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Also, TT
Also, TT
1.0 Introduction
This chapter includes the research details such as the background of the study, the
problem statement, the research question, the objective of the study, and the summary of the
topic.
In 1997, Malaysia was hit hard by the Asian financial crisis. Since then, Hong
Kong, Singapore, and Malaysia have taken significant steps and measures to improve
corporate governance, including greater openness and stricter application of rules to
prevent corporate governance failure. Poor corporate governance can lead to a lack of
accountability, while nepotism and concentrated ownership contributed to the
financial crisis. Malaysia has also made significant strides in the application of
effective corporate governance with the adoption of the Malaysian Code of Corporate
Governance (MCCG) in 2000.
Also, Tthe accounting profession is being developed by issuing public practice
licenses only to the most qualified candidates. The Malaysian Institute of Accountants
(MIA), a statutory body established to regulate and develop public practice in
Malaysia, has issued strict regulations. In 2010, the Audit Monitoring Board (AOB)
added extended these restrictions. In this context, the Audit Monitoring Board (AOB)
was established to monitor oversee, and ensure the accuracy of audited financial
statements of public interest entities.
As a result, this effort proceeded in 2007 with the creation of a new MCCG
that might take the place of the old 2001 MCCG. There were a number of significant
changes, including the requirement that the Audit Committee (AC) and external
auditors meet more frequently without the presence of the Board and the membership
of the Audit Committee (AC) being changed to include only non-executive directors.
It is indeed interesting to investigate whether this adjustment has a direct impact on
the choice of auditors and the caliber of Malaysians' audits. Additionally, Malaysia
was selected as the study's background since corporate governance there is still in its
development when compared to established nations like the AS and the UK.
Additionally, Malaysia's capital market is extremely unique in that relative enterprises
dominate and the majority of businesses are linked and ethnically managed.
Therefore, it would be intriguing to investigate how this component influences
Malaysia's corporate governance reform.
A move toward high-quality auditor education teaching will result from the
expanding need for accurate and reliable financial information. This is predicated on
an increase in the proportion of independent directors and an Audit Committee
(AC) composed entirely of non-executive directors. In order to provide stakeholders
with more accurate financial information, it is less likely that low-quality auditors will
be chosen and more likely that high-quality auditors will be chosen. The study also
attempts to explore and investigate the link between the choice of competent auditors
and corporate governance practices within organizations. This study aims to
determine whether factors such as ownership concentration, CEO quality, company
financial standing, ownership dominance, political connections, share price, and
family control of the company firms have a significant and direct impact on the choice
of quality auditors in addition to the composition and function of Audit Committee
(AC). Although there has been a lot of research on corporate governance, there
haven't been many studies on the Malaysian market. This is particularly true for
studies like this one, which examine Malaysian corporate governance procedures and
their effects on auditor selection.
The primary importance of the corporate governance structure has been the
subject of numerous studies; recent research explains why it is critical to sustaining
the business. Corporate sustainability is based on actions taken by management and
the board of directors with the intention of positively affecting the sustainable
elements (i.e., environmental, social, economic, political, and territorial). According
to scholars’ academics, corporate efficiency - the promotion of sustainability in all
organizational practices has a strong influence influences the quality of corporate
governance (Hahn and Scheer Messer, 2006; Mudiyanselage, 2018; Schrippe and
Ribeiro, 2019). The second type of governance, auditing, has recently come under
heavy criticism for its potential to influence both internal and external business
operations. The financial crisis
of 2008-2009 highlighted the weaknesses of auditing. The financial crisis at the turn
of the millennium showed that corporate governance, financial reporting, and
especially auditing was out of balance. Moreover, it is unclear how auditors can give
their clients a clean audit opinion for the years 2007 to 2009, considering that many
banks recorded significant losses during that period time.
