3.6.

1 CHAPTER 1

INTRODUCTION

1.0 INTRODUCTION
This chapter includes the research details such as the background of the study, the
problem statement, the research question, the objective of the study, and the summary of
the topic.

3.6.2 BACKGROUND OF THE STUDY

In 1997, Malaysia was hit hard by the Asian financial crisis. Since then,
Hong Kong, Singapore, and Malaysia have taken significant steps and measures
to improve corporate governance, including greater openness and stricter
application of rules to prevent corporate governance failure. Poor corporate
governance can lead to a lack of accountability, while nepotism and concentrated
ownership contributed to the financial crisis. Malaysia has also made significant
strides in the application of effective corporate governance with the adoption of
the Malaysian Code of Corporate Governance (MCCG) in 2000.

Also, the accounting profession is being developed by issuing public

practice licenses only to the most qualified candidates. The Malaysian Institute
of Accountants (MIA), a statutory body established to regulate and develop
public practice in Malaysia, has issued strict regulations. In 2010, the Audit
Monitoring Board (AOB) added extended these restrictions. In this context, the
AOB was established to monitor oversee, and ensure the accuracy of audited
financial statements of public interest entities.

As a result, this effort proceeded in 2007 with the creation of a new

MCCG that might take the place of the old 2001 MCCG. There were a number
of significant changes, including the requirement that the Audit Committee
(AC) and external auditors meet more frequently without the presence of the
Board and the membership of the Audit Committee (AC) being changed to
include only non-executive directors. It is indeed interesting to investigate
whether this adjustment has a direct impact on the choice of auditors and the
caliber of Malaysians' audits. Additionally, Malaysia was selected as the study's
background since corporate governance there is still in its development when
compared to established nations like the AS and the UK. Additionally,
Malaysia's capital market is extremely unique in that relative enterprises
dominate and the majority of businesses are linked and ethnically managed.
Therefore, it would be intriguing to investigate how this component influences
Malaysia's corporate governance reform.

3.6.3 PROBLEM STATEMENT

Due to the effects of the economic crisis that started in 2007, many
consumer users of financial information from corporations have expressed their
concern with the procedure for auditing and verifying such information. Other
than that, the auditor may be involved in reporting Key Audit Matters as part of
the audit engagement. However, the intention of providing KAM is to increase
the accuracy of information regarding performed audits and to give financial
users a foundation on which to keep communicating with management and
those in charge of governance. Consequently, there are a number of issues that
need to be resolved. The mistakes caused are also the accountant's
responsibility. Also, it influences the accountant's capacity to produce quality
outcomes.

There has been a requirement for more informative audit reports and for
auditors to give users of financial information more relevant data on the risks
that organizations face as a result of previous financial scandals and the
increasing complexity of financial reporting. However, knowing more about
KAMs may be useful to those who use financial statements, some are
concerned that the disclosure may be perceived as implying different levels of
assurance in various parts of the financial statements, or "little by little"
assurance. The issue with this claim because it assumes that corporate
managers will be exposed to more narrative risk as a result of auditors exposing
more KAMs.

Agency theory acknowledges the need for effective corporate governance

mechanisms to reduce the risk between management and shareholders (Jensen
& Meckling 1976). Corporate governance mechanisms assist businesses in
achieving their goals and increase the probability of long-term success
(Securities Commission of Malaysia 2017). The formation of an audit
committee is an essential component of the corporate governance mechanism.
Securities The Malaysian Commission has mandated the formation of an audit
committee via the Malaysian Corporate Governance Code (MCCG). This
committee is in charge of planning internal audits, appointing external auditors,
advising external auditors on audit matters, and ensuring that financial
statements are prepared in accordance with prescribed accounting standards.
The existence of this committee mitigates the agency problem associated with
the manager-shareholder agent-principal relationship.
In turn, if a material misstatement is later found, the notion of component
assurance may indicate varying levels of perceived auditor responsibility. The
influence of KAMs disclosures on perceptions of auditor assurance as well as
perceptions of the auditor's accountability and responsibility for a major
misstatement subsequently detected in the KAMs area are investigated using an
empirical model to address these concerns. Furthermore, KAMs are shared in
order to provide transparency regarding the audit that was conducted and to
give users of financial statements a basis for future interaction with
management and others in charge of governance.
In general, auditors give the same level of reasonable certainty for KAM
areas as they do for other areas of financial statements, adapting the type and
scope of audit processes to account for any extra difficulty and subjectivity.
However, there is no assurance that readers of financial statements will
interpret KAM disclosures in accordance with this logic. Specifically,
emphasizing a financial statement area as "important" to the audit, along with
further disclosure of the corresponding audit processes undertaken, could
provide the impression that this area has greater assurance than other parts of
the audit. Such disclosures could also be regarded as enhancing the auditor's
duty for that financial statement area, possibly increasing the auditor's liability
in the case of a subsequent major misstatement. found in that area. Given the
increased focus on KAM, KAM disclosures offer the opportunity for
counterfactual reasoning regarding what the auditor "should have known" about
any misstatement.
 3.6.4 RESEARCH QUESTION
Based on the problem statement that has been discussed, the research question of
the study are:-

