Auditors

Appointment
• Section 263 of the CA 2016 requires a company to appoint an ‘approved
company auditor’.
• An approved company auditor is one that has been approved by the Minister
of Finance to act as auditor and has the necessary qualification and satisfies
the Minister that he is of good character and is competent to perform the
duties of an auditor under the CA 2016.
• Applicant is of ‘good character’ and ‘competent’ to perform duties as an auditor
• Registered as a public accountant (MIA) under S. 14(3) Accountants Act 1967
• Applicant age – at least 21 years
• Council (MIA) – a fit and proper person to be admitted S. 14(3) Accountants Act
1967
• Applicant must have passed the final exam in accounting of MIA
• Section 263(3) of the CA 2016 provides that any approval granted by the
Minister as an approved company auditor may be made subject to such
limitations or conditions as he thinks fit and may be revoked at any time by
him by the service of notice of revocation on the approved person.
• Every approval under section 263 of the CA 2016 including a renewal of
approval of a company auditor shall be in force for a period of two years
after the date of issue unless sooner revoked by the Minister.
• Section 263(5) of the CA 2016, any person who is aggrieved with any
decision of the Minister or with the decision of any person or body of
persons to whom such Minister has delegated all or any of his powers may
appeal to the Court.
• Section 264(5) of the CA 2016, a company shall not appoint a person or a
firm as an auditor unless prior to the appointment-
• (a) that person has consented in writing to act as the auditor; or
• (b) in the case of a firm, at least one partner of the firm has consented in writing.
 Auditor for private company
• A private company shall appoint an auditor for each financial year of the company
as stipulated under section 267 of the CA 2016.
• Section 267(2) –the registrar shall have the power to exempt any private company
from appointing an auditor according to the conditions as determined by the
registrar.
• Section 267(3)-the board shall appoint an auditor of the company in the case of
newly incorporated companies at least 30 days before the end of the period for the
submission of the financial statements to the Registrar or to fill a casual vacancy in
the office of auditor.
• Section 267(3)- a member shall during the period of thirty days before the
end of period allowed for the lodgement of the previous year financial
statement with the Registrar, appoint an auditor if the board fails to appoint
an auditor under section 267(3)
• In the event company fails to appoint an auditor, the registrar may appoint
one or more auditors upon application in writing from any member of the
company
• Section 269(1) – an auditor of private company shall hold office in
accordance with the terms of his appointment provided that-
• (a) he does not take office until the previous auditor cease to hold office,
unless he is the first auditor of the company
• (b)he ceases to hold office thirty days from the circulation of the financial
statement to the members unless he is re-appointed.
 Auditor for public company
• Section 271 (1) – an auditor of a public company shall be appointed for each
financial year of the company.
• Section 271(2)- further provides that the board shall also appoint an auditor at any
time before the first annual general meeting of the company or to fill casual vacancy
in the office of the auditor.
• Section 271(3)(a)- the auditor who appointed before the first annual general meeting
shall hold office until the conclusion of the first general meeting..
• Section 271(3)(b)- an auditor appointed to fill casual vacancy in the office shall hold
office until the conclusion of the next general meeting.
• Section 271(4)-the members shall appoint an auditor by ordinary resolution-
• (a) at the annual general meeting
• (b) if the company should have appointed an auditor at annual general
meeting but failed to do so; or if the board fails to appoint and auditor; or
• (c ) if the board fails to appoint an auditor under subsection 2
• Pursuant to section 273, the auditor of a public company shall hold office in
accordance with the terms of his appointment, provided that-
• (a) he does not take office until the previous auditor has ceased to hold office
unless he is the first auditor of the company, and
• (b) he ceased to hold office at the conclusion of the annual general meeting
next following his appointment, until he is re-appointed
 Disqualification
• A person cannot be a company auditor if-
• He is indebted an amount exceeding RM25,000 to the company or to a corporation
related to the company
• He is or his spouse is an officer of the company
• He is or a partner, employer or employee of the company
• A partner or employee of an employee of an officer of the company
• A shareholder or his spouse is a shareholder of a corporation whose employee is an
officer of the company
• He is responsible for or he is the partner, employee or employee of a person
responsible for the keeping of the register of member or the register of debenture
holders of the company
• Any undischarged bankrupt within or outside Malaysia except with the leave of Court
• He has been convicted of any offence involving fraud or dishonestly punishable with
imprisonment for three months or more
Duties of auditors
Statutory duties
• Section 266(1) –an auditor shall report to the members on the financial statements
and on the company’s accounting and other records relating to those financial
statements and if it is a holding company for which consolidated financial statement
are prepared shall also report to the members on the consolidated statements, and
the report shall be-
• In the case of a public company, laid before the company at its general meeting; or
• In the case of private company-
• (1) circulated to its members
• (2) laid before the company at a meeting of members
• Section 266(2) (a) requires the auditor to state in the report whether the
financial statement or the consolidated financial statements are in his opinion
properly drawn up
• i. to give a true and fair view of the matter required by section 248 of the CA
2016.
• ii. in accordance with the provision of the Act so as to give a true and fair
view of the company’s affair.
• iii. In accordance with the applicable approved accounting standards.
• Section 266(2) (b) –if in his opinion the financial statement or the consolidated financial statements have not
been drawn up in accordance with a particular applicable approved accounting standard, the auditor is
required is state:
• i. whether the account, if drawn up in accordance with the approved standard, have given a true and fair
view of the matters required by section 248
• ii. If in his opinion the account, would not, if so drawn up, have give a true and fair view of those matter, his
reason for holding that opinion
• iii. If the directors have give the particulars of the quantified financial effect under section 244, his opinion
concerning the particulars
• iv. In a case to which neither (ii) nor (iii) above applies, particulars of the quantified financial effect on the
financial statements or consolidated financial statements of the failure to so draw up the financial statements
or consolidated financial statements, and the case may be.
• Section 266 (3) of the CA 2016, it is the duty of the auditor to form an opinion as to each
of the following matters and to state in his report particulars of any deficiency, failure or
shortcoming in respect of any of these matters.
• (a) whether he has obtained all the information and explanation that he required
• (b) whether proper accounting and other records (including registers) have been kept by the
company as required
• (c ) whether the returns received from branch offices of the company are adequate; and
• (d) whether the procedures and methods used by a holding company or a subsidiary in
arriving at the amount taken into consolidated accounts were appropriate to the
circumstances of the consolidation.
• Section 266 (6) of the CA 2016 requires the auditor's report to be attached
to or endorsed on the financial statements or consolidated financial
statements and shall, if any member so requires, be read before the company
in general meeting and shall be open to inspection by any member at any
reasonable time.
 Duties to carry out audit