Audit reports as the most support to enable communication with the company's
stakeholders in this context. The auditor's communication with stakeholders is one of
the key problems in the European Commission's Green Paper on its audit policy,
which was published after the global financial and economic crisis (European
Commission, 2010). The conclusion of the entire audit process is contained in the
auditor's report. It gives a brief overview of the financial statements that have been
audited, the roles and duties of management and the auditor, and the auditing
procedure, and ends with the auditor's opinion (ISA 700). However, despite its
significance, it is typically quite succinct and uniform. As a result, several authors
(Beard et al., 2016; Gutierrez et al., 2018) blame audit reports for being uninformative
due to their excessive standardization. Others claim that the majority of countries'
audit reports are uniform and do not mention company-specific information
(Gutierrez et al., 2018). Due to the fact that audit reports do not contain company-
specific information, many stakeholders have questioned the effectiveness of auditor
reporting (Beard et al., 2016).
The IAASB places emphasis on the importance of communication between the
auditor and the management of its clients in this situation in order to effectively solve
KAM concerns. The IAASB has regarded internal corporate governance in creating
auditing standards in the past, realizing the basic impact of corporate governance
features and structures on many elements of the company (e.g., ISA 260; ISA 315;
ISA 700). For the reasons outlined above, the existence of excellent corporate
governance capable of advising auditors in carrying out their obligations efficiently
can assist in improving the goals of the new ISA 701. Many regulators use self-
regulatory codes that outline the key elements and traits of an ideal model of proper
corporate governance, with a focus on the role and structure of the board of directors
and the duties of internal committees, in relation to the development of a reliable and
sustainable corporate governance system (Tukker et al., 2008). Indeed, prior research
indicates that higher- quality corporate governance systems can improve market
regulation and guarantee better protection for all stakeholders (Kang and Shivdasani,
1995; Mallin, 2002; Black et al., 2006).
Due to the effects of the economic crisis that started in 2007, many consumers users
of financial information from corporations have expressed their concern with the
procedure for auditing and verifying such information. Other than that, the auditor may be
involved in reporting Key Audit Matters as part of the audit engagement. However, the
intention of providing KAM is to increase the accuracy of information regarding
performed audits and to give financial users a foundation on which to keep
communicating with management and those in charge of governance. Consequently, there
are a number of issues that need to be resolved. The mistakes caused are also the
accountant's responsibility. Also, it influences the accountant's capacity to produce
quality outcomes.
There has been a requirement for more informative audit reports and for auditors to
give users of financial information more relevant data on the risks that organizations face
as a result of previous financial scandals and the increasing complexity of financial
reporting. However, knowing more about KAMs may be useful to those who use
financial statements, some are concerned that the disclosure may be perceived as
implying different levels of assurance in various parts of the financial statements, or "little
by little" assurance. The issue with this claim because it assumes that corporate managers
will be exposed to more narrative risk as a result of auditors exposing more KAMs.
Based on the problem statement that has been discussed, the research question of the
study are :
The aim of this survey is to present an early empirical inquiry into any possible
relationship between a system of sustainable corporate governance and the volume of KAMs
disclosed in the audit report. Furthermore, the study has the following three specific
objectives:
1. To identify the level of KAMs, and key audit matters disclosed in the years 2020,
2021 & 2022.
2. To measure the sustainable governance index for the sample companies.
3. To determine the relationship between sustainable corporate governance and the
number of key audit matters disclosed among the listed company in Malaysia.
This study provides material for lecturers in academic institutions and professional
organizations to understand the significance of audit committees, quality financial reporting,
and other key audit matters for all Malaysian companies. This material can be used by
academic institutions and professional organizations to prepare for the audit. Key audit
matters and corporate governance have benefited from this research. Furthermore, the
auditors give the same level of reasonable certainty for KAM areas as they do for other areas
of financial statements. There is no assurance that readers will interpret KAM disclosures in
accordance with this logic. Such disclosures could also increase the auditor's liability in the
case of a subsequent major misstatement. Moreover, specific research goals are mentioned,
describing what this study is meant to accomplish. To emphasize the value and significance
of this research, the significance of the study is finally discussed in this chapter.
1.6 SUMMARY
Malaysian Commission has mandated the formation of an audit committee via the
Malaysian Corporate Governance Code (MCCG). The existence of this committee mitigates
the agency problem associated with the manager-shareholder agent-principal relationship.