1. How and what is the level of key audit matters disclosed in the years
2020, 2021 & 2022 among listed companies in Malaysia?
2. How to measure the sustainable governance index for the listed companies in
Malaysia?

3. Does sustainable corporate governance influence the number of key

audit matters disclosed among listed companies in Malaysia?

3.6.5 RESEARCH OBJECTIVE

The aim of this survey is to present an early empirical inquiry into any possible
relationship between a system of sustainable corporate governance and the
volume of KAMs disclosed in the audit report. Furthermore, the study has the
following three specific objectives:-

1. To identify the level of KAMs, and key audit matters disclosed in the
years 2020, 2021 & 2022.
2. To measure the sustainable governance index for the sample companies.

3. To determine the relationship between sustainable corporate governance

and the number of key audit matters disclosed among the listed company
in Malaysia.
 3.6.6 SIGNIFICANCE OF THE STUDY
This study provides material for lecturers in academic institutions and
professional organizations to understand the significance of audit committees,
quality financial reporting, and other key audit matters for all Malaysian
companies. This material can be used by academic institutions and professional
organizations to prepare for the audit. Key audit matters and corporate
governance have benefited from this research. Furthermore, the auditors give the
same level of reasonable certainty for KAM areas as they do for other areas of
financial statements. There is no assurance that readers will interpret KAM
disclosures in accordance with this logic. Such disclosures could also increase
the auditor's liability in the case of a subsequent major misstatement. Moreover,
specific research goals are mentioned, describing what this study is meant to
accomplish. To emphasize the value and significance of this research, the
significance of the study is finally discussed in this chapter.

3.6.7 SUMMARY
Malaysian Commission has mandated the formation of an audit
committee via the Malaysian Corporate Governance Code (MCCG). The
existence of this committee mitigates the agency problem associated with the
manager-shareholder agent-principal relationship. Some are concerned that
disclosure may be perceived as implying different levels of assurance in various
parts of the financial statements, or "little by little" assurance. Auditors give the
same level of reasonable certainty for KAM areas as they do for other areas of
financial statements. Given the increased focus on KAM, KAM disclosures offer
the opportunity for counterfactual reasoning regarding what the auditor "should
have known" about any misstatement.
 CHAPTER 2
LITERATURE REVIEW

2.0 LITERATURE REVIEW

3.6.8 INTRODUCTION
A literature review is a comprehensive examination of previous research
on a certain subject. The literature review examines academic books, journals,
and other materials that are relevant to a certain study topic. In order to
maintain the integrity of financial reporting, corporate governance and auditing
issues are important. The topics have received a lot of attention in the
accounting literature. The concept of sustainable corporate governance in
Malaysia is covered in this chapter, as well as how it affects audit functions.
Audit fees may also be impacted by the risk committee and key audit matters.

