BDAA4103 Audit And Assurance: Malaysian Audit Environment

ld lead to inappropriate audit opinion and reflect the effectiveness of auditing. If the initial conclusions made by auditors are incorrect due to erroneous conclusions made by auditors, this would require them to do additional work and this impacts the efficiency of auditors (Endaya & Hanefah, 2016).

Furthermore, the decision of auditors to use statistical or non statistical sampling method is concerned with the judgment of auditor to obtain appropriate audit evidence in an efficient manner. In event of statistical sampling, determination of sampling size can be done by using probability sampling and non probability sampling approaches. Sampling of audit can be designed by using appropriate steps of which one of the steps is to select as sample using means of probability and non probability and then performing the test. Sampling techniques can be divided into probabilistic sample selection and non probabilistic sample selection.

Analysis of probabilistic sampling method:

It is a method of sampling where each items of population has a known probability equal chances of getting selected in the sample because the samples are selected on random basis. Some of the methods that are used by auditors in selecting the sample using probabilistic method include simple random sampling selection, systematic sample selection, stratified sample selection and probability proportional to selection of sample size (Chen et al., 2015).

Probabilistic method is a technique of statistical sampling that is concerned with ascertaining whether there is existence of control characteristics or not. It helps in determining the effectiveness of control resulting from deviations due to internal control policy (Elder et al., 2015).

Simple random sampling: According to this statistical method, every element of the set experiences equal probability to be selected as sample. This is the main feature of this sampling technique.  On every selected element, the procedure of auditing will be applied. Consequently, the conclusions will be related to entire elements existing within the audited set. Auditors use this method for those sets, which do not possess any segmentation for auditing purpose. In this context, it needs to mention that random sampling can be done through replacing element that is already selected or without any replacement (Wei et al., 2014). However, financial auditors generally apply simple random sampling without replacement.

Example: The financial auditor may want to select 50 random elements from the set of cashing operations. This is included in the cashing register. The auditor can introduce parameters, which imply the set related to cashing operations, in the computer. The set of cashing operations means total number of cashing operations from which the computer program can randomly chose the number related with the operations, which further can make the sample.

Systematic sampling: In this method, the financial auditor measures a counting step after which selects elements methodologically in the sample. The person obtains this counting step through dividing the total size of the set with the wanted sample size. The main advantage of this sampling technique is that the process is comparatively easy to form (AICPA., 2017). Though auditor could find a risk related to objectivity within the process of selecting sample elements.

Example: There are 400 operations in the cashing register. The size of selected sample consists with 40 elements. This implies that the dimension for the next step is 10. The auditor should determine the beginning point for forming sample. If the randomly selected starting number is 3 then operation that take 3^rd position within the register will be considered as the first element of the sample.

Stratified sampling selection: In this process, the auditor selects those particular elements, which have highest values. At the time of selection, total set is divided into various subsets that depend on dimensions for forming larger samples. This is done for obtaining larger subsets. Through stratifying all elements into subsets, the financial auditor can provide greater importance for some specific elements. On the contrary, less importance will be provided to other elements of other subsets.

Example: The auditor of finance groups the purchasing invoices into 2 subsets based on their value. The criterion of this stratification is 1000 MU. Then the obtaining subsets are:

• Those contain elements more than 1000 MU, the auditor can select 20 elements
• Those contain elements less than 1000 MU, the auditor can select 10 elements

Probability proportional technique of sampling: In this process, the sample is formed out of those elements, which have the highest values. This offers an element the possibility to be selected with the registered value of the same proportionally.

Example: If the number of element is 20000 within the sample then the probability of selecting one element would be 1/20000.

Analysis of non probabilistic sampling method:

Under this method, auditors do not use probabilistic methods for selecting sample; rather they rely on using professional judgments for selecting sample. Such samples can be selected by using methods such as block sample selection, directed sample selection and haphazard sample selection. Auditors under this technique are required to apply his professional judgment about audit test to draw the conclusion. The guidelines about the non statistical sampling audit are provided by audit firms to cope up with the drawback associated with the ineffectiveness and inefficiency of audit testing. There cannot be quantification of sampling risk for testing classes of transactions and account of balances using non statistical sampling (Sayyar et al., 2015).

In order to perform substantive tests by auditors, they are permitted to use both the non statistical and statistical sampling approaches during auditing. However, for sample planning, evaluation and selection by comparing to the statistical methods, the more frequent practice used by the firm are the non statistical methods of sampling. Also, during auditing, both statistical and non statistical sampling is gathered together. Auditors using his professional judgment determine the audit evidence sufficiency by the accumulation of such evidence using non statistical sampling approaches (Collins et al., 2016). Nonetheless, the following requirements should be fulfilled by both the approaches. The sample selected should represent the whole sample. When performing substantive test, the size of sample should take into account risk, materiality and characteristics of population. The acceptance level of sampling risk arising from sample results and projection of errors must be considered.

