July 12, 2008

Research Proposal on The role of quality financial audits: Malaysia and Hong Kong in Comparison

PROPOSED TITLE: The role of quality financial audits: Malaysia and Hong Kong in Comparison

 

INTRODUCTION

Financial audits exist to add credibility to the implied assertion by an organization's management that its financial statements fairly represent the organization's position and performance to the firm's stakeholders as the principal stakeholders of a company are typically its shareholders, but other parties such as tax authorities, banks, regulators, suppliers, customers and employees may also have an interest in ensuring that the financial statements are accurate. The audit is designed to reduce the possibility of material misstatement denoting missing information, whether caused by fraud or error as important enough to cause stakeholders to possibly change decisions.

 

RESEARCH AIMS AND OBJECTIVES  

-          to understand the business of the company and the environment in which it operates

-          to determine the major audit risks example, if sales representatives stand to gain bonuses based on their sales, and they account for the sales they generate, they have both the incentive and the ability to overstate their sales figures, thus leading to overstated revenue. In response, the auditor would typically plan to increase the rigour of their procedures for checking the sales figures

-          to assess the internal control procedures such as by checking computer security, account reconciliations, segregation of duties

-          to compile report to management regarding any important matters that came to the auditor's attention during performance of the audit

-          to evaluate and review the audit evidence obtained, ensuring sufficient appropriate evidence was obtained for every material assertion

-          to consider the type of audit opinion that should be reported based on the audit evidence obtained

 

LITERATURE OVERVIEW

 

Since the conversion models for quality audits are the immediate needs, it is recommended that the researchers intending to work may adopt ideal tactic for developing those conversion models. The worthiness of those conversion models can be improved in future by conducting case studies and referring to the inferences drawn out of them. Before anything else, the contemporary researchers working in quality-auditing arena shall focus their efforts toward developing effective financial accounting system, which shall be linked to an appropriate and unique audit standard enabling contemporary organizations to realize the importance of internal auditing and conduct them by managing and monitoring their performance so that the results are realized.

 

Figure One: Categorization of literature mining


Figure Two: Combined categories of literature mining on quality-auditing

Source of above figures, adopted from:

<http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0510200403.html>

 

 

Ideally, there can be such presence of best practices of high performing internal audit within organizations as indicated below:

-          Identify internal auditing customers and the stakeholders of the audit process

-          Outline each of these customers' needs and expectations and learn their current impressions of the department's performance

-          Establish business partnerships with internal auditing customers.

-          Involve all internal auditors in process improvement, including identifying areas for improvement

-          Devise a department mission statement that defines activities in terms of all systems: information, operating, strategic and financial controls

-          Construct human resource policy that blends audit and operational expertise to create new audit team profile

-          Develop process for communicating audit findings that reaches beyond quantitative findings to reveal qualitative issues and solutions - solutions that will be implemented

-          Use software applications to help focus audit work on those activities or processes that generate data outside of generally accepted parameters.

 

 

When an organization has an internal audit function, management may delegate to it some of its supervisory roles, especially with respect to the review of internal control. This particular internal audit function constitutes a separate component of internal control undertaken by specially assigned staff within the organization, with the objective of determining whether other internal controls are well designed and properly operated. Indeed, it was found from the surveys that a majority of the internal audit functions concentrated on the review of internal control and the organization's operational efficiency. The customers of internal audit can be said to involve, in the main, the management of the organization, which in turn represents the interest of the organization as a whole.

The best practice in benchmarking internal auditing in this respect concerns meeting the expectations of management about the role of internal audit. The surveys elicited the perceptions of the CEOs in terms of the internal audit approach and their understanding of internal audit functions. Responding CEOs were also asked about their views in respect of any possible changes in the role of internal auditing for the future. A review of the responses from the CEO survey provides some guidance on this best practice. In Hong Kong, there was also a significant number who believed that internal audit had an exploitative and authoritative approach. This could be a reflection of the cultural and business ethos in Hong Kong. In all countries, there was still a strong belief in a more traditional role of the internal audit function as an independent appraisal of the internal control process.

Internal auditing provides a value-added service for organizations. Internal auditors nowadays do not confine themselves to the routine review of internal control, but have evolved with the complexity of business to expand into a consultancy role for management. Internal auditors can act as an intermediary service to management in terms of reviewing operational efficiency, investigating outcomes of financial initiatives, providing knowledge of business activities, and identifying potential risks. Unlike external financial audits which are normally defined by statutes, internal audit has a wide scope, without such statutory limitation.

Thus, there identified overlapping stages of development for internal audit. These are financial audit, system based audit, management audit and social audit. There is widespread support for the use of management audits as a helpful extension to the financial audit, and which can deal with the efficiency and effectiveness of management in achieving company objectives, maintaining the budgetary control system, and the performance of the management of finance, accounting, marketing and production functions (Cited from, Innes, 1984 and 1987). The future orientation of management audits provides opportunities for improving profits, more effective use of company resources, and analysis of useful financial and operational data.

OVERVIEW OF METHODOLOGY

There can be utilization of certain surveys with the purpose of providing profile of internal audit in Malaysia in comparison to Hong Kong. The surveys will address number of issues concerning internal audit including attitudes and recognition, professionalism and the future role of internal audit such country involved. The surveys will then establish benchmarks for international comparisons of internal audit practice. The surveys will ascertain management understanding and expectations of the internal audit function, executive officers and internal audit managers will be the focus of the survey process

The target population will represent enough spectrum of private organization within each of the countries concerned. The data in the survey can be obtained through mailing of the questionnaires. The questionnaire data will be analyzed using the SPSS and will be subject for tabulation in lieu for interpretation and reporting. The survey instruments will be crafted so that perceptions of CEOs could be compared with those of the IAMs in respect of internal audit functions. The survey questionnaires then be send to CEOs of certain range of organizations, which included companies listed private as well as government organizations.

Thus, where internal controls are strong, auditors rely more on Substantive Analytical Procedures – the comparison of sets of financial information as well as financial with non-financial information, to see if the numbers matter and that unexpected movements can be explained. Aside, where internal controls are weak, auditors then rely more on Substantive Tests of Detail – selecting sample of items from the major account balances and finding hard evidence

 

 

 

REFERENCE

         Innes, J. (1984), "External managers' auditing of companies - a survey of bankers", PhD thesis, University of Edinburgh,

       Innes, J. (1987), "External managers' auditing of companies - a survey of credit managers", Managerial Auditing Journal, Vol. 2 No.1, pp.26-31.

LINK:

http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0510200403.html


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