Audit Qualifcations and Determinants in Malaysia

CHAPTER ONE

OVERVIEW OF THE STUDY

1.1 INTRODUCTIO

The usefulness and reliability of the audited financial statements depend on the quality of audit and the integrity of the auditor. One of the measures of audit quality is the auditor's report which contains important information for stakeholders about the quality of the financial statements as well as some indication towards the company's performance. While the audit quality is difficult to measure, the extent to the auditor is willing to issue qualified opinion often provides some indication of audit quality.(Chen et. al.,2005).

The qualified opinion of the auditor is one type of auditor report that conveys some bad news related to the company. This type of report is considered a warning to users and may affect the company's reputation because it is the only decision made by auditor that is objectively observable by the public. Usually, when the independent auditor issues this type of report to shareholders and other users, it indicates that the managers' accounts may be, in some respect, not true and fair view which in turn may reflect that some aspects of stewardship is being brought into question.

Several prior studies have investigated different variables in different models that have been advocated as explanatory factors of audit qualifications including company's characteristics(i.e. performance), market variables, auditor characteristics and corporate governance.

My study will examine in the context of Malaysia will examine auditee financial performance measures, auditor characteristics and it will incorporate corporate governance factors variables that may effect audit qualifications

1.2 OBJECTIVE OF THE STUDY

The main objective of this research is to explore empirically the association between obtaining audit qualifications and the characteristics of auditee and auditor. The paper will research on whether such characteristics is a useful indicator for predicting qualifications in auditor's report and whether different characteristics exist between firm receiving auditor's qualified opinion and those receiving clean opinion.

Based on the above research objective, this paper hopes to provide answers to the following research questions:

1. Do firm specific variables (i.e. financial performance variables) determine the type of audit report either qualified or non qualified?

2. Is there any relation between corporate governance structure and audit qualifications (Composition of audit committee, composition of board director, family member, concentration of ownership)?

3. Do auditor characteristic (type of audit firm) has an