3.6.9 CORPORATE GOVERNANCE

A move toward high-quality auditor education teaching will result from
the expanding need for accurate and reliable financial information. This is
predicated on an increase in the proportion of independent directors and an
Audit Committee (AC) composed entirely of non-executive directors. In order
to provide stakeholders with more accurate financial information, it is less
likely that low-quality auditors will be chosen and more likely that high-quality
auditors will be chosen. The study also attempts to explore and investigate the
link between the choice of competent auditors and corporate governance
practices within organizations. This study aims to determine whether factors
such as ownership concentration, CEO quality, company financial standing,
ownership dominance, political connections, share price, and family control of
the company firms have a significant and direct impact on the choice of quality
auditors in addition to the composition and function of Audit Committee (AC).
Although there has been a lot of research on corporate governance, there
haven't been many studies on the Malaysian market. This is particularly true for
studies like this one, which examine Malaysian corporate governance
procedures and their effects on auditor selection.
 The primary importance of the corporate governance structure has been
the subject of numerous studies; recent research explains why it is critical to
sustaining the business. Corporate sustainability is based on actions taken by
management and the board of directors with the intention of positively
affecting the sustainable elements (i.e., environmental, social, economic,
political, and territorial). According to scholars’ academics, corporate
efficiency - the promotion of sustainability in all organizational practices has a
strong influence influences the quality of corporate governance (Hahn and
Scheer Messer, 2006; Mudiyanselage, 2018; Schrippe and Ribeiro, 2019). The
second type of governance, auditing, has recently come under heavy criticism
for its potential to influence both internal and external business operations.
The financial crisis of 2008-2009 highlighted the weaknesses of auditing. The
financial crisis at the turn of the millennium showed that corporate
governance, financial reporting, and especially auditing were out of balance.
Moreover, it is unclear how auditors can give their clients a clean audit
opinion for the years 2007 to 2009, considering that many banks recorded
significant losses during that period time.

Regulators and professional organizations have changed the global

strategy taken to audit reporting in response to the stated and to user needs.
Thus, following open discussions, the International Auditing and Assurance
Standards Board (IAASB) suggested a number of modifications to audit report
standards. The IAASB standards discussion process came to an end in
December 2015, and the new International Standard on Auditing (ISA) 700
series introduces significant changes to the format and content of audit
reports, establishing a new method of communication between businesses and
consumers of their financial information. The IAASB's position reflects its
conviction that enhanced audit reporting will enhance its communication
value.
 3.6.10 THE SUSTAINABLE CORPORATE GOVERNANCE
CONCEPT
In comparison to other East Asian nations, Malaysia's corporate sector
grew quickly in the 1990s. In Malaysia, the number of publicly traded
firms increased on average every year from 285 in 1990 to 795 in 2000
(KLSE, 2002), compared to 10%, 7%, and 1% in Indonesia, Thailand, and
South Korea, respectively (Khatri, 2001). Additionally, the total market
capitalization of the companies listed on the main and second boards of
the Malaysian stock exchange increased at a rate of 40% on average
annually, mostly due to rising share prices, a high volume of new equity
issues, and privatizations. The growth of the corporate sector in Malaysia
was strongly correlated with the government's initiatives to expand the
private sector and advance industrialization while reorganizing ownership
and participation structures in society. The government had understood
since the early 1980s that solely state-owned businesses were not the
greatest means of attaining both rapid growth and social objectives,
particularly those of the 1971 New Economic Policy (NEP).

Institutional investment is recognized to be highly affected by

corporate governance (Bushee, Carter & Gerakos, 2007). Corporate
governance has also been a part of reform initiatives by institutional
investors (Karpoff,2001, for review). The body of research shows that
institutional investors are effective at enhancing corporate governance. An
alternative option for institutional investors that expect good corporate
governance is to simply invest in companies with current good
governance procedures and avoid companies with weak governance.
However, little is known regarding the significance of governance
structures in institutional investment (Claessens & Fan,2002; Bushee et
al., 2007). Two things happened in 2001 on Malaysia's stock market
related to corporate governance reform. The Minority Shareholder
Watchdog Group (MSWG), a watchdog group primarily created to
enhance shareholder activism by institutional investors, was established.
The first was the introduction of the Malaysia Code on Corporate
Governance (MCCG) as part of the Kuala Lumpur Stock Exchange
(KLSE) Listing Rules. According to Abdul Wahab, How, and Verhoeven
(2007), the implementation of the corporate governance code has
improved corporate governance standards in Malaysian businesses.

Since many companies failed during and after the financial crisis,
corporate governance in Malaysia has increased the attention of critics.  
The financial crisis triggered a significant amount of analysis and
discussion, a majority of which focused on macroeconomic issues,
systematic stability, as well as issues relating to the regulation of foreign
investors, the role and function of regulators, and the requirement of
improving disclosure and the governance system. This crisis brought
Malaysia's corporate governance problems to the public, which triggered
measures to improve and reorganize the country's entire business sector
(Kamini Singam). According to Micheal Backman, in the order to develop
effective corporate governance systems, there must be a set of efficient
corporate governance systems. These basic regulations will serve as the
framework for the Malaysian corporate governance system, including the
following:-

