Professional Ethics, Conduct and Practice).
“In view that auditor independence is critical in fostering trust among investors towards the audit profession, firms are reminded to closely monitor its compliance with relevant ethical requirements,” the report said.