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The important of corporate governance is emerging rapidly and published in worldwide such as USA, UK, Japan and many other countries according the explanation made by Joshi and Wakil (2004) in their journal. The corporate governance literature presumes that the Board of Director playing an important role in the governance function since the concept of company as a separate legal entity came into existence. Shareholder will appoint Board of Director to manage operation of company and achieving sufficient return for shareholders (Ballesta and García-Meca, 2005) however those agents (Board of Director) might not always act in the interests of the company's owners (shareholders) under the conflict of agency theory.
The Board of Director might present financial statements that contain problem such as misstatement, fraud, bias and etc. If those shareholders no found out those problems, they will not know that the company is going concern and continue trust the performance of Board of Director. To gain confidence believe that those financial statement prepared by Board of Director are accurate and comply with the required standards and regulation, shareholders necessarily appointed independent external auditor (also known as statutory auditor which is requiring by Companies Act 1965 in Malaysia) to examine those financial statement which prepared by Board of Director and express their opinion on whether the financial statement are prepared and presented in all material respects in accordance with an identified financial reporting framework in a true and fair view and issues standard audit report.
This study firstly is discussed what is the standard audit report, following up is the purpose of standard audit report is prepared and at the end is the usefulness of standard audit report to stakeholders.
Standard Audit Report (SAR)
The standard audit report address the scope of auditor's legal responsibilities is prevent and detect those fraud by verifying all transactions, exercise considerable judgment in the selection of audit procedures, reliability of internal control of the entity and the duty of management is prepared the financial statements and maintenance those accounting records. (Dixon, Woodhead and Sohliman, 2006; Fadzly and Ahmad, 2004)
Section 174 of the Companies Act 1965 requires the auditors should state in his opinion whether the financial statement give a true and fair view, and are in compliance with Act and applicable approved accounting standards; and the accounting and other records and the registers required by the Act have been properly kept by the company in accordance with the Act. Section 169 of the Companies Act 1965 state that the director of company need present audited financial statement at annual general meeting (AGM) and make sure those statement give a true and fair view of the company's affairs and results of its operation.
According to the Al-Thuneibat, Khamees and Al-Fayoumi (2008) in their journal, standard audit report represents the mainly important part of the audit process and it is the principal channel of communication between the auditor and the user of the financial statements. Those auditor will addresses those financial statements are prepared under International Financial Reporting Standards (IFRS) which grown in terms of the quantity of revelation and the detail therein and presented truth and fairly in accordance with Generally Accepted Accounting Principles (GAAP) and are based upon the audit within a deemed materiality level. Standard audit report is the review and evaluation report resulted from the test of control and substantive procedures that auditor performed therefore the report must reasonable, objective and acknowledged by the users as a significant source of information.
According to Giacomino and Akers (2012), there have been few changes and improvement in the standard audit report since several years and the considerable changes in the audit report are: added "independent" to the title to identify this as an audit report and differentiate it from other report on financial statement that might be issued by Board of Director, addressee to the members of the company.
Introductory paragraph, changed "examined" to "audited" to identifies which financial statement are enclosed by the auditor's report and when the audit was accomplish, added the wording that "these financial statements are the responsibility of management" to elucidate that the financial statement are the duty of management and added this specific statement "our responsibility is to express an opinion on these financial statements based on our audit" to regarding the auditor's responsibilities is to express opinion on financial statement.
Scope paragraph, auditing standards require that an audit be "planned and performed to obtain reasonable assurance about whether the financial statements are free of material misstatement" and added two sentences to describe audit procedures to explain the scope of the audit so the standard of the auditor work is clear and other factor such as limitation of audit testing is known, at the end of the scope paragraph, added "we believe our audit provides a reasonable basis for our opinion."
Opinion paragraph, adding this statement "in all material respects" to present the auditor's opinion on the financial statement in terms of true and fair view and replaced the "subject to" wording with an unqualified opinion and explanatory paragraph to guarantee the reader that the audit has been carried out in accordance with recognized principles and practices.