Some are concerned that disclosure may be perceived as implying different levels of
assurance in various parts of the financial statements, or "little by little" assurance. Auditors
give the same level of reasonable certainty for KAM areas as they do for other areas of
financial statements. Given the increased focus on KAM, KAM disclosures offer the
opportunity for counterfactual reasoning regarding what the auditor "should have known"
about any misstatement.
CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction
A move toward high-quality auditor education teaching will result from the
expanding need for accurate and reliable financial information. This is predicated on
an increase in the proportion of independent directors and an Audit Committee
(AC) composed entirely of non-executive directors. In order to provide stakeholders
with more accurate financial information, it is less likely that low-quality auditors will
be chosen and more likely that high-quality auditors will be chosen. The study also
attempts to explore and investigate the link between the choice of competent auditors
and corporate governance practices within organizations. This study aims to
determine whether factors such as ownership concentration, CEO quality, company
financial standing, ownership dominance, political connections, share price, and
family control of the company firms have a significant and direct impact on the choice
of quality auditors in addition to the composition and function of Audit Committee
(AC). Although there has been a lot of research on corporate governance, there
haven't been many studies on the Malaysian market. This is particularly true for
studies like this one, which examine Malaysian corporate governance procedures and
their effects on auditor selection.
The primary importance of the corporate governance structure has been the
subject of numerous studies; recent research explains why it is critical to sustaining
the business. Corporate sustainability is based on actions taken by management and
the board of directors with the intention of positively affecting the sustainable
elements (i.e., environmental, social, economic, political, and territorial). According
to scholars’ academics, corporate efficiency - the promotion of sustainability in all
organizational practices has a strong influence influences the quality of corporate
governance (Hahn and Scheer Messer, 2006; Mudiyanselage, 2018; Schrippe and
Ribeiro, 2019). The second type of governance, auditing, has recently come under
heavy criticism for its potential to influence both internal and external business
operations. The financial crisis
of 2008-2009 highlighted the weaknesses of auditing. The financial crisis at the turn
of the millennium showed that corporate governance, financial reporting, and
especially auditing was out of balance. Moreover, it is unclear how auditors can give
their clients a clean audit opinion for the years 2007 to 2009, considering that many
banks recorded significant losses during that period time.
Audit reports as the most support to enable communication with the company's
stakeholders in this context. The auditor's communication with stakeholders is one of
the key problems in the European Commission's Green Paper on its audit policy,
which was published after the global financial and economic crisis (European
Commission, 2010). The conclusion of the entire audit process is contained in the
auditor's report. It gives a brief overview of the financial statements that have been
audited, the roles and duties of management and the auditor, and the auditing
procedure, and ends with the auditor's opinion (ISA 700). However, despite its
significance, it is typically quite succinct and uniform. As a result, several authors
(Beard et al., 2016; Gutierrez et al., 2018) blame audit reports for being uninformative
due to their excessive standardization. Others claim that the majority of countries'
audit reports are uniform and do not mention company-specific information
(Gutierrez et al., 2018). Due to the fact that audit reports do not contain company-
specific information, many stakeholders have questioned the effectiveness of auditor
reporting (Beard et al., 2016).
The IAASB places emphasis on the importance of communication between the
auditor and the management of its clients in this situation in order to effectively solve
KAM concerns. The IAASB has regarded internal corporate governance in creating
auditing standards in the past, realizing the basic impact of corporate governance
features and structures on many elements of the company (e.g., ISA 260; ISA 315;
ISA 700). For the reasons outlined above, the existence of excellent corporate
governance capable of advising auditors in carrying out their obligations efficiently
can assist in improving the goals of the new ISA 701. Many regulators use self-
regulatory codes that outline the key elements and traits of an ideal model of proper
corporate governance, with a focus on the role and structure of the board of directors
and the duties of internal committees, in relation to the development of a reliable and
sustainable corporate governance system (Tukker et al., 2008). Indeed, prior research
indicates that higher- quality corporate governance systems can improve market
regulation and guarantee better protection for all stakeholders (Kang and Shivdasani,
1995; Mallin, 2002; Black et al., 2006).