• An auditor is under duty to carry out audit. He is required to devise

procedures to assist in the detection of errors of fraud.
• In Pacific Acceptance Corp Ltd v Forsyth, Moffit J stated that:
• ‘An auditor pays due regard to the possibility of fraud or error by framing and carrying
out his procedures, having in mind the general and particular possibilities that exist, to
the intent that is a substantial or material error or fraud has crept into the affairs of the
company he has a reasonable expectation that it will be revealed.’
 Duties to report to members

• Auditor is under a duty to investigate and form opinion on the adequacy of

the company’s accounting and other records. The auditor has then to report
to the members of the company on the account to be laid before the
company at its general meeting.
• He is required to state in his report whether in his opinion the accounts a
properly drawn up and are in accordance with the provisions of the Act so
as to give a true and fair view of the financial position.
 Duties to be independent
• An auditor should be independent. Independency ensures that the shareholders
receive an unbiased opinion of the ‘true and fair view’.
• Re Transplanters (Holding Co) Ltd, Wynn Parry J stated that ‘once a man takes upon
himself a position of auditor…he must stand aloof and divorced from the aims, objects and
activities of the company.’
• Auditors are entitled to seek assistance from the company’s directors, accountants
and other employee in carrying out their functions. Auditors are in breach of their
duty if they rely on them for information on which they are required to form their
own independence opinion.
• Dominion Freeholders Ltd v Aird
• An auditor prepared an erroneous report. The company brought an action against
him for breach of his contractual duty of care and he sought to join the company
accountant as co-defendant. This was on the basis that the accountant had supplied
him with incorrect information and was in breach of duty owed to him. The
application was rejected.
• Jacob JA stated, ‘…he as auditor is not entitles to rely upon that information or
representation and would be in breach of his duty to the company in so
relying…they are required in the course of their duties to reach and independent
conclusion, and if they do so, they cannot shed their responsibility by casting the
liability on the company officers or officers concerned.’
 Duty to use reasonable care and skill