Date of the report to inform the user that the auditor has considered effects of transactions that the auditor became aware of on the statements up to that date. Auditor's address, usually list out where the auditor responsible locate so he can be contacted if necessary. Auditor's signature, the auditor's report should be signed assume responsibility for the audit.
Those changes were intended to make the audit report more useful by defining an audit and more effectively communicating the responsibilities of management and the auditor with the hope that SASs (53-61) would help reduce the expectation gap.
However, auditor's opinion in standard audit report is self explanatory and based on tests performed based on statistical samples, reviews, discussions with management and most importantly levels of materiality that is different among entities. Those auditors are responding to audit failures, this incentive auditor follow up harsh and proper guidelines for providing high quality standard audit report which focus on the key areas of risk to establish and preserve their reputations. (Fafatas, 2010)
The purpose Standard Audit Report
Monitoring agents' activities and improving transparency
According to the agency theory, independent external auditor considered as a consistent group in monitoring the agent's activities and trim down the benefits from withholding information because the auditors helping principal keep an eye on the agent's activities and improving transparency of all the business activities. As a result, auditors will issues standard audit report that highlights internal control system and how they monitoring the financial reporting process in helping users to understand the internal control system and financial reporting process. Therefore the standard audit report will increases the trustworthiness of financial statement, provide diverse useful information and assist the users of the report valuation the performance of the company and making wisely decision. (Hashim and Rahman, 2011)
Usefulness of the Standard Audit Report
Supporting stakeholders making wisely decision
Stakeholders needed standard audit report to support their investment and financial decision, thus auditor timely submission the detailed standard audit report will gives more confidence to those stakeholders even the auditing has inherent limitations in terms of scope of work and materiality.
According the survey research of Gómez-Guillamón, 2003, once the standard audit report publicly known, those users of the standard audit report such as shareholders, potential investors, bankers and suppliers will make shrewdly investment and lending decision based on their judgment and confidence with their final decision, this has show that standard audit report has greatest influence on making decisions at aggregate level. Company's shareholders and potential investors evaluate the performance of the company, bankers evaluate the credit worthiness of the company before lending and suppliers investors evaluate the liquidity of the company before supplying goods based on the type of opinion (unqualified, qualified and emphasis of matter) in the standard audit report that issued by auditor.
According to ISA 700, qualified auditor's opinions are dividing into four of the different types and namely: limitation-on-scope, going concern, disagreement with management and disclaimer of opinion. In private and international trading exempt companies, the type of qualification prevalent was limitation-on-scope and this implied management did not perform well their duty such as did not properly perform the yearly stock-take on the time. The going concern qualification usually were made by sole practitioners due to they was not advanced with current standards and this qualifications were qualified on the basis of uncertainty.
The disagreement with management qualification was related to disagreement with the treatment or disclosures of matters in the financial statements is, this occur when the auditor disagreed with management as to the non-preparation of consolidated financial statements, inappropriate accounting treatment and departure from International Financial Reporting Standards (IFRS), lack of professional valuation of property and amounts in the financial statements, mainly in view of the fact that management did not properly provide for depreciation on property and fixed assets. The disclaimers of opinion qualification only fewer issued by auditor, this qualification occurs when auditors could not perform audit procedures on a number of financial statement items and the company with a seriously impaired going concern in addition to the non-provision for depreciation by directors.(Farrugia and J. Baldacchino, 2005)
From those point, we found out that the standard audit report has greatest influence those stakeholders making wisely investment and financial decision at aggregate level, gives those stakeholders gain more confident to trust the performance of the management and those financial statement is from discrimination and bias and truth and fairness even auditing has inherent limitations in terms of scope of work and materiality. Auditors responding to audit failures, thus auditors establish and preserve their reputations for providing high quality standard audit report which focus on the key areas of risk
Interestingly, according to CFA Institute conducted recent survey in March of 2011, those users of the standard audit report suggestion that the auditor needed provided more specific information in the standard audit report and pithy review about how they reach their opinion. This shows that the standard audit report still has space to improvement.