For using both the sampling and non sampling approaches, selection and designing of samples should be done by auditors for carrying out the evaluation of the sample results and applying audit procedures. This would assist auditors in obtaining sufficient evidence of audit. However, the professional judgment is used by auditors irrespective of the approach of sampling which is chosen during the audit sampling. It is so because the quality of audit is governed by the professional judgment that is exercised by the auditor during testing of samples and helps in determination of appropriate statistical parameters for collecting audit evidence (Samaha et al., 2015).

It is the matter of judgment of auditors that governs the decision to use the approach of statistical or non statistical sampling. This is so because in particular circumstances, it is required by auditors to obtain sufficient audit evidence in the most efficient manner. For instance, the statistical analysis of the absence or presence of errors will be less important that the analysis of the cause and nature of errors in event of test of controls. In such situation, it would be appropriate to use non statistical sampling. The statistical and non statistical approach used by the auditors forms the basis of selecting sample in the process of sample selection. Nevertheless, some sampling methods such as systematic sample selection, random sample selection method, stratified sample selection can be used in both the sampling approaches that is statistical and non statistical. On other hand, sampling methods such as directed sample selection, block sample selection and haphazard sample selection are appropriate to use when the non statistical approach are chosen to be use by auditors (Mat Zain et al., 2015).

The criteria for selection samples during audit by auditors are dependent upon the nature and risk of transactions. It is required by the auditors to examine such transactions using non statistical sampling if the population contains are items and uses both the statistical and non statistical using if the population is made up of large as well as small items (Sayyar et al., 2015).   

Implications of sampling methods on the performance of firms:

For auditing of small and medium scale enterprises and big companies, auditors make use of different techniques of sampling. The routines of transaction of companies forms the basis of the selecting the techniques of sampling.

The journal article titled “The Impact of quality of audit on the performance of firms: Evidence from Malaysia” examined the impact of the quality of audit on the performance of Malaysian firms by selecting listed companies on bursa stock exchange for the period 2003 to 2012. A sample of five hundred forty companies has been chosen from stock exchange of Malaysia depicts that return on assets as measure of performance of firms is inversely related to audit fees. It means that weaker performing companies demand more for using such sampling methods. Key items constitute greater proportion of the balance sheet; the auditors mainly use non sampling method of selecting samples (Fu et al., 2017).

Another article titled” An insight into the sampling policies of large audit firms” conducted an open ended survey for internal accounting firms into their sampling policies. Variations have been found among the large firm sampling policies along with providing evidence. It has been found that the sampling policies of firms is required for projection of errors and the commonly referenced methods were different projection that projected the average misstatement of each items and ratio projection that deals with the application of misstated ratios in the sample (Johl et al., 2015). In addition to this, it is indicated by the response of participant’s that the sampling policy of firms do not treat the misstatements as representative of the population. In the process of standard setting and the inspection, there will be increased focus on testing of revenue. Revenues are tested by using substantial analytical procedures. Therefore, the measurement of the performance of firms by using the auditing procedures and sampling methods is positively associated with the performance of firms. For obtaining assurance over the revenue figures, many firms have relied on the substantive analytical procedures (Endaya & Hanefah, 2016).

In a journal article titled” The use of attribute sampling in audit missions for financial statement companies: a source of risk factor or a source of efficiency” demonstrates the effectiveness of internal control by performing the audit sampling. It has been found that the use of sampling method is very common when conducting the audit of financial statements prepared by investment companies. It is so because they are required to evaluate and obtain evidence in an effective manner about the accounting balance and class of transactions. The primary concern of the auditor is to obtain accurate and sufficient evidence of the auditing sample to support level of planned risk in the preliminary audit strategy of auditors (Al-Matar et al., 2013). A sense of professional skepticism vigilant attitude should be maintained by auditors when deciding upon the strategy of internal control so that a proper balance is assured for maintaining effectiveness and efficiency in conducting audit. Therefore, it can be seen that adoption of appropriate sampling methods by auditors helps in detecting the material misstatement and thereby there is accurate measurement of the performance of firms.

In an article titled “The effect of firm performance and internal audit” attempts to analyze the relationship between performance of firms and internal characteristics of audit. The department of internal audit quality is reflected in financial report prepared by organization. One of the significant parts of structure of corporate governance is practicing of internal control that is effective and helps in analyzing the material misstatements in the financial statement of company. There exist relationship between the performance of firms and the sampling method employed by auditors (Tee et al., 2017).

