Question 1

It is imperative that the account of all companies to be audited annually by an independent auditor regardless of their size, public or private and it has been denoted by Section 169(1), Section 174(1) and Section 174(2) of the Company Act 1965. Hence, auditing is a mandatory process for all companies in Malaysia. However, auditing was not exactly made compulsory for all companies across the globe despite of its function to express the opinion of the truth and fairness of the financial statements of the company in accordance with the requirement of the Companies Act 1965. For an example, United Kingdom did not legally obligate all its companies for annual audit requirement by exempting the small companies from this requirement and over the past two decades, the regime has amended the legislation which is Section 249A of Company Act 1985 by increasing the turnover threshold and the total of the balance sheet as well in order to extend the definition and scope of small company in the country. The UK government is aware that the process of accounts being audited annually is a costly process for a small company wherein it is a huge wastage of money and resources on which it is reducing the profit of the small company compared to the multinational companies (MNC). Furthermore, it is also argued that auditing was not providing any improvements on the management of a small company and there are not many external users for an annually audited account. The latest amendment for defining a small company by UK was total revenue not exceeding 4.8 million, total assets not beyond 2.4 million and employees of not exceeding fifty.

Others such as United States, several other European such as Spain and most of the ASEAN countries such as Australia had remove mandatory annual audit from their legislation or exempted small companies from the annual audit legislation. There is an argument that audit was wasting money, time and resources of the small companies since it is incurring huge costs for this process. Therefore, resulting in the profit reduction since the audit fees is high. However, the audit fees would be a double edge if the company is facing losses or not generating any profits at all. Another argument is that most directors

themselves are the shareholders of the small company as well as the user of the statutory accounts which means it is family-managed or owner-managed. Hence, the risk of internal and external fraud or mismanagement would be very low compared to large companies since the delegation of control is very low. Furthermore, the accounts of the small companies is not going to be published since there is a doubt whether the banks, employees, taxation authorities and the managements will be relying on the statutory audited account. Another reason is that the record keeping of accounts was rather unsophisticated. There are not much complicated activities and transactions which requires the account to be checked in detail.

Despite of being viewed as a red tape for the small companies, certain countries are still a proponent to these legal obligations for all companies not withstanding of sizes or not generating any profitability. A country that can embody it will be Malaysia. There is a rational of why these countries being the proponents to mandatory annual audit for every company including the smaller size. Firstly, to detect any possible mistakes or errors and frauds on the companys account. Any mistakes or errors on the record keeping of an account would have been resulted to the over valuation or under valuation of the profitability, properties and cost of a company. Hence, the true and fair value concept will not be followed accordingly. Furthermore, a director of the company may take advantage of the accounting regulations and standards to defraud the shareholders, stakeholders and publics. As long as there is a business operated, there will be a possibility where the director might breach their fiduciary duties or the management to reduce their pressures by manipulating the accounts for self interest or to conceal any proof of their mismanagement. The auditor can express their opinion on the true and fairness of an accounts and financial statements if such repercussions or doubts occurred since the law has delegated the rights and duties to the independent auditors to do so. Hence, the implementation of mandatory annual audits for all companies was a step to deter any frauds and breach of any accounting standards and regulations. Secondly, it is a general concept for auditing to provide assurance. An audited account and financial reports can spur confidence among the shareholders albeit they are the only user of the statutory account. There are certain times where the shareholders are willing to spend in

order to determine, verify, measures and validate the performance and position of their company as well as the effort of their managements on generating revenue for their companies. By this way, it will increase the credibility and importance of the financial statement among the shareholders, employees and publics for decision making rather than viewing it as a statement of showing how much it earns which has neglected the crucial role of the financial statement. Thirdly, there is another advantage point for audit where it can certainly act as a value added to a company. A companys performance and growth would be limited if there is no recommendations and opportunities for them. An audit can provide a descent recommendation for them if they are really well performed and managed. Therefore, it will spur the confidence among the shareholders and stakeholders of that company if there is any plan for expanding or any bank lending in the future. Fourthly, it would be a threat or affecting the survival of the audit firms in certain countries of which their main source of income will be annual audit. For an example, about 92% of the accounting firms in Malaysia are proprietorships or two partner outfits which rely on audit as their source of income. Hence, exemption of small companies would be much more difficult than is perceived.

If I have to choose between these two arguments, I will be the proponent of against the abolishment of mandatory annual audits. It is undeniable that audits involving too much money and time but behind this pain, there is a gain as well. Even though there might be a little or without any delegation for the management of small companies but the possibility of frauds are exist. Audits provide assurance to the stakeholders that the company did not involve in accounting manipulation and to assured that the directors as well as his management are managing their in accordance of the business ethics. This will increase the reliability and credibility of the financial statements since it is occasionally used in decision making and performance evaluations. Furthermore, it can be detected if there is any mismanagement or the employees trying to defraud their superiors or shareholders for their own benefits regardless of the company sizes. This is to deter any financial or commercial crime to be happens as well as wastage of the companys resources. Hence, there wont be any risk of delegations, frauds or losses for the stakeholders. Another rational is that many accounting firms which is in the form of

proprietorship was depends on audit fees as their main source of income. If such regulations are abolished, it is difficult for many accounting firms to survive and limiting the opportunities of accounting jobs. Audit is a win-win situation for both parties.

