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The important of corporate governance is emerging speedy 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 has 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 run the company's operation by provide particular service such as managing the performance of business and achieving sufficient return for shareholders to maximize shareholder's personal wealth (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.
Thus shareholders need to have confidence that those financial statement prepared by Board of Director are accurate and comply with the required standards and regulation, therefore shareholder necessarily appointed an independent external auditor (also known as statutory auditor) and it is requiring by Malaysia Companies Act 1965. The job scope of the external auditor is to examine those financial statement which prepared by Board of Director and to 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)
According to the Al-Thuneibat, Khamees and Al-Fayoumi (2008) in their journal, standard audit report represents the most important part of the audit process and it is the principal channel of communication between the auditor and the users of the financial statements. 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 relevant source of information because they will use the report as a relevant source of information and will consider it in the decision-making process. The effect on decision-making means that the report must have information content which will affect investment decisions, credit decisions and share prices.
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: 3-paragraph format (introductory, scope and opinion) instead of two, 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 (identify the person who may use the report). Introductory paragraph, changed "examined" to "audited", to identifies which financial statement are covered by the auditor's report and when an audit was conducted, added the wording that "these financial statements are the responsibility of management", to clarify that the financial statement are the responsibility 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 an 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 provide 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 established 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.
The purpose Standard Audit Report prepared
Prevent and detect fraud and make sure financial statement is true and fair
Section 169 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. Auditors need ensuring submission of the audit report in time to the members of the company and expressing an opinion on the truth and fairness of the financial statements under Section 174 Companies Act 1965.
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, soundness of internal control of the entity and the management has responsibility for preparation the financial statements and maintenance those accounting records. (Dixon, Woodhead and Sohliman, 2006; Fadzly and Ahmad, 2004)
Management of the company might present financial statements that contain problem such as misstatement, fraud, bias and etc. If those stakeholders no found out those problems, they will not know the company is going concern and continue trust the performance of management, thus they will regret their decision if the company suddenly bankrupt. Therefore, stakeholders needed engage independent external auditor to prevent and detect those problems in the financial statement that prepared by the management and make sure those financial statements is free from discrimination and bias and truth and fairness.
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 thus stakeholder has confident to trust those standard audit reports and making the financing and investing decision.
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)
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)
As an example HSBC Holdings plc, the auditors issued a qualified report and state down their opinion on the standard audit report that the Group and parent company have properly prepared the financial statements in accordance with the requirements of the Companies Act 2006 and it give a true and fair view of the state of the Group's and of the parent company's affairs thus company's shareholders and potential investors disburden on their wisely investment decision to invest in the HSBC Holdings plc. From this point, we can assume that those stakeholders highlight the type of opinion in the auditor's report as being essential and valuable information to affect their investment and lending decisions.
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)
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.