From the analysis of the sleeted research papers, it can be said that there are less evidence about the use of both statistical and non statistical method employed during the process of auditing in Malaysian firms. Furthermore, it has been found that auditors tend to use professional judgment when identifying large values or key values. Nevertheless, the firms in Malaysia can use both the sampling techniques in their audit procedures by complying with the International auditing standard and following the recommended guidelines for auditing (Kafetzopoulos et al., 2015). The present research paper should also consider the quality of audit using sampling method as moderator between the performance of firms and characteristics of audit. One of the integration that the future research work should account for is to provide investors with clear picture to integrate the market based measure and accounting measure in enhancing the performance of firms.

References:

AICPA. (2017). Audit guide: Audit sampling. John Wiley & Sons.

Al-Matari, E. M., Al-Swidi, A., & Fadzil, F. H. B. (2013). The effect of the internal audit and firm performance: A proposed research framework. International Review of Management and Marketing, 4(1), 34-41.

Bailey, C., Collins, D. L., & Abbott, L. J. (2017). The Impact of Enterprise Risk Management on the Audit Process: Evidence from Audit Fees and Audit Delay. Auditing: A Journal of Practice & Theory, 37(3), 25-46.

Chan, K. H., Lin, K. Z., & Mo, P. L. L. (2003). An empirical study on the impact of culture on audit-detected accounting errors. Auditing: A Journal of Practice & Theory, 22(2), 281-295.

Chen, Y., Gul, F. A., Veeraraghavan, M., & Zolotoy, L. (2015). Executive equity risk-taking incentives and audit pricing. The Accounting Review, 90(6), 2205-2234.

Collins, D. W., Pungaliya, R. S., & Vijh, A. M. (2016). The effects of firm growth and model specification choices on tests of earnings management in quarterly settings. The Accounting Review, 92(2), 69-100.

Danescu, T. A. T. I. A. N. A., & Spatacean, O. V. I. D. I. U. (2012). The Usage of Attribute Sampling in Audit Missions for Financial Investment Companies: a Source of Efficiency or a Risk Factor. Proceedings of the 1st p, 333.

Elder, R. J., Lowensohn, S., & Reck, J. L. (2015). Audit firm rotation, auditor specialization, and audit quality in the municipal audit context. Journal of Government & Nonprofit Accounting, 4(1), 73-100.

Endaya, K. A., & Hanefah, M. M. (2016). Internal auditor characteristics, internal audit effectiveness, and moderating effect of senior management. Journal of Economic and Administrative Sciences, 32(2), 160-176.

Fu, N., Flood, P. C., Bosak, J., Rousseau, D. M., Morris, T., & O'Regan, P. (2017). High?Performance work systems in professional service firms: Examining the practices?resources?uses?performance linkage. Human resource management, 56(2), 329-352.

Johl, S. K., Kaur, S., & Cooper, B. J. (2015). Board characteristics and firm performance: Evidence from Malaysian public listed firms. Journal of Economics, Business and Management, 3(2), 239-243.

Kafetzopoulos, D. P., Psomas, E. L., & Gotzamani, K. D. (2015). The impact of quality management systems on the performance of manufacturing firms. International Journal of Quality & Reliability Management, 32(4), 381-399.

Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Routledge.

Krahel, J. P., & Titera, W. R. (2015). Consequences of Big Data and formalization on accounting and auditing standards. Accounting Horizons, 29(2), 409-422.

Krishnan, J., Krishnan, J., & Song, H. (2016). PCAOB international inspections and audit quality. The Accounting Review, 92(5), 143-166.

Mat Zain, M., Zaman, M., & Mohamed, Z. (2015). The effect of internal audit function quality and internal audit contribution to external audit on audit fees. International Journal of Auditing, 19(3), 134-147.

Meek, G. K., Roberts, C. B., & Gray, S. J. (2015). Factors influencing voluntary annual report disclosures by US, UK and continental European multinational corporations. Journal of international business studies, 26(3), 555-572.

Mohammed, N. F., Fahmi, F. M., & Ahmad, A. E. (2015). The Influence of AAOIFI Accounting Standards in Reporting Islamic Financial Institutions in Malaysia. Procedia Economics and Finance, 31, 418-424.

Samaha, K., Khlif, H., & Hussainey, K. (2015). The impact of board and audit committee characteristics on voluntary disclosure: A meta-analysis. Journal of International Accounting, Auditing and Taxation, 24, 13-28.

Sayyar, H., Rohaida, R., & Sidi Zaleha Abdul-Elhabib, M. A. (2015). The Impact of Audit Quality on Firm Performance: Evidence from Malaysia. International Business School, University Teknology Malaysia, June,(1-19).

Storey, D. J., Keasey, K., Watson, R., & Wynarczyk, P. (2016). The performance of small firms: Profits, jobs and failures. Routledge.

Tee, C. M., Gul, F. A., Foo, Y. B., & Teh, C. G. (2017). Institutional monitoring, political connections and audit fees: evidence from Malaysian firms. International J