Audit might be a red tape to some companies especially the undersize but there might be a possibility that the statutory accounts to come into the function when there is a sudden planning of growth, applying for loans, merged with other companies and so on. Hence, it is better to get ready with an umbrella rather than making yourself difficult when there is a need to substantiate your profitability and performance in the future.

Question 2

An auditors duty is to provide an assurance, giving opinions and act as a fraud detector for their clients financial statements. Its objective is to add value on the

financial statements in order to increase its reliability and credibility and furthermore, auditing would have been a very important task if it is published to the unlimited third party if the auditors are auditing a public companys account. Hence, the role played by an auditor is imperative concerning their responsibilities and liabilities of providing their independent opinions in order to provide a better coverage of a companys actual financial position and strength. However, an auditors task is getting tougher and intense as well as involving scrutiny on their duties due to the accounting scandals, uncertain collapses and undetectable frauds which is occurs within this decade at the beginning of year 2000. The vivid example will be Enron, Bank of Credit and Commerce International, WorldCom and Lehman Brothers where it has causes their audit firms to be involved in litigations in which their auditors was alleged of providing a biased opinion in order to defraud the stakeholders. However, there are certain times that the audit either might not be able to detect the frauds, being deceived by the accounts or had been provided a false information. Hence, causing the opinion provided to be inaccurate and causing them to be legally liable due to the inaccuracy of their opinion.

There are three types of opinions which are appropriate for every audit report and there are except for, adverse and disclaimer on which it will state the problems or comments regarding a companys financial statement. However, the reliability and accuracy of the opinion might be deeply affected due to few circumstances. Firstly, there is a separation between of management and ownership between the shareholders and the agent of a company. Hence, there is a wealth delegation to the director by instructing them to increase the wealth of the shareholders. The duty of an auditor comes in when a director is going to present the annual financial statement to their shareholders. An auditor will assured the credibility of the financial statement by providing their opinion in their audit report based on their knowledge and expertise. Then again, an auditor must

first seek for the cooperation from their client in order to determine the objectivity and accuracy of the financial statement since the agent of a company holds all the relevant financial information and transactions. Problem comes in when the management is taking advantages from the accounting loopholes by providing inaccurate and misleading information to the auditors or the management deceived the auditor by not disclosing the relevant past transactions or information or providing fake transactions. Hence, it will be much more difficult for the auditors to scrutinize the accounts or unable to verify the revenues, expenses, assets, liabilities and equities of the company. Such problem might cause the auditor to misinterpret and misjudged the financial statements by providing inaccurate opinions. Secondly, there is a limitation on their role and authority when an auditor is handling an auditing process. An auditors opinion may sometime been altered by their partners or superiors on which the new opinion is not representing their actual comment and thoughts on the financial statements. Hence, it might be unfair for the auditor on duty if they are liable with the opinion they since there is a mix suggestion from their superior or partners. Furthermore, the auditing process was based on sampling basis on which they are only verifying or checking only a few two to three months out of a year which incurred the highest amount of transaction. It is impossible for an auditor to exactly check the whole companys transaction since the daily business of a company might be involving tons of transaction. This sampling method by caused the auditor to miss out the months that conceal false accounting entries, misleading information, forged documents, unrecorded liabilities, or recorded transactions with undisclosed elements. Thirdly, an auditors opinion is still subjected to uncertainties and internal cooperation as well. Uncertainties such as inflation, recession, politics and environmental cause are often being a few issues a companys survival and management and all this are not under the control and predictions of an auditor. They can provide an opinion about how a company is well managed and what is the objectivity of their financial statement as well as providing consultations for company but if there is no cooperation from the internal team, it is very difficult for an auditor to exercise their discretion to provide their best opinion.

Albeit they are certain times that the auditor should not be liable with the opinions they had made but this is provided that if they have been following the rules and

regulations as provided under the IFRS, IAS and ISA. There are certain times that the auditor should be held legally liable to what they have opine in their reports. It is fundamental for each auditor to be independent from their client in order to be able to exercise their discretion independently. If an auditor has direct or indirect relationship or interest with their clients, the auditor should be held liable of what they opine if they have the intention of defrauding the shareholders by providing a biased and falsifying audit report. Furthermore, an auditor might sometime being reckless or ignorance by not following the regulations or skipping a certain procedure during the auditing process which causes them to misinterpret the financial statement. They should be held liable in such event as well.

Thus, an auditor should be held liable of they have opine to some extend of which it is provided that they have been following the laws and regulations in provision that what they are commenting here is consideration of public interest. That is why, there should another regulation added to supervised and managed if such incidents really occurred in order that the auditors are not blindly held liable with their inaccurate opinions.