i. Effective corporate governance standards guarantee that

managers and controlling shareholders follow the rule of law.
ii. Extensive corporate accountability and adequate external
auditing.
iii. Effective stock exchanges.
iv. Markets that are either competitive or constantly in danger of
becoming seriously competitive.
v. Efficient and transparent legal systems that are supported by
independent and effective judicial systems to protect the law.
vi. There must be a definite guideline between the regulator and
the regulated
vii. Independent, transparent, and competitive banking systems.
viii. Well’funded, inquisitive and independent media.
 Since 1995, Malaysia has actively improved its corporate governance
framework in a number of ways. The Committee was formed in 1998, and
its Report was published in March 1999 as the result of significant
reforms (Kamini Singam). The approval of the Committee's
recommendations also led to the development of the Code of Corporate
Governance, the institution of a statutory qualification framework for
business directors, and significant changes to the listing requirements of
the Kuala Lumpur Stock Exchange (KLSE).

3.6.11 THE IMPACT OF CORPORATE GOVERNANCE ON

AUDIT FUNCTIONS
According to a preliminary study, the division of ownership and
control is the root of the corporate governance problem, which also
includes worries about the corporate controller's opportunistic behavior
(Berle and Means, 1932; Jensen and Meckling, 1976). The wealth of
numerous various stakeholders, including the local community, the
environment, clients, suppliers, workers, and society at large, must also be
taken into account by corporate governance (Ayuso and Argandon a,
2009; Spitzeck and Hansen, 2010). As a result, a number of issues, such as
law, the adoption of best practices codes, the significance of stakeholders,
shareholder protection, and the defining of management's role and
responsibilities, are becoming increasingly crucial in relation to good
corporate governance systems. The external business environment has
changed significantly and becomes more complex, but traditional
corporate financial reporting is unable to keep up with these changes
because of its many limitations and flaws, including its short-termism,
lack of coherence, complexity, and absence of non-financial information
(such as social, health, carbon emissions, and labor rights) (Haji &
Ghazali, 2013; Silvestri et al., 2017). Integrated Reporting (IR), a new
strategy for corporate communication, has received a lot of attention
recently as a way to get over these limits (Camodeca et al., 2018).
 Assuming that the implementation of an appropriate corporate
governance framework can result in growth and sustainability while
providing possibilities for firms, corporate governance can be seen in this
situation as being essential to the business sustainability and the expansion
of any economy (Zhang, 2012; Sundarasen et al., 2016; Harjoto and
Wang, 2020). A sustainable corporate governance system attempts to
protect a number of factors, including the entire set of stakeholders,
including the economy, environment, and society (Hahn et al., 2010;
Lozano and Huisingh, 2011; Lozano, 2013; Amini et al., 2018; Maglio et
al., 2020). Therefore, corporate sustainability and its techniques, which
are intended to achieve sustainability in all corporate processes, are
closely related to corporate governance quality and its related challenges
(Hahn and Scheermesser, 2006; Schrippe and Ribeiro, 2019). This study
focuses on the relationship between internal corporate governance traits
and new instruments for the audit function, among the various effects that
sustainable corporate governance may have, both directly and indirectly,
on the interests and stakeholders of the firms. Previous research has
discovered evidence that both the relationship between the auditor and the
client and the effect of corporate governance on the audit process are
important.

After the corporate failures and the Asian financial crisis of 1997,
corporate governance (CG) has become a critical problem in Asia
(Akhtaruddin et al., 2009). In nations like Japan, South Africa, and
Malaysia, corporate governance significantly contributes to closing the
information expectation gap between firms and investors. It also aims to
improve responsibility and disclosure (IIRC, 2019). These advantages of
corporate governance are attained through pressuring businesses to
provide more voluntary disclosures. IR is seen as a sign of good corporate
governance, which is important for drawing in investors (KPMG, 2017).
In addition, governance disclosures are a crucial part of the presentation's
framework for IR content (IIRC, 2013). Additionally, the corporate
governance structure of a company significantly affects the adoption of IR
and voluntary disclosure (Velte & Stawinoga, 2017).
 In fact, Sustainability Reporting is seen as an integral component of
Integrated Reporting since it offers nonfinancial disclosures on how a
company's operations affect economic, social, and environmental issues;
as a result, it is an important step in the adoption of IR (Silvestri et al.,
2017; Stubbs & Higgins, 2014). Additionally, Malaysian Public Listed
Companys are required by Bursa Malaysia to apply Sustainability
Reporting criteria; at the moment, the majority of Malaysian businesses
are interested in sustainability initiatives and publish a separate
sustainability report. As a result, SR might have a big impact on how
Malaysian Public Listed Companys adopt IR, and CG and SR could have
a big impact on how much more IR disclosures are made.

3.6.12 REGULATORY FRAMEWORK: THE NEW

AUDIT (ISA 700)
Global standard-setters and audit regulators, such as the Public
Company Accounting Oversight Board (PCAOB) and International Auditing
and Assurance Standards Board (IAASB), have recently implemented an
expanded audit reporting model in response to concerns regarding the lack of
transparency in auditor reports (IAASB, 2015; PCAOB, 2017) (Gold et al.).
Auditors serve a critical role in promoting financial stability, trust, and market
confidence by providing an independent opinion on whether the financial
statements have been prepared in accordance with the financial reporting
framework (ISA 700). The audit report is a barrier to the effectiveness of
capital markets since the auditors' view serves as a fundamental basis for
investors' and stakeholders' decision-making processes. However, with the
recent corporate governance scandals and the global financial crisis, the
majority of regulators, investors, and academics began debating the audit
report's efficacy. Bedard et al. (2016) and Gutierrez et al. (2018) indicate that
the lack of company-specific information is the main factor. In particular,
stakeholders are uninformed of the limitations of an audit process, such as
materiality, sample procedures, roles and responsibilities in the discovery of
fraud, and managers' responsibilities (European Commission, 2011). In
response to these dynamics, regulators as well as basic worldwide (including
the Public Company Accounting Oversight Board (PCAOB), the International
Auditing and Assurance Standards Board (IAASB), the Financial Reporting
Council (FRC), and the European Commission) have modified audit reporting
standards to require auditors to disclose more information.

International Auditing and Assurance Standards Board (IAASB) issued

a change of International Standard on Auditing (ISA) 700, the standard on
the auditor's report, applicable for reports dated on or after December 31,
2006. (Gold et al.). The purpose of the modification was to enhance users'
understanding of an audit and to adjust users' expectations with the real
obligations of the auditor and management, as well as the reliability of
audited financial statements (IFAC, 2008). This version of ISA 700
centered on the addition of explanations of auditor versus management roles,
as well as the nature, scope, and processes of the audit, to the report. This
raises the question of whether such explanations actually result in a reduced
expectation gap than when the report contains no further explanations.
Determining the current situation of the expectation gap under the updated
ISA 700 auditor's report and testing whether the presence versus lack of
explanations in the auditor's report as stipulated by the revised ISA 700
results in a reduced expectation gap are the objectives of this research. The
main intention of the new audit report is to communicate these matters and
increment investors' comprehension of the auditor's position and obligation
(Gold et al.).

In a similar context, the PCAOB is in the process of modifying the

present auditor's report, including the notification of Critical Audit Matters.
Similar to KAMs, these are matters presented to the audit committee that 1)
relate to accounts or disclosures that are relevant to the financial statements;
and 2) involve exceptionally difficult, subjective, or complicated auditor
judgment. The new criteria surrounding CAM disclosures will take effect for
audits of large accelerated filers for fiscal years ending on or after 30 June
2019. The new regulations will take effect for periods ending on or after 15
December 2020 for all other companies to which the provisions apply
(PCAOB 2017). We also investigate the impact on financial reporting
behavior of higher vs lower levels of information accuracy as a measure of
disclosure transparency in KAM sections. As a result, we react to regulators'
and investors' concerns that communication of KAMs may rapidly lead to
more standardized disclosure, hence potentially diminishing the informative
value of KAM sections (IAASB, 2017) (Gold et al.).

3.6.13 THE EXTERNAL AUDIT FUNCTION

Audit reports as the most support to enable communication with the
company's stakeholders in this context. The auditor's communication with
stakeholders is one of the key problems in the European Commission's
Green Paper on its audit policy, which was published after the global
financial and economic crisis (European Commission, 2010). The
conclusion of the entire audit process is contained in the auditor's report. It
gives a brief overview of the financial statements that have been audited,
the roles and duties of management and the auditor, and the auditing
procedure, and ends with the auditor's opinion (ISA 700). Others claim that
the majority of countries' audit reports are uniform and do not mention
company-specific information (Gutierrez et al., 2018). Due to the fact that
audit reports do not contain company-specific information, many
stakeholders have questioned the effectiveness of auditor reporting (Beard
et al., 2016).
The IAASB places emphasis on the importance of communication
between the auditor and the management of its clients in this situation in
order to effectively solve KAM concerns. The IAASB has regarded internal
corporate governance in creating auditing standards in the past, realizing the
basic impact of corporate governance features and structures on many
elements of the company (e.g., ISA 260; ISA 315; ISA 700). For the
reasons outlined above, the existence of excellent corporate governance
capable of advising auditors in carrying out their obligations efficiently can
assist in improving the goals of the new ISA 701. Many regulators use self-
regulatory codes that outline the key elements and traits of an ideal model of
proper corporate governance, with a focus on the role and structure of the
board of directors and the duties of internal committees, in relation to the
development of a reliable and sustainable corporate governance system
 (Tukker et al., 2008). Indeed, prior research indicates that higher-quality
corporate governance systems can improve market regulation and guarantee
better protection for all stakeholders.

3.6.14 KEY AUDIT MATTERS

ISA 701 Communicating Key Audit Matters in the Independent Auditor's
Report was issued by the International Auditing and Assurance Standards
Board (IAASB) to enhance the communicative value of the auditor's report by
providing greater transparency regarding the audit performed. The purpose of
Key Audit Matters (KAMs) is to provide additional information to users of
financial statements and to assist in their understanding of issues in the audited
financial statements for the current period. Communicating KAMs may also
assist users in comprehending the entity and major areas of management
judgment in audited financial statements (ISA 701: Paragraph 2). For audits of
financial statements for periods ending on or after December 15, 2016, for
publicly listed companies, the IAASB's requirement to communicate key audit
matters (KAMs) now exists in existence (“Key Audit Matters and Investors’
Reactions”), (2021).

IAASB published the revised structure of the auditor's report for the first
time in January 2015, which includes an audit matter section (s). Specifically,
ISA 701 (The International Auditing and Assurance Standards Board, 2015)
requires that auditors examine the following when issuing KAM:-

1. Identified areas having a greater risk of significant misstatement or

significance risk in accordance with ISA 315.
2. Significant auditor judgments regarding areas of the financial
statements required significant management judgment, such as
accounting estimates considered to have high estimation
uncertainty.
3. The impact on the audit of key transactions or events that occurred
during the period.

Additionally, auditors are required by ISA701 to describe each main

audit matter in a distinct section and to explain why it was deemed most
significant and how it was addressed (IAASB, 2015, para13). However, the
regulation provides clear restrictions on the size of KAMs (Fayad Altawalbeh
and Alhajaya). The extended audit report provides more information about the
auditing process. Independent auditors are likely to feel greater of
accountability, so they will expend more time and effort on analyzing financial
statements and executing additional KAM-related processes (Elmarzouky et
al.). Other than that, the amended auditor’s report, which includes disclosure
of KAMs, is intended to offer shareholders with more information (Porumb et
al., 2018).In addition to the business characteristics of the auditor and the
client, ISA 701 emphasizes the requirement for the contact between the
auditor and the client's corporate governance representativeness in order to
disclose the KAMs adequately. Consequently, company governance features
may impact the auditor's decision about KAM disclosure. Velte (2018) is one
of the first to examine company governance as a driver of KAM disclosure. In
especially, the author claims that a greater proportion of women on audit
committees have a greater ability to understand KAM disclosures. In addition,
KAM readability has been found to be connected to audit committee members'
financial expertise (Velte, 2019). Wuttichindanon and Issarawornrawanich
(2020) conclude that the number of KAMs has a strong and
favorable association with the number of independent directors.

Disclosure of KAMs would reduce the gap between risk-neutral and

risk-seeking investors' expectations (Velte & Issa, 2019). As investors become
better aware of the nature of external audits, the expectation gap decreases.
The expectation gap is the difference in assurance level between what
investors expect and what auditors provide. Due to a smaller expectation gap,
risk-neutral and risk-seeking investors would value the capital investment
transparency afforded by KAMs (Velte & Issa, 2019). In Thailand, investors
responded positively to the inclusion of KAMs in the auditor's report, and
stock prices increased (Boonyanet & Promsen, 2019). KAMs were also
connected with higher abnormal trading volumes and smaller abnormal bid-
ask spreads, indicating a reduction in information asymmetries between
auditors and audit report users (Reid et al., 2015; Fayad Altawalbeh &
Alhajaee, 2019).
Consequently, the above reasoning and the mentioned literature encourage this
study to investigate the following hypothesis:-

Hp1. There is a negative correlation between an efficient and sustainable

corporate governance framework and the number of revealed KAMs.

Hp2. To disclosure of KAMs would reduce the gap between risk-neutral and
risk-seeking investors' expectations.

3.6.15 RESEARCH FRAMEWORK

3.6.16 SUMMARY
This chapter has explained the impact of corporate governance,
external audit fucntion and disclosed key audit matters. Furthermore,
disclosure of KAMs would reduce the gap between risk-neutral and risk-
seeking investors' expectations. As investors become better aware of the
nature of external audits, the expectation gap decreases.
 CHAPTER 3
METHODOLOGY

3.0 METHODOLOGY
3.6.17 INTRODUCTION
Chapter three will explain what research methodology that will use to
complete the research and how sources of data and formulation that use in
order to get the final result. This chapter also provides information on the
population and the sample selection that is chosen for this study. This chapter
also aims to discuss the data collection methods. The variable measurement
of dependent and independent variables is focused on in this chapter. Last but
not least, the data analysis methods used in this study in analyzing the data
are also mentioned in this chapter.

3.6.18 SAMPLE CONSTRUCTION AND DATA

SELECTION
Sampling is a technique that finds out the way to assume information
about a population based on findings from the population without examining
each individual instance. Sampling is the process of selecting a sufficient
number of items from a population so that a study of the sample allows us to
generalize the sample's characteristics or attributes to the population as a
whole. Some features of the population are selected as the sample's
subjects during the sampling procedure. The authors of that study
recommended that future audits include population density as a sampling
stratification variable, as built environment features and physical activity
may vary by density.

We eliminate from the sample firms that lack historical financial

market, accounting, and corporate governance data, as well as companies
involved in business combinations that may result in an overstatement of
KAMs. In order to exclude any potential survivorship bias (Bartov et al.,
 2000; Ecker et al., 2006), we do not exclude enterprises that were delisted or
declared bankruptcy during the referred period which is from the year 2019
until 2022. There are several different sampling techniques available and
they can be subdivided into two groups probability sampling and non-
probability sampling.

Moreover, this research examines the key audit matters and internal
audit functions using a non-probability sampling method. The non-
probability sampling that will be used is purposive sampling. Purposive
sampling is necessary because the intended sample will be the top 100 listed
companies in Bursa Malaysia.

3.6.19 SAMPLE SELECTION

The sample of this research is Bursa Malaysia-listed
companies. This study chooses the top 100 as sample companies
because they are more likely to have KAMs than smaller the
company. The data for this research is based on the annual report
from 2019 until 2021. 100 companies from Bursa Malaysia-listed
companies will be used as our sample.

3.6.20 DATA COLLECTION METHOD

Data collection is the process of gathering information from various
sources to address the issue and examine the results. Primary and secondary
data are combined in the data collection system. The primary data would come
from information that was obtained directly, such as answers to the
questionnaire used to collect data.

Other than that, the secondary data includes data that has already been
published in the literature. In this study, the way we get data is through
secondary sources. This study's material is supported by secondary data. With
Bursa Malaysia's annual report, which we can obtain or download, our
primary objective is data collection. The yearly report will be a reliable source
of all the data required for this study.
 3.6.21 VARIABLE MEASUREMENTS
This research has two types of important variables which is dependent
variables and independent variables. There have two types of dependent
variables for this research which is the corporate governance and disclosed
key audit matters. Other than that, for independent variables for this research
is what the companies should do following the proxy considering the
corporate governance. Then, it shows the appropriate model specification.

3.6.22 DEPENDENT VARIABLE

The dependent variable for this research is disclosed as the key audit
matters. The number of KAMs disclosed in the audit report (No KAM) is our
dependent variable. Understanding how and when auditors arrive at KAMs,
which can be viewed as a measurement of the number of dangerous features
issued from the financial statement, is critical as a first step. The auditor must
choose the concerns that deserve special consideration when conducting the
audit process from those that are discussed with those responsible for
governance. In the first step of establishing our dependent variable, we
collected all the annual reports for each firm-year observation. Next, we
looked at the KAM section of the corresponding audit reports.

3.6.23 Key Audit Matters

(Velte & Issa,2019), the disclosure of KAMs would result in a
lower expectation gap for risk-neutral and risk-seeking investors.
However, most KAMs being disclosed would increase perceived audit
risk and could drive away risk-averse investors from the company. 
Audit risk is the possibility that financial reports include major
mistakes regardless of the audit opinion determining that none exist.
According to international regulations on KAM disclosure, previous
auditor reporting standards were not decision-useful for stakeholders
because they did not provide firm-specific information about the audit
process and the outcome (Bédard et al., 2016). This is because
stakeholders did not receive firm-specific information about the audit
 process and the outcome. There is an association between audit
committee effectiveness and disclosure of KAMs:-

KAMs= βο + β1BoardSize + β2BoardIndependece +

β3 Leverage + β4Profitability + ε it

To obtain the number of disclosed KAM elements of the

document, which indicates the item to the KAM refers, in order to
determine the number of disclosed KAM. It is significant that a single
KAM might also make reference to several different things.
Consequently, this research goes into great detail in establishing how
many items each KAM refers to and, in turn, determining the basis of
the dependent variable of this study. This is done by relying on a large
number of substances to plan and evaluate. Although Fuller (2015) ,
discovered a favorable correlation between KAM disclosure and
management reports, Kang (2018) already said the audit committee's
general questioning behavior toward management decreases when
KAM is published.

3.6.24 INDEPENDENT VARIABLE

The independent variable is what the companies should do following
the proxy considering the corporate governance. According to (Fera et al.),
based on our review of the relevant literature, we conclude that seven of these
factors are positively related to the quality of corporate governance: the
presence of minority directors on the board, the control committee, and the
internal audit committee; the appointment of an internal audit committee; and
the frequency with which the control committee meets. However, the minority
board of directors is not used in Malaysia. because the minority shareholder
holds less than 10% of the company's voting stock. Therefore, Malaysian
courts rarely participate in management or shareholder disputes. However,
when minority shareholders are being treated unfairly by the majority, this is
not always the case. Decisions such as buybacks and winding-up orders are
commonly issued by the courts, which are given wide discretion in these
instances.

We calculate the GovScore, which ranges from 0 (poor corporate

governance) to 10 (high quality and sustainable corporate governance), by
adding the total points given to each firm-year observation for all elements.

10
GOVCOREit =∑ (Rating j)¿ ¿
j=1

Where i stands for the company, j for the single corporate governance
component, and t for the year.

Every firm-year observation's GovScore was calculated, and it was then

transformed into a variable (CG Score) that takes the value 1 if a firm's overall
score in a given year is higher than the median and 0 otherwise. This element,
in particular, enables us to determine between businesses with sound corporate
governance and those that possess it.

3.6.25 CONTROL VARIABLE

Some independent variables will be included as control
variables such as board independence, board size, and leverage. They
estimate a positive correlation between size (Size), which they defined
as the natural logarithm of total assets, and the quantity of KAM
reported. Other than that, more investments require more audit
processes. However, assuming whether it's a direct relationship with a
firm's overall risk, resulting in a higher number of KAM disclosed, or
an indirect relationship with the response variable. We additionally
 include in the leverage the ratio between long-term debt and total
assets as a control variable in our model.

3.6.26 MODEL SPECIFICATION

This is the quality of corporate governance has an impact on the amount of
disclosed KAMs :-

No KAM ¿ β 0+ β 1CG Score + β 2 ¿ + β 3 Leverage+ ∑ (Year Effects )+∑ (Industry Effects )+ ε¿ ¿

Where i is the specific company, t is the reference and ε ¿ stands for the
regression error. The dependent variale (No KAM), consists of the number of
KAMs reported in the audit report, whereas the major independent (CG Score)
is our proxied measure of the quality of corporate governance as specified in
Section 3.6.

3.6.27 SUMMARY
In conclusion, this chapter discussed the research methodology used in
the study, including the sample construction and data selection, data collection
method, and variable measurements. The study used a non-probability
sampling method of purposive sampling to select the top 100 Bursa Malaysia-
listed companies as the sample for the research. The data for the study was
collected through secondary sources, specifically the annual reports of the
companies from 2019 to 2021. The dependent variable for the research is the
number of Key Audit Matters (KAMs) disclosed in the audit report, and the
independent variable is the factors related to corporate governance that the
companies should follow. The study used a model specification to analyze the
relationship between the dependent and independent variables.