• An auditor is under a duty to use reasonable care and skill in carrying out the
audit and in forming opinion on the company’s account.
• Failure to use such reasonable care and skill renders an auditor liable to the
company in damages for breach of contract and negligence.
 Auditor’s Report
• Report must state:
• Whether the accounts or consolidated accounts are properly prepared in accordance with
law
• Whether in his opinion a true and fair view is given of the state of the co’s affairs and of its
profit or loss
• In the case of consolidated accounts whether a true and fair view is given of the state of
subsidiaries’ affairs and profit or loss
• Whether the accounting and other records and registers are properly kept
• Whether the accounts have been kept in accordance with the applicable accounting
standards
Audit and Financial reporting
Financial statements in accordance with the approved accounting
standards
Decoupling of annual return and audited financial statements
Annual return must be lodged within 30 days of the anniversary of
the company’s incorporation date
Failure to lodge more than 3 years is a ground of striking off
Financial statements need to be distributed to the members within 6
months of year end
AUDIT EXEMPTION

• Practice Directive No. 3/2017 on the Qualifying Criteria for Audit Exemption
for Certain Categories of Private Companies (“Practice Directive”).
• The Companies Act 2016 (“CA 2016”) requires every private company to
appoint an auditor for each financial year of the company for purposes of
auditing its financial statements.
• The Registrar of Companies (“Registrar”) may however exempt certain
qualifying private companies from having to appoint an auditor according to the
criteria and conditions set out in the Practice Directive.
AUDIT EXEMPTION

•
When the audit exemption takes effect
The audit exemption will apply for a qualifying private company’s financial
statements with annual periods commencing on or after the dates stated in
the Practice Directive as follows:

•
Members of the company or the Registrar can still require an audit

A company that is eligible for audit exemption shall be required to audit its
accounts if it receives a notice in writing requiring the company to audit its
accounts during a financial year but not later than one month before the end of
that financial year from:
• any member or members eligible to vote and holding in aggregate of not less
than 5% of the total number of issued shares of the company or any class of
those shares;
• not less than 5% of the total number of members eligible to vote in of the
company; or
• the Registrar who directs the company to have its accounts audited.
Companies electing for audit exemption are still required to prepare
and file accounts with CCM
A private company that elects to be exempted from audit must still
prepare and circulate its unaudited financial statements within the time
period stipulated in the CA 2016 and which complies with applicable
approved accounting standards.
The unaudited financial statements must be lodged with CCM together
with the directors’ report, statement by directors and statutory declaration
prescribed by the CA 2016 as well as an audit exemption certificate within
30 days after circulation.
 Liability
• Liability in contract
• Pacific Acceptance Corp Ltd v Forsyth, Moffit J stated that, ‘it is beyond
question that when an auditor professing as he does to possess the requisite
professional skill, enters into a contract to perform certain tasks as an
auditor, he promises to perform such tasks using that degree of skill and care
as is reasonable in the circumstances as they then exist.’
• Liability in negligence
• Professional owes a duty of care to their clients. An auditor who uses less
than the required degree of care and skill is liable to the company for any
loss suffered as a result.
• Auditor is also under a duty to exercise the appropriate standard of care to
shareholders and outsiders. Any failure to do that may lead the auditor liable
in an action for the tort of negligence.
• Arenson v Cassan Beckman Rutly & Co
• Shareholder wished to sell his shares. In order to determine a ‘fair value’ for the
shares to be sold, an auditor, in his capacity as an expert, was requested to value the
shares. Based on the valuation made by the auditor, the shares were sold at a price
far below another valuation later made by the auditor. The shareholder sued the
auditor for negligence.
• Court held that an expert, who valued share, knowing that valuation was to be used
by the buyer and seller in calculating the price of the shares, was liable to them both
if he or she made the